October 22nd, 2017
It is a curse of our time that on many issues, views are so violently polarised. Something is either beyond all question wonderful, or beyond all question wicked. And some issues lurch precipitously from the one category to the other. The Private Finance Initiative, for example. Twenty years ago, PFI was accepted by all except the unions and the Labour Left (such as it then was) as self-evidently the way major capital projects for public services got done. The National Audit Office, Public Accounts Committee, and with few exceptions, the media, all accepted it as a fact of life and produced nice reports saying that it was a good thing.
Now, though, everyone agrees PFI was a disaster, causing huge damage to public services and wasting vast amounts of public money. And in the forefront of the penitents are...the NAO, the PAC, the media. But above all, what one might call New Old Labour, who reserve their greatest loathing not for the Tories, but for the Labour Government which had the biggest majority and longest period in power in all their party's history. For them, it is an article of faith that the Blair and Brown Governments, which let the vast majority of PFI contracts, did nothing good (1).
This is a mistake, for the truth is more complicated than that, and the consequence of these simplistic, sloganising views is that we do not understand what happened and do not learn from it for the future.
There is certainly plenty of evidence that some PFI deals were extremely poor value, especially in the NHS. It's also clear that since the 2008 Crash, the much lower rate for Government borrowing makes PFI very unattractive indeed, if not totally unviable. And even for the majority of deals which of course predated the Crash, PFI now looks an odd way of proceeding. Particularly, for the service element, the much vaunted risk transfer looks in hindsight more theoretical than real', while the very long term of these contracts looks problematic in a world where user requirements and technology are changing faster than ever.
Still, PFI wasn't all bad: and the alternative of traditional public procurement can boast many disasters of its own.
Firstly, it's worth recalling that through PFI we got over 100 new or substantially rebuilt hospitals and over 500 schools, not to mention GP surgeries and primary care centres. We could never have built the same number through conventional finance, since these would have required funding up front (1A). Therefore, even if PFI wasn't the best way to do it, the fact is that millions of people have been or will be treated or educated in new buildings, with up to date equipment, who would otherwise have been treated or educated in decayed, old and ill equipped buildings. So there is a huge social benefit, which continues.
Secondly, the actual service was delivered publicly, even though construction was privately financed and some support services privately run. Thus – and the Labour penitents seem to miss this – PFI was associated not with a reduction, but a huge expansion in the public service workforce: under Labour, the workforce in education increased by a third of a million, the NHS by even more (2).
Thirdly, not all PFIs were bad value. In my own field, prisons, PFI was particularly good value for several reasons that have been overlooked. Public sector performance had been dire: PFI allowed prisons to be built twice as fast at half the cost. And while privately managed jails in the 1990s had many problems (though certainly no worse than the much more expensive public ones), research showed that they provided a more respectful attitude towards prisoners than the traditional public sector prison culture (3). The keys to this success were two fold:, prison contracts combined building and operations, kept separate in NHS and school contracts; and had a single, thus more experienced and powerful customer, while in the NHS and schools the market was fragmented (4).
Fourthly, let us recall that traditional public sector projects have achieved, and are still achieving, disasters as frequent and as appalling as PFI. To name but a few of a long and never-ending list: Type 45 destroyers (at least 2 years late and £1.5bn over budget, consequently programme halved, plus their engines switch off in warm waters, which could be embarrasing), Network Rail's Great Western line electrification (costs triple the budgeted figure, programme much delayed and curtailed), 2012 Olympics (double the budget, the most costly Olympics in history), or in my own sector, electronic tagging (5 years late, millions spent on 2 failed procurements, and so on, and so on) (5). It is entirely arguable, on the facts, that public finance of major projects wastes money on much the same scale as PFI.
And finally, let's remember what the Labour penitents seem genuinely ignorant of, that there is no such thing as a purely public sector capital project. Buildings are not designed or built, IT systems are not created, by public servants (6). It is all done under contract. And that means that precisely the same issues that bedevilled many PFI deals – poor specification, inept procurement, poor contract management – must necessarily apply to any project, however financed. So there is always a public service customer, private sector suppliers and a contract of some sort between them. Working out the best mix of public and private sectors, and the right form of contracting, will always be the key challenge.
So the true lesson of PFI is this: that whether we finance capital projects privately or publicly, the real problem is not the involvement of the private sector, but the often poor performance of the public sector as customer.
(1) John McDonnell announced at the Labour Party Conference on 26 September that a Labour Government would take all PFI contracts back in house, although the accompanying press release added the words 'if necessary'. No estimate was given of the costs of doing so. It was said that 'Parliament would assess the appropriate level of compensation', implying legislation to override contract terms on premature termination; and that compensation would be paid not in money, as required by contract terms, but Government bonds.
An example of a Labour penitent is Margaret Hodge, Guardian, 26 September:
Hodge apologies for having been a believer in PFI under the Labour Government. Curiously, she discovered how evil it was immediately Labour went into Opposition.
(1A) The acocunting rules were eventually changed so that the financial control totals had to accommodate the full capital costs of PFIs up front but this didnt happen until late in the day, and it still wasn't quite as tough as actually finding the actual cash up front.
(2) Cribb, J. et al. 'The public sector workforce: past, present, and future'. Institute for Fiscal Studies, 2014
(3) Crewe, B., Liebling, A. and Hulley. S. (2011) 'Staff culture, the use of authority, and prisoner outcomes in public and private prisons' Australia and New Zealand Journal of Criminology. 44(1): 94-115.
(4) The use of PFI in prisons is analysed in detail in my book, 'Competition for prisons: Public or private? ' (2015)
(5) On this and other MoJ procurement failures see:
(6) Design of prisons was done in house up to the mid 80s - that is, at the time when prison building was slower and more costly than ever before or since. But to the best of my knowledge, Home Office civil servants never actually laid bricks.
I was formerly Finance Director of the Prison Service and then Director of the National Offender Management Service responsible for competition. I also worked in the NHS and an IT company. I later worked for two outsourcing companies.
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