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18 January 2018

How do you solve a problem like the Private Finance Initiative?

Faced with the £200bn cost of PFI, Labour has reaffirmed its pledge to end the scheme and to nationalise some existing contracts. 

By George Eaton

At yesterday’s Carillion-themed PMQs, Jeremy Corbyn raged against the practice of outsourcing, declaring that “these corporations need to be shown the door”. The Labour leader has now been handed further ammunition through today’s impeccably-timed National Audit Office report on the Private Finance Initiative (PFI).  

Many have long warned that the scheme, under which the government uses private capital to fund public infrastructure, is ruinously expensive: a conclusion supported by the report. It found that overall spending on PFI deals was higher than publicly-financed alternatives; a group of schools cost 40 per cent more to build and a hospital 70 per cent more to construct than if they were funded by government borrowing.

PFI was first introduced by John Major’s Conservative government in 1992 in order to reduce state borrowing following the recession (the contracts were conveniently kept off the national balance sheet). It was under Labour, however, that the majority of deals were signed. Having pledged to stick to the Tories’ spending plans for their first two years in office, and to keep the national debt low, Tony Blair and Gordon Brown turbocharged PFI. 

But as today’s reports suggests, this approach is a false economy (not least when the government has been able to borrow at ultra-low interest rates). So, as Lenin once asked, what is to be done? 

It’s worth noting that the Conservatives’ PFI successor scheme (PF2) has significantly reduced the use of private financing. In the five years to 2007/08, the government averaged 55 deals a year but signed just one in 2016/17. In part, of course, this is because far fewer schools and hospitals are being built. And the Tories’ aim to achieve an overall budget surplus still limits the scope for government borrowing. 

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Labour has pledged to sign no new deals if elected. But as the NAO makes clear, it’s not new contracts that are costing the state billions but existing ones. At last year’s Labour conference, John McDonnell made headlines when he pledged to “bring existing PFI contracts back in-house.” Though the declaration won rapturous applause, economists warned that the cost of paying compensation to private companies could outweigh any savings (with the cost put at £50-60bn for the NHS alone). 

It was unsurprising, then, that party aides subsequently clarified that Labour was not, in fact, pledging to take all PFI contracts back in-house: “Labour will review all PFI contracts and, if necessary, take over outstanding contracts and bring them back in-house, while ensuring NHS trusts, local councils and others do not lose out, and there is no detriment to services or staff.”

The Labour MP Stella Creasy, however, has suggested a third way: a windfall tax on PFI companies. In an echo of the last Labour government’s windfall tax on the privatised utilities, Creasy told the Today programme: “The one place where we do have leverage with them [the companies] is on the tax they pay. They’ve also had a massive corporation tax bonus because corporation tax on a lot of these contracts [when they] were signed, and it was part of the deal and the reason why we went with them, was around 30 per cent. Under this government it has now dropped to 17 per cent. So we are estimating that some of them have saved around £190m in corporation tax payments alone. That is money that is owed to our public sector, and is money we could get back with a windfall tax.”

Creasy’s record – she secured a cap on payday loan charges and free abortions for Northern Irish women – means the idea is worth watching. But I understand that Labour’s shadow Treasury team believe there are several problems with the proposal: it would not effect the cost of financing (which is the main objection to PFI), it would raise no revenue if levied on firms such as Carillion which made money from PFI projects but no overall profit, and it leave the projects in private hands for decades without addressing any of the other failings: inflexibility, projects being used for tax avoidance and excessive management fees.

In short, Labour isn’t about to substitute a windfall tax for nationalising PFI contracts. Shadow Treasury sources emphasise that previousl legal judgements (such as over Northern Rock’s nationalisation) have established parliament’s right to nationalise and to set compensation levels specific to the case. Under a new Labour government, public ownership and state investment would be championed not merely as necessary (as in the case of Northern Rock) but as desirable.