There is much hype for and against the Private Finance Initiative. The argument against is that, with a large budget surplus, the government should itself carry out the capital investment urgently required for hospitals, schools and transport. It thus avoids the higher interest charges and profit element incurred by private sector involvement. Both points are correct: interest rates are typically 1-2 per cent higher for private schemes and no private body will invest unless there is a return on capital.
The argument for PFI picks up at precisely this point. Shouldn’t the government also look for a return on its investment? Under new accounting rules for spending departments, it will have to do so. There will be a depreciation charge on fixed assets so that the return on investment will have to be sufficient to replace the asset over its lifetime. The lack of such a charge in the past may explain in part why the country’s infrastructure has deteriorated so shamefully.
The pro-PFI argument further runs that private sector investment will be sufficiently more productive to make available an asset at no greater cost than if the government had done it previously on a no-profit basis.
The fact is that the savings projected for hospitals and schools have yet to be proven in practice. Where we do have experience is in prisons, not that this would have been my choice or priority for PFI. However, Labour inherited commitments and rightly decided to complete the programme. The figures I saw at the Treasury showed some 20 per cent savings on the most recent prisons constructed and run under PFI contracts. Further, we know that, in the public sector, overruns on hospital building projects were legion.
Early in the new government’s life, Frank Dobson, no fan of the PFI, called me in to the health department to ensure that the hospital build programme, of which there is a substantial one coming from public funds, benefited from the lessons of the PFI. Again, on the London Tube’s new Jubilee Line, even the senior Tube management now accepts that only the assumption of effective control by a private company has given at least the hope of a restricted service by the end of the year. In the case of the Docklands Light Railway, in the early 1990s, the same remedy was applied to the same end.
The Channel Tunnel reminds us that this is not a one-way street. But the point there is that the private sector took the risk and the private sector, not the taxpayer, paid the price. That is precisely what is meant by the transfer of risk – the risk of failing to complete the construction on time and on budget and the risk of failing to provide the service on cost over the lifetime of the project. It has been a stringent prerequisite of PFI schemes approved under this government that such risk is firmly lodged with the commercial contractor.
So what does the anti-PFI case really amount to? Much of it seems to be special pleading from public sector unions, and from Unison in particular. True, there are some genuine concerns: that is why this government has issued much stronger guidance on trade union undertakings and pension rights, in response to the sound points on these issues put forward by Unison. But there will be big changes in working practices in all economic sectors. Some will be discomforting and most will be unavoidable. If we fail to make these changes, whether in public or private investments, the ultimate losers will always be those most in need.
The improvement in the use of our capital must be the real justification for the PFI and other partnership schemes. We need an absolute increase in the amount we invest in the short term to deal with the crisis points created by decades of neglect. Looking further ahead, we need a more productive economy and sustained growth to pay for the overall higher level of capital investment that is required in the medium- and long-term to rebuild the nation’s infrastructure. Present Treasury policies, unprecedentedly, seem set fair to deliver on both fronts.
The writer was paymaster general, 1997-98, and is now chairman of the “New Statesman”