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| Labour's PFI pledge would be expensive – but it isn't a blank cheque | |
| (about 1 hour later) | |
| The private finance initiative was the live now, pay later method of building hospitals, schools and other bits of public infrastructure. Governments that were short of cash could get companies to put up the cost of shiny new investment and pay the money back in instalments over many decades. | The private finance initiative was the live now, pay later method of building hospitals, schools and other bits of public infrastructure. Governments that were short of cash could get companies to put up the cost of shiny new investment and pay the money back in instalments over many decades. |
| But as John McDonnell stressed in his speech to Labour’s conference, PFI has proved a rotten deal for taxpayers because the accumulated annual payments have dwarfed the initial building costs. In the long run, it would have been cheaper for ministers to borrow the money rather than sign what were essentially expensive mortgage deals with the private sector. | But as John McDonnell stressed in his speech to Labour’s conference, PFI has proved a rotten deal for taxpayers because the accumulated annual payments have dwarfed the initial building costs. In the long run, it would have been cheaper for ministers to borrow the money rather than sign what were essentially expensive mortgage deals with the private sector. |
| That was the case even when interest rates were 5% or more. It has been doubly true since the collapse of official borrowing costs in the 10 years since the financial crisis to barely more than zero. PFI deals were dreamed up when Britain crashed out of the exchange rate mechanism 25 years ago and were falling out of favour with the Tories when Gordon Brown backed them strongly following the 1997 election. | |
| Private finance initiative deals were introduced in 1992 under the Tory government of John Major, before becoming widespread under Tony Blair’s Labour administration after the 1997 election. Typically used for public buildings and infrastructure, PFI schemes introduce private investors into the design, build, finance and operation of new facilities which are then rented back by the state over several years. | Private finance initiative deals were introduced in 1992 under the Tory government of John Major, before becoming widespread under Tony Blair’s Labour administration after the 1997 election. Typically used for public buildings and infrastructure, PFI schemes introduce private investors into the design, build, finance and operation of new facilities which are then rented back by the state over several years. |
| Under the deals, projects are undertaken by private contractors, who then own the structure for decades following completion. | Under the deals, projects are undertaken by private contractors, who then own the structure for decades following completion. |
| Why did it become widespread? | Why did it become widespread? |
| PFI allowed ministers to build public buildings such as schools and hospitals with minimal upfront costs to the Treasury. Given tight budgeting constraints as the UK ran successive deficits throughout the mid 2000s, the deals became a way to commission popular projects without immediately hitting the public purse. | PFI allowed ministers to build public buildings such as schools and hospitals with minimal upfront costs to the Treasury. Given tight budgeting constraints as the UK ran successive deficits throughout the mid 2000s, the deals became a way to commission popular projects without immediately hitting the public purse. |
| More than 700 projects have been signed offreached financial close, securing private sector investment of around £59.4bn, according to the most recent figures available from the Treasury. | More than 700 projects have been signed offreached financial close, securing private sector investment of around £59.4bn, according to the most recent figures available from the Treasury. |
| Why is it controversial? | Why is it controversial? |
| Although helping to massage the public finances in the short-term, over the longer term PFI deals can come with a higher cost to the government as the private sector investment is repaid with interest. In 2013-14 around £10bn was spent on servicing private finance contracts, with about £4bn of this related to debt and interest, according to the National Audit Office. The agency is due to publish a fresh study on PFI spending this autumn. | Although helping to massage the public finances in the short-term, over the longer term PFI deals can come with a higher cost to the government as the private sector investment is repaid with interest. In 2013-14 around £10bn was spent on servicing private finance contracts, with about £4bn of this related to debt and interest, according to the National Audit Office. The agency is due to publish a fresh study on PFI spending this autumn. |
| Where is the money going? | Where is the money going? |
| Private companies that have built NHS hospitals using PFI deals have made pre-tax profits of £831m over the past six years, according to the Centre for Health and the Public Interest. The companies are also poised to make almost £1bn more over the next five years. | Private companies that have built NHS hospitals using PFI deals have made pre-tax profits of £831m over the past six years, according to the Centre for Health and the Public Interest. The companies are also poised to make almost £1bn more over the next five years. |
| Firms such as Balfour Beatty, Carillion, Interserve and Kier Group are among some of the biggest involved in PFI schemes, while they also sell PFI portfolios to fund management companies. | Firms such as Balfour Beatty, Carillion, Interserve and Kier Group are among some of the biggest involved in PFI schemes, while they also sell PFI portfolios to fund management companies. |
| McDonnell’s PFI pledge has two parts to it. The first part – no future PFI deals – is uncontroversial. Philip Hammond is not especially keen on them either. | McDonnell’s PFI pledge has two parts to it. The first part – no future PFI deals – is uncontroversial. Philip Hammond is not especially keen on them either. |
| The other part – to wind up all existing PFI contracts – is a bit trickier. In theory, it would be possible for a future Labour government to say that the public had already paid many times over for their schools and hospitals and that therefore the contracts were being terminated without compensation. | The other part – to wind up all existing PFI contracts – is a bit trickier. In theory, it would be possible for a future Labour government to say that the public had already paid many times over for their schools and hospitals and that therefore the contracts were being terminated without compensation. |
| In reality, compensation would have to be paid. Lawyers made a small fortune from drawing up PFI deals, and these will guarantee the private contractors financial redress in the event that contracts are terminated. | In reality, compensation would have to be paid. Lawyers made a small fortune from drawing up PFI deals, and these will guarantee the private contractors financial redress in the event that contracts are terminated. |
| McDonnell is not even thinking of going down the no-compensation route, which is just as well since it would end up in a battle in the courts that he would almost certainly lose. | McDonnell is not even thinking of going down the no-compensation route, which is just as well since it would end up in a battle in the courts that he would almost certainly lose. |
| Instead, the plan is that parliament will assess the appropriate level of compensation at the point at which contracts are brought back in-house, and shareholders will be compensated in the form of government bonds, which will be exchanged for shares. | Instead, the plan is that parliament will assess the appropriate level of compensation at the point at which contracts are brought back in-house, and shareholders will be compensated in the form of government bonds, which will be exchanged for shares. |
| The idea that parliament, which has skin in the game, should decide on the level of compensation could itself be subject to a legal challenge. More importantly, though, the final figure for compensation is going to be high, no matter how it is arrived at. Estimates put the cost at between £50bn and £60bn for the NHS alone, to be financed by extra borrowing. | The idea that parliament, which has skin in the game, should decide on the level of compensation could itself be subject to a legal challenge. More importantly, though, the final figure for compensation is going to be high, no matter how it is arrived at. Estimates put the cost at between £50bn and £60bn for the NHS alone, to be financed by extra borrowing. |
| Aware that there might be other – perhaps more pressing – demands for a future Labour government, McDonnell left himself some room for manoeuvre. The press notice sent out to accompany his speech did not say that Labour would wind up every PFI deal. Rather, it said a Jeremy Corbyn government would review all PFI contracts and, “if necessary”, take over outstanding contracts and bring them back in-house. That “if necessary” is important. | Aware that there might be other – perhaps more pressing – demands for a future Labour government, McDonnell left himself some room for manoeuvre. The press notice sent out to accompany his speech did not say that Labour would wind up every PFI deal. Rather, it said a Jeremy Corbyn government would review all PFI contracts and, “if necessary”, take over outstanding contracts and bring them back in-house. That “if necessary” is important. |