PFI – a dearer way to borrow?

       PFI was coming in when I was a Cabinet Minister. I remember surprising officials by turning down seeking  a PFI proposal for a new hospital and saying we should do it from state borrowing as it would be cheaper.

        Andrew Lansley is right to highlight bad value contracts, and to try to do something to correct them. The private sector may have been better at keeping construction to budget and to timetable, which argued for suitable contracts to do just that. Adding in twenty or thirty years of responsibility for the building and including  borrowing the money meant higher prices overall in some cases. These are now proving dear for taxpayers, and inflexible at a time when we need to do more for less.

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28 Comments

  1. lifelogic
    Posted September 22, 2011 at 2:58 pm | Permalink

    Indeed the driving force was I suspect to keep it off the PSBR and perhaps in some cases to allow private profits for friends of the rich powerful. The first is so transparent anyway – so what is the point in keeping it of the PSBR anyway. The provider will usually pay more to borrow the money than the state anyway. Also the complexity of a contracts which need to deal with future unforeseen changes in needs, buildings, demand technology, politics and the like.

    Any changes or decisions thus need far more parties to agree with their advisers, lawyers, surveyors and accountants all round (all with an interest in more work for them) so delays and additional expenses in every direction. In general no benefit what so ever and very many down sides.

    The state sector has never been good at agreeing contracts with anyone – after all it is not their money or they who will benefit from the final purchase. So what do they care anyway it is just a job and a good pension.

    • lifelogic
      Posted September 22, 2011 at 9:33 pm | Permalink

      Also PFI seems to lock them into inflation increases so they cannot even inflate the bills away. Good old Major (the great BBC sage) and no return to Boom and Bust (and I did not ever quite understand Adam Smith) Gordon Brown.

  2. Andy Hopkins
    Posted September 22, 2011 at 3:00 pm | Permalink

    You are absolutely correct.
    Until the common consensus is that the real skill of public office is NOT to spend money, but to save it, whilst delivering critical services, then this sort of nonsense will continue, as it provides those elected with quick answers to complicated problems.

    I would also like some disclosures on the connections between those responsible for the decisions, and those who won the contracts, as this is the only way to ensure that everything was conducted above board…

  3. forthurst
    Posted September 22, 2011 at 4:50 pm | Permalink

    Obviously it depends with whom is the contract: if it is a Local Health Authority, just tell it to stop paying for PFI and if necessary declare bankrupcy meanwhile use other resources to maintain the facility; when the (PFI company-ed) try to foreclose, make it illegal for them to change use or sell to any other Health provider than the NHS; then offer them a pittance for the assets.

    The other alternative would simply to nationalise the assets with the government deciding how little to pay the (PFI company-ed).

    The government should have no qualms about playing rough with (private finance companies – with unflattering comments and allegations about what they get up to-ed)

  4. sm
    Posted September 22, 2011 at 5:00 pm | Permalink

    Agree with Lifelogic. Some may allege yet another policy implemented by powerful groups in the dark.

    Lack of transparency?Use of offshore secrecy jurisdictions?Commercial secrecy versus the national public interest and proper scrutiny?

    Can we not beef up our PAC with Senate like investigations with teeth.

    If the economic substance walks like a duck,quacks like a duck, and looks like a little duck , nutured by mother duck, why should it then be legally shown as a non duck, off the books?

  5. uanime5
    Posted September 22, 2011 at 5:15 pm | Permalink

    The only thing the Government can do is renegotiate these contracts, or change the law so the PFI companies can’t charge as much.

    • lifelogic
      Posted September 23, 2011 at 6:39 am | Permalink

      Or perhaps change the tax system in some way to catch the PFI system.

  6. Lindsay McDougall
    Posted September 22, 2011 at 5:38 pm | Permalink

    Somewhere in the City there is a company that was heavily involved in the hospital PFI contracts, that employed only 14 people, and had a return on capital invested of over 100% per annum.

    Why do you not propose a change in the law that would allow taxpayers to sue politicians that signed wasteful PFI contracts? If you could see that PFI was an expensive way to borrow, why couldn’t the others?

  7. Kenneth
    Posted September 22, 2011 at 7:36 pm | Permalink

    Not only did the Labour government overpay for work-to-rule PFI deals – effectively adding to the national debt – it apparently built too many hospitals. How can a government build too many hospitals?

    For that matter how can a government build large fire service ghost control centres? Now I hear that John Prescott is blaming a civil servant. It seems that no-one thought of questioning why a budget of just over £100M turned into spending of over £500M. He can blame whoever he likes but someone in the government was sanctioning the cheques. Heads should have rolled for this disaster.

    This casual approach to OUR money was a running theme in the last two Labour administrations and some are still in the shadow cabinet. That is truly scary.

    • lifelogic
      Posted September 23, 2011 at 6:43 am | Permalink

      “This casual approach to OUR money was a running theme in the last two Labour administrations and some are still in the shadow cabinet. That is truly scary.”

      Indeed a running these of government throughout the ages and similar “thinkers” are in (indeed comprise most of) the current cabinet and the EU system too.

