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
    +2

    Comment number 33.

    #26 Toxic
    We might agree that pfi has been an outrageously expensive way of keeping debt off the govt's balance sheet. It is also true that the Tories dipped their toes in to this pool.
    But the Grand Master was the Great Borrower, Boom & Bust Brown.
    I don't think you can lay this one on Thatcher.

  • rate this
    -2

    Comment number 32.

    Another part of the government trying to sort out the mess left by the last incompetent 'government'.
    La La Labour left us, the UK taxpayer, with over one TRILLION pounds of PFI debt. This is 'off the books' so it is not highlighted ( especially by the BBC).
    The mess left will take many years to sort out, amplified by a worsening world climate.
    The last thing OUR country needs is Labour Balls

  • rate this
    +5

    Comment number 31.

    16.Jeromesh
    "Will they not learn?"

    They're politicians..... when have politicians ever learnt from the past mistakes of any other government? Or, indeed, from anything else? They're too wrapped up in their own little bit of dogma and convinced (despite lots of evidence to the contrary) that theirs is the only way.

  • rate this
    0

    Comment number 30.

    As far as I'm concerned PFI would not have been necessary if the Thatcher government had invested in schools and hospitals - They didn't - so the said buildings were decaying badly - becoming not fit for purpose. Major saw the disaster and started to invest. Labour followed (and roundly condemned) Now the inept ConDems are admitting PFI is actually right - Another U turn.

  • rate this
    +4

    Comment number 29.

    This government lectures about getting into debt yet it continues this mad scheme digging us in deeper and lining the pockets of the rich yet again - there are other suspicious elements at work generally like the so called 'Nurses for Reform' which is not a 'nurses' group but trying to get more of the NHS privatised.
    Not sure who is profiting from who - anyone investigating?

  • rate this
    +12

    Comment number 28.

    The Government should scrap PPI. If we cannot afford to build these inferstructure projects, then the government must either raise taxes now to pay for then, or not have them now. The message is
    If we can't afford to pay for it then we can't have it.
    Lets get out of this "Jam Today" society.
    Fiscal Responsibility: All Governments should set the example for society to follow.

  • Comment number 27.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    -2

    Comment number 26.

    PFI has been a disaster because Thatchers spivs were queing up to get their hands on the tax payer funded gravy train.

  • rate this
    +9

    Comment number 25.

    #22 If you needed an object lesson in how the public sector does not understand the private, that comment is it.

    The private sector makes money. That is its job. Managers in the private sector are paid to find ways to make profits and then to make those profits bigger

    It's like a machine but civil servants just don't understand how it works. That's how we are stuck with these huge bills

  • rate this
    +2

    Comment number 24.

    #21 GBF seems to have a concise description of where we are.
    Be interesting to see if there's is any serious attempt to get us out of some of these money pit deals our politicians and experts have engineered.
    The theory was good but, but without competence........

  • rate this
    +9

    Comment number 23.

    I'm afraid that PFI has been a disaster because very poor deals were negotiated. Weak civil servant convince minister with little experience and no skill ar negotiating a business deal that this is the best they can do. The minister accepts it because he wants his/her new buiulding. Same as most governments where civil servants don't want to upset the minister who doesn't understand their brief.

  • rate this
    +3

    Comment number 22.

    Anything for money . . . . I think we already knew that we were being robbed in the education department. . . . . Do these 'fat cats' have no kid's? Do they think lining their own pockets are more important than the education of our countries kid's? It gets sicker by the day

  • rate this
    +24

    Comment number 21.

    Brown and Blair bragged so much about all the money they were spending on schools and hospitals in our country, when in truth they were simply lumbering the taxpayer with hugely expensive and bloated deals from which they could not escape for 30 or more years.

    It is interesting to note how many of these deals were in fact to the considerable benefit of companies run by their pals.

  • rate this
    +1

    Comment number 20.

    18. Kevinharding
    Mate. You couldnt run a sweet shop.
    Balancing the books by spending less and selling more abroad, not within the uk, is the only way to mend our economy. Anyone saying infrastructure and creating more uk jobs is nuts, unless those jobs sell products overseas.

  • rate this
    +10

    Comment number 19.

    every day that passes by Osborne is behaving more and more like Brown..

    PFI is similar to gambling which the civil servants do and we the taxpayers pay. What can go wrong...

  • rate this
    -2

    Comment number 18.

    monetary stimulus- private lending cannot kick start growth
    in an entrenched recession
    debt based investment needs returns
    which need greater consumption
    the coalitions deficit reduction plan is not credible
    if it is not working
    it presumes growth which it undermines
    the developed worlds longest ever recorded recession
    will continue until it embraces increased fiscal stimulus
    increased deficits

  • rate this
    -2

    Comment number 17.

    Fungibilty.

  • rate this
    +22

    Comment number 16.

    I don't think it's entirely fair to blame Labour here. PFI started out in John Major's Tory government in 1992 and the idea was, at the time, condemned by Labour.

    After the Tories gave birth to this monster, Labour fattened it up until it was a bloated teenager. Now PFI is 20 years old, it thinks its found a get rich quick scheme (PF2), and so will continued to spend. Will they not learn?

  • rate this
    +4

    Comment number 15.

    The way "savings" could be calculated, is by the cost of yearly repayment, so to renegotiate existing PFI deals, we can commit to a longer period, paying SLIGHTLY smaller sums.

    My view is that government is like a spendaholic, having maxed out on plastic, gets other cards from wherever they can.

    If people are paying back personal debt, they can not AFFORD covering .Gov spend, on more borrowing.

  • rate this
    +1

    Comment number 14.

    The biggest problem with government is that it has NEVER invested in anything where profit or money could be made, apart perhaps from war.
    The Ponzie scheme of State, Pensions, NHS, Defence and Welfare (Council Tax Bills) has no investment cover for payment and it is borrow borrow borrow to pay for anything.

    A private arena to make more profit, can only do so at the expense of others - The Poor.

 

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