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Private Finance Initiative


The government's Private Finance Initiative was originally brought in to fund new infrastructure because of pressure on public funds. But now the Treasury is healthier, there are claims that the PFI does not give value for money.

This week we ask: Is the Private Finance Initiative still relevant in the current economic climate?

Yes Cathy McGlynn, director, PPP Forum

The premise of this question is that both Conservative and Labour governments only used the PFI to massage Britain's balance sheet.

In reality, the government has actively sought to use the PFI and Public Private Partnerships (PPP), even during the recent period of economic growth and stability, acknowledging them as one of the best ways of harnessing leading private sector expertise and management to help the government modernise Britain's ageing public infrastructure.

Despite some vocal critics, there is no doubt that projects are being delivered much more quickly than under traditional methods. Competition between companies bidding for each project is keen.

Debt finance does cost more than government borrowing but, because PPP projects are government backed, certainly not that much more. And when taking into account time and cost overruns typical in non PPP procurement, the value of taking a PPP approach becomes even more attractive, regardless of economic climate.

Independent assessments conclude that value for money is being achieved.

Those companies engaged in PFI projects have public service obligations, which are reinforced by specific contract performance requirements. A failure to meet these requirements results in financial penalties (unlike in traditional public sector procurement).

Private sector firms have allocated some of their best managers to these projects because they know that their companies, and not the taxpayer, will bear any overrun costs.

This is a massive incentive for the government to continue procuring projects through PPPs.

PFI and other forms of public private partnerships are now being taken up in countries throughout the world. This is recognition that Public Private Partnerships can be the best way to help governments modernise their public sector infrastructure.

No ohn Lister, information director, London Health Emergency

In 1993 Tory Chancellor Kenneth Clarke said that the PFI meant 'privatising the process of capital investment in public services'. So PFI would be controversial at any time.

But forget ideology: there are good practical reasons to oppose it.

PFI was supposed to bring extra money into public services, yet hold down public borrowing. In fact, Clarke used the PFI as an excuse make cuts in Treasury capital for investment in the National Health Service (NHS), which have never been restored.

While Clarke was facing a hefty deficit, Labour has been sitting on a surplus, including a £20bn windfall from mobile phone franchises - enough cash to fund all the PFI projects in health and education, finance investment in London Underground and buy back Railtrack!

Instead Labour has run up long term debts, and invested even less than the Tories.

PFI was supposed to eliminate delays in the completion of new schemes such as hospitals, but projects take years.

Hospital building stopped for over five years, because the private sector wanted the profits, but would not shoulder any real risk. Shamefully, Labour agreed that the government would underwrite PFI payments of bankrupt NHS Trusts.

PFI was supposed to bring new efficiencies, but instead it has brought increased costs and a massive reduction in bed numbers just as the NHS admits the need for more beds.

PFI deals mean liquidating land and property assets; locking NHS Trusts into inflexible 30 year deals - as tenants; siphoning cash from revenue budgets to pay profits to shareholders; and fiddling the figures to make the public sector seem more expensive and PFI schemes cheaper - rotten value for money.

The facts

London Health Emergency is a pressure group that has lobbied the National Health Service for 17 years, and has consistently opposed its PFI and other privatisation plans.

The National Audit Office (NAO) has written 22 reports on PFI projects. Of these reports, prison and road schemes were found to be more successful than schools and hospitals.

The first PFI looked at by the NAO was the Skye bridge in Scotland, completed in 1995, to replace a ferry crossing. It cost the Scottish office £15M - more than expected - but the bridge would have cost £22M by conventional means.

However tolls, through which the private sector makes its profits, are expensive.

Financial consultant Deloitte & Touche claimed in a report that the government's Public Private Partnership plans to upgrade London's underground system do not represent value for money. The report said there was 'no evidence' that the plans were cheaper than keeping the Tube in public hands.

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