  8. zorro
    Posted September 22, 2011 at 8:43 pm | Permalink

    I have seen some shocking examples of PFI stitch ups in the public sector. They can so easily reel in civil servant types with supposedly attractive quotes whilst bumping up the ‘maintenance’ contract and charging outlandish prices for simple maintenance and replacement items.

    I wasn’t sure of John’s position on this, but I had always thought that state borrowing with competing private contractors made better economic sense for big public infrastructure buildings. There have also been allegations of people seeming to profit inappropriately from such deals.

    zorro

  9. stred
    Posted September 22, 2011 at 8:50 pm | Permalink

    As an architect, I can understand why and how Mrs T was peruaded of the merits of PFI. Public contracts for building, particularly in the NHS, were a disaster/ They took an incredible time to finish and the brief kept changing. By the time the buildings were finished it was timw to demolish,

    Then the big builders gained influence and the consultants were put in the back seat. Buidings were produced much more quickly, but a coach and horses was driven through the design and specification. I remember going to a CPD or professional development, seminar in 1991 to learn how NOT to run a contract. At least, unless you were in a builder’s claims department. I gave up and have been living off investment and development since.

    So, now we have another gigantitic BU on the nation;s hands. PFI has produced better stylistic design much more quickly than the old system. But, the buildings have been designed with little thought about maintainance costs. After all, why should they when the PFI provider is the monopoly supplier to maintain it. Thus, a headmaster cannot ask for a competitive tender from a local carpenter to rearrange a few doors. The PFI provider, owned by an offshore company and financed by Royal Wank, perhaps, is going to charge 5 times the rate. I have been looking at the giant PFI behind the Royal London. It is designed as pigeon perch in the sky, with brise soleil blinds al over it, altough ther is little or no sun.

    I have a proposal for the future of public building provision. This could also apply to private contracts.
    a. Never let a contract without a full specification, bill of quantities and detailed drawings.
    b. Never let the consultants be chosen ( as bfore) on the ‘who knows who’ basis.
    c, Carefully provide a finished brief and ask for competitive design tenders.
    d. Chose a group of architects, engineers and quantity surveyors who provide a complete design including, apart from the aeththetic considerations,
    e. all costs,including mainainance and energy included.
    f. insist that maintainance will be on a competitive basis.

    • alan jutson
      Posted September 23, 2011 at 9:21 am | Permalink

      stred

      Your points are all very logical, and I would have thought should already have been standard proceedure for anyone who is considering a building project.

      What you suggest is no more than absolute commonsense if you want all to compete on a level paying field when tendering in a normal competitive manner.

      Perhaps someone from the government or Civil Service could explain why it does not happen like this.

  10. stred
    Posted September 22, 2011 at 8:58 pm | Permalink

    I should have added, then go out to competitive tender from at least 6 companies who are umlikely to ring the process. Perhaps 10 if colusion is to be avoided these days.

    Sorry about the script. I have lost my glasses.

  11. stred
    Posted September 22, 2011 at 8:58 pm | Permalink

    collusion

  12. stred
    Posted September 22, 2011 at 9:04 pm | Permalink

    Obviously, the excorbitant compound interest goes without saying. Have you been able to find out whether Pfi contracts have been let on an inflation proofed basis?

  13. Ian
    Posted September 23, 2011 at 12:15 am | Permalink

    Five things worry me.

    There is no competitive tendering with PFI, therefore a morally dangerous element of discretion is placed in the hands of ministers, mandarins, quangocrats, councillors and council officers. This practice is at odds with past and present policy on lowest price and best value tendering.

    The then Inland Revenue awarded a large PFI contract for the maintenance of its London offices to an offshore outfit based in the Bahamas – so missing out of substantial tax revenues. Paymaster General Dawn Primarolo raised no qualms about this arrangement, despite her past experience as a tax consultant to the wealthy.

    Gordon Brown acted as an unpaid salesman for the City’s banks, trying to interest other EU countries in PFI schemes. As I understand it, this was not part of his job remit as chancellor. If anything it would have been a Department of Trade and Industry matter.

    An expensive PFI contract was awarded for the training of helicopter pilots prior to the second Gulf war. Due to complications which would never have arisen with a cheaper, more orthodox contract, the pilots were not trained in time for the invasion.

    As the IMF has been concerned about PFI adding enormously to PSBR since May 2004, why is cheaper Treasury bond financing not used instead of PFI, in keeping with the commitment made by this country to the EU’s Stability and Growth Pact?

  14. oldtimer
    Posted September 23, 2011 at 8:07 am | Permalink

    It is fact that in its early days the Blair/Brown government went out of its way to promote the use of PFI contracts. I heard, with my own ears, a Treasury official (I think he must have been a Spad) advocating their use. His very words were “I`m from the Treasury and I am here to help”, explicitly to help the senior public sector people in his audience to get round spending limits by using PFI contracts.

  15. Denis Cooper
    Posted September 23, 2011 at 8:49 am | Permalink

    Didn’t Ken Livingstone say that it would be cheaper to finance the work on the Tube through public sector bonds rather than through PFI?

    One potential problem is that PFI loans have been securitised, so if PFI contracts are re-negotiated downwards or cancelled the effects will spread out through the financial system in the form of a new class of “toxic” or “impaired” assets.

