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
    0

    Comment number 173.

    Intresting! Has anyone costed running the full process through a 100% public funding project? ie is the profit taken by the private sewctor greater than any over spending by the public sector?

    I have a funny feeling the private option is more expencive and so have never and can never work!

  • rate this
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    Comment number 172.

  • rate this
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    Comment number 171.

    So, aren't we at some kind of war footing with the economy with special measures required, such as the current Bill going through Parliament taking £65bn off civil service pensioners? Well, let's see some of that kind of thing here - an Act of Parliament forcing renegotiation - a quarter of the profits predicted for PFI projects would still be a very generous return.

  • rate this
    0

    Comment number 170.

    There wasn't that much wrong with PFI other tja attracting invesors when the Brits couldn't wouldn't do it themselves, and Mr Brown rather obsessed his pet project amd was taken to the cleaners, possibly. The concept is straight forwardly a mortgage ,model. Let's hope PF2 is seen to be more attractive and advice for government stops coming from bankers, in competition with savings and insurance

  • rate this
    0

    Comment number 169.

    PFI is a wheeze to avoid front loading. All one does is arrange the project financing so that the crunch comes years down the line. The critical issue is whether one can manage this so the any risks are indeed borne wholly by the private sector. But the private sector knows that just as with RBS and Lloyds, the State will always bail out a failed project if it is big enough.

  • rate this
    0

    Comment number 168.

    So Gideon is limiting the membership of this sure fire winner to his chums. His inner circle of chums. No doubt.

    Somehow you just know this adjustment is being done solely for his chums.

    Specially trained public servants can be trusted to bring in money from previous tax havens. In cover of darkness.

    Why else is he doing this?

  • rate this
    0

    Comment number 167.

    156. schoolies... That was my first thought... the Taxpayer is going to buy into the PFI sounds like yet more money going from taxpayer to private hands, I assume the PFI companies are the beneficiaries?! There's a lot of it about. To buy into what was mostly a nationalized process until it was farmed out via the PFI is sickening. Robbing Peter Smith to pay Paul Chumley-Smythe, twice over.

  • rate this
    0

    Comment number 166.

    I though GO's original plan was to ditch this taxpayer rip-off altogether. Perhaps the lure of leaving infrastructure investment off-book (for now) was too great. It will be interesting to see if: 1, he ends the 'secondary market', 2, that £100 lightbulb changing becomes a think of the past; and 3, NHS Trusts being bankrupted by PFI hospitals are rescued from this fraud. Time will tell.

  • rate this
    0

    Comment number 165.

    Robert,
    Lousy negotiations with companies ready to take early PFI windfalls and leave the taxpayer to pick up the pieces - care home operators key example. I am not a civil servant but any of them on PFI contracts on a hiding to nothing! with the odds stacked against finding a reputable company willing to perform honourably for the long term.
    Suggest pension funds only likely true PFI investors.

  • rate this
    +1

    Comment number 164.

    PFI looks more and more like a scheme dreamt up by a maniacal socialist attempting to discredit the idea that the private sector is somehow more efficient than the public sector.
    Did a brilliant job there whoever you were.

  • rate this
    0

    Comment number 163.

    And which flavour of government started the PFI nonsense. Umm thought so. Another scheme to keep our pals in funds. Trouble is the scam has been spotted and shown to be just that and a very poor deal for the tax payer. If the private sector is more efficient then the answer is to get the public sector to copy their methods not let them do it plus a large profit, the maths isn't difficult.

  • rate this
    0

    Comment number 162.

    It’s impossible for the private sector to meet fully the service provisions of a PFI contract. You should only pay for what you get. Asking failing PFI hospitals and schools the question; how much money was deducted for service failures? The answer will be little or none. That’s why these organisations make big profits because they factored in these deductions. It’s just that they never came

  • rate this
    0

    Comment number 161.

    @158
    Generally contracts negotiated under Labour cost more bought less and left taxpayers in the doo-doo. They mishandled the negotiations on GP contracts, Dentists contracts, PFI contracts, Defence contracts..... The list is shockingly long. The perfect recent example is the Astute class submarine fiasco.

  • rate this
    -1

    Comment number 160.

    Without PFI we wouldn't have our great new schools & hospitals,which Maggie Thatcher allowed to deteriorate into dangerous structures !
    Don't like the Contracts ? blame the Civil Servants & their Lawyers,the Private Sector have better ones !!

  • rate this
    0

    Comment number 159.

    Unfortunately there exists a fundamental misunderstanding of PFI in this country by the general public and in many cases by the people responsible for administering them. They are complex commercial contracts which are fully understood by the private sector but squirreled away by the public sector never to see the light of day.

  • rate this
    0

    Comment number 158.

    PFI under Labour was a disgrace
    I had to deal with one PFI contract building & was tasked with getting a breakdown of a large govt blgd facility in terms of notional, rents, running costs etc - only to be told after months of inquiries that the civil servant who had negotiated the deal had not made any file notes of how the PFI contract payments had been calculated & no 'breakdown' was available

  • rate this
    0

    Comment number 157.

    130.Eddy
    New Labour were insufficiently cynical, I think
    ~ ~ ~
    Hmmn. I think N.Labour were extremely cynical. They knew they could appear like heroes with many of the electorate while buttering up business with the opportunity to make vast sums.

    'Luton-ing', IIRC its now called after a lot of taxpayers money disappeared into a hole in Bedfordshire.

    Hey! Let's be very careful out there ...

  • rate this
    +1

    Comment number 156.

    I'd like to see the small print re PF2. I am wondering if there is any chance the taxpayer ends up taking 100% of the losses for a hope of a share in 20% of future profits?

    I wouldn't put it past the lobbyists and bean counters to come up with a way to rob us even more.

  • rate this
    +1

    Comment number 155.

    139.chrisboote
    Retrospective law changes are a bad president
    143.Eddy from Waring
    All the PFI PPP programmes I have been involved in have very punitive clauses for both parties if the contract is broken. This is to stop either party just walking away mid contract. Hence the judiciary would have little choice but to make substantial amounts payable.

  • rate this
    0

    Comment number 154.

    152 time to think

    'I think the true size of the public debt must be eyewatering'

    And so must the cost of servicing it.

    No government can sort out this mess so we have a long painful decline for the ordinary people while the rest cash in and hope they can get out before the big bust..

 

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