PFI becomes less private

 

The chancellor is changing the private finance initiative (PFI) to make it more public and less private.

The last government financed the building and maintenance of vast numbers of schools, hospitals and other expensive investments by asking the private sector to bear the big costs, in return for regular payments from the public sector.

But the Treasury under George Osborne became concerned that huge long-term liabilities were being created for taxpayers - and that lousy negotiation by civil servants was allowing private companies to make huge windfall profits.

So in the Autumn Statement on Wednesday George Osborne will unveil what will be called Private Finance 2 (PF2) - which will involve the public sector taking stakes of up to 49% in individual private finance projects (20% stakes are likely to be typical) and appointing a director to the boards of each project.

This is to ensure that the taxpayer gets a share of any profits from the deal.

The BBC's Robert Peston: Private companies have made excessive profits

Other innovations will be that each private finance project will have to publish its financial performance every year and the Treasury will publish a running total of taxpayers' cumulative private finance liabilities - to allay concerns that these liabilities are becoming unaffordable.

Also there will be an attempt to speed up the signing of deals, or the procurement process - which can take up to five years at the moment - by setting an 18-month deadline (at which point, any public sector money allocated to the project would be reallocated).

Contracts under PF2 are also supposed to be smaller, simpler and less leveraged (they will involve less debt finance).

So they will no longer include what is known as soft facilities management, or contracts for catering, cleaning, security and IT.

And in the past a typical PFI deal would be funded to the tune of 90% by debt, but that debt proportion will fall to 80%.

If these reforms are designed to make the contracts less speculative, the Treasury has resisted pressure to change contracts to explicitly penalise those investors who sell their PFI projects early to generate vast profits.

The Treasury thought about introducing clauses that would have explicitly punished those investors who trade their PFI stakes before the expiry of contracts but feared these investors would have increased what they charge to be involved in the first place.

Also, in a separate but linked initiative, the Treasury has renegotiated existing PFI deals to find £2.5bn of savings over the lifetime of the contracts - which is £1bn more than it originally hoped.

In today's money, future PFI liabilities for taxpayers are £144bn, according to the Office for National Statistics.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +10

    Comment number 13.

    Robert, I can not see any real difference between PFI and PFI2 apart from the board member, as some have suggested, who is getting a boys for boys job. Sounds similar to the Police Commissioner layer. We now have a huge bill of 41 extra PCC's and their staff and office fees at a time of cutting police?

    The PFI contracts are fixed and will need paying 20-30 years even if the buildings are empty.

  • rate this
    -3

    Comment number 12.

    why are there no Mars bars on Venus? She eats them.

    A blast from the past ~ Stephanomics circa 2009 ~ http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2009/11/cautious.html my how times fly.

    The hills are alive ~ http://www.sysopt.com/showthread.php?201563-The-hills-are-alive-with-poopies./page2

    Long live the Union ~ http://www.bbc.co.uk/history/0/20428167

    China tea ches Korean War?

  • rate this
    0

    Comment number 11.

    10 Acet ~ That is the way things work, like it or not.

    Hmmm..... 35 x 5. Thank you Sir Mervin....... now sort out the ONS. Otherwise QE will go bananas.

  • rate this
    +17

    Comment number 10.

    So, jobs for the boys AND huge windfalls for well-connected private companies.

    How exactly will having a member of the board nominated by the state going to do anything about long terms contracts which are agree UPFRONT and give huge profits to private companies!?

    No, this is all about creating exceptionally well paid board membership positions for politically nominated people: jobs for the boys

  • rate this
    -2

    Comment number 9.

    £144bn is a £144bn, of course. Except paid over 30 years or however long remains. One hopes the assets return string free to HMG.

    I public funds are available in partnership then many problems are overcome. I watched the PFI build up and there is no doubt as to its boost to the economy. Fingers crossed there's no faffing about.

    Me Thane! You vassel.

  • rate this
    0

    Comment number 8.

    This sounds so reasonable, that a few lunches and dinner even with Brit Investment community (Penion Funds) might pull it off. But what are we going to build... airports?

    If the public 20% is up front then this really could be good news. The previous investmemts were impressive but criticised on cost. Here's to Mark ll

  • rate this
    +1

    Comment number 7.

    Genius, the Socialists promote private financing and the Conservatives move to state funding. Who says British Politics is an arcane discipline?

  • rate this
    -3

    Comment number 6.

    PFI has been a DISASTER for this country, and the NHS in particular

    The equivalent of buying your house on a credit card???
    Government corruption gone mad

    This was a flagship Labour policy which has been instrumental in destroying the NHS

    Now we have to buy out these scam finance deals which were signed off by the Labour Party



    Roll on the Independence vote

  • rate this
    +10

    Comment number 5.

    If private industry is willing to invest in a public service, then the public service should wake up and realise it's on a winner.

    See Energy, Utilities, Transport ...

    Yet our 4 year term politicians will sell it all off to cling to power, regardless of the long term consequences.

  • rate this
    0

    Comment number 4.

    Gordon Brown's poisonous legacy still continues to bleed this nation dry. Just for some dodgy, off-balance-sheet accounting nonsense!

  • rate this
    +16

    Comment number 3.

    "and that lousy negotiation by civil servants was allowing private companies to make huge windfall profits"

    Really? Gosh, that's news to me! Actually, it's been going on for as long as I can remember - decades. You see, fixing it would mean disrupting the old boys network which is at the very heart of the establishment, where gongs get handed out for abject failure.

  • rate this
    +2

    Comment number 2.

    All jolly interesting; but... why do the BBC and, seeingly, HM Treasury continiue to call it an Autumn Statement? It's late. It's winter. It's Advent. It's not Autumn. Most Primary School children could advise the BBC and HM Treasury of this; so why insist on retaining the "Autumn Statement" moniker. It's wrong. Change it. Change it before Wednesday. Or just look... stubbornly foolish...

  • rate this
    +14

    Comment number 1.

    Still the Treasury can't seem to understand simple arithmetic!

    All PPP/PFI/PFI2..3..4..5..6 schemes give huge profits to (bankrupt) banks and this money comes from the public/taxpayer so every project funded by such legalised loan sharks is a bad deal for the country.

    There is NOTHING less expensive than the Treasury spending the money directly from tax collected, or government bond finance.

 

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