    Reply: I seem to remember that Labour put the tube into a very expensive PPP, which united Ken and I in disagreement!

  16. stred
    Posted September 23, 2011 at 10:13 am | Permalink

    Also, the group of architects, engineers, and QSs should submit a competitive fee package. The competition should be open to all and not rsricted to noninees of professional organisations such as the RIBA and RICS.

  17. Mark
    Posted September 23, 2011 at 1:36 pm | Permalink

    There are some who try to hide behind sanctity of contract as a reason why PFI schemes should be allowed to continue to rob taxpayers. They are not aware of the real world: in long term commercial relationships, contracts regularly get renegotiated if they become too one sided for the benefit of one party, and terminated (sometimes using small print, sometimes other devices) if there is no reasonable resolution.

    We have legal precedents such as the Hammersmith and Fulham derivatives fiasco, where the judge ruled that the borough was not legally competent to enter into derivatives transactions, and they should be set aside as ultra vires, like contracting the marriage of a minor. Dig into a PFI contract, and you’ll soon find some embedded derivatives in the terms that may form the basis for a similar legal challenge.

    Other options that could be floated include hollowing out the state counterparty and threatening to leave it go bankrupt pending renegotiation; imposing a PFI windfall tax; and outright nationalisation so that at least the government would be paying itself £300 to change a lightbulb. All of these are best used as threats to encourage renegotiation, but inevitably it will be necessary to carry the threat through in some cases to show that it is serious, and not mere political posturing.

    Renegotiation will require skilled negotiators and legal minds, conversant with the businesses concerned. It is not clear how such teams can be assembled other than by poaching from the “other side”, who know where the bodies are buried. It may also help to review regulations that made many PFI contracts so expensive in the first place: £300 to change a lightbulb is doubtless “justified” by complying with health & safety law.

    • Mark
      Posted September 23, 2011 at 1:45 pm | Permalink

      The £1.5bn of PFI renegotiations announced back in July is a mere pimple on the total: we need to be thinking in terms of knocking 20-30% off the cost of many contracts: in some cases, halving them.

    • Mark
      Posted September 23, 2011 at 4:25 pm | Permalink

      I think it would also help to bring all PFI contract on balance sheet. Then successful renegotiations that reduce cost (even at the expense of increasing borrowing) could be monitored, and help reduce our real debts.

  18. REPay
    Posted September 23, 2011 at 2:03 pm | Permalink

    Balls and Brown hated PFI when the Tories started it…then they saw that they could buy votes today at the expense of tomorrow. Our Civil Service is incompetent in all commercial contracting and also have no skin in the game as they are deliberately rotated off major projects so it can be no one’s fault. They also are insulated to some extent from the markets. The FTSE has gone down through 5000 – we are in a very bad place. The BBC will see it as a problem for bankers and the rich.

  19. stred
    Posted September 23, 2011 at 2:46 pm | Permalink

    As I understand it, many of these contracts have been sold on several times and may even be owned in part by state owned investment banks such as Royal Bank. The money has gone and the customer would be renegotiating with himself. If the recipients are still offshore companies, then by all means cut them off at the knees and sack any civil servant who can be shown to have got us into this mess.

    However, I heard the BBC interviewing an enobled top functionary who seemed to think the system was fine, as expenditure was only 1% of the NHS total. The PFI zealot who pushed the system under Labour is back in the Treasury and M.Gove has been persuaded to build the next batch of schools by PFI with standard buildings with the help of Tescos. Really, you could not make it up.

    Alan Jutson. The problems have arisen because the big builders lobbied 20 years ago and put the skids under tight tendering procedures. Politicians were fed up with architects such as Poulson and appalling delays by public architects. They did not realise that the changes allowed contractors to make a killing every time a variation was made and through post contract works. Ever since the system was changed, public contracts have ballooned in cost. Also, regulation has increased and large companies realise that this is profitable, as work expands. We now have the some of the highest building costs in the world. In London even domestic costs are now £2000/sm +.

    PS. Sorry about some of the mis- editing above when I had lost my glasses.

    • Denis Cooper
      Posted September 23, 2011 at 5:06 pm | Permalink

      I can avoid using mine, now that somebody has told me today:

      Press CTRL and + together to enlarge (need to put on CAPS LOCK first for the +), press CTRL and – together to reduce.

      You learn something new every day (but may forget it the next).

      • Bazman
        Posted September 24, 2011 at 7:51 pm | Permalink

        Or use an add on for the Firefox browser called NoSquint. Which can magnify text, pictures or both and remember settings for different sites.

  20. Mike Fowle
    Posted September 24, 2011 at 6:20 pm | Permalink

    Lifelogic’s first comment was quite right, IMHO, that the aim was to keep the debts of f the PSBR, but I think he under estimates the sheer brass neck of the last government and its media supporters, in that they will use figures they know were dishonest and misleading but quote them anyway, and their loyal supporters (e.g. the BBC) will repeat them.

    As for the competence or otherwise of civil servants to enter into multi million pound contracts, raised by zorro, as a former very minor civil servant myself, I can only say – he is absolutely right.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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