Are reports of the death of PFI exaggerated?
In the 2018 budget, the government announced it would stop using private finance initiative (PFI) structures to fund future UK infrastructure projects. News articles on the death of the unloved financing scheme promptly ensued. But the devil, as always, is in the detail.
The use of PFIs has declined considerably over the last several years. Whilst this has partly been due to the austerity agenda, there’s little doubt that their tarnished public image is also a factor. It comes as little surprise then that the government has decided to turn over a new leaf on the way it engages the private sector for infrastructure project delivery.
PFIs – a UK iteration of public-private partnership schemes (PPPs) – were first introduced in the 1990s and became heavily used under the Labour governments after 1997. The idea was that the private sector would be more efficient at building and maintaining schools, prisons, hospitals and waste disposal facilities than the public sector. Getting the costs of these projects off the public balance sheet was another convenient feature of PFI structures.
The criticism often levelled at PFI is the asymmetric distribution of risks and rewards between the public and the private sector. As exemplified by the collapse of construction and services company Carillion, private sector mistakes in budgeting or execution can result in losses for both private and public sides of the arrangement. On the other hand, developers often realise windfall profits via sales of PFI projects in the secondary market – a benefit not shared by the public side.
Around £60 billion is spent each year on infrastructure in Britain. Given the government’s aims to keep both debt and the deficit under control, private financing is likely to retain an important role in delivering these essential assets. But the model will need to be adjusted to attract public support as well as private capital.
Schemes devised in Wales and Scotland offer useful insight as to how this may be achieved. Scotland devised the ‘Non-Profit Distributing’ (NPD) model, which capped the profits for the private sector, with any excess returns reinvested into the public sector. At the same time, the model ensured public control over assets by appointing a public interest director to protect company boards. One drawback (if you want to see it that way) is that the significant degree of public sector control meant these projects were classified as ‘on-balance sheet’ liabilities for the public sector according to Eurostat and ONS accounting rules.
Wales’s Mutual Investment Model (MIM) strikes more of a balance between public and private interests and could provide a better blueprint for the future of public-private partnerships in the UK. Under the model, private sector partners build and maintain the assets, which should maximise the efficiencies. But the public maintains a minority ownership in the project, ensuring that it shares in the return on investment.
MIM is already being considered in Scotland and may make a good template for the future of private infrastructure finance in the UK.
PFIs are not dead. But they are likely to change. What these new models have in common is a more active role for the public side of public-private partnerships. This requires a range of technical and financial skills and a demanding but balanced approach to dealing with private sector partners. In infrastructure, much like elsewhere, there is no free lunch.