The PFI legacy – and a way forward

Over the summer the financial difficulty of NHS trusts, some of which have Private Finance Initiatives, gave Lansley a chance to attack Labour’s record on the NHS.  Future financial troubles of trusts burdened with PFI repayments will give Jeremy Hunt that same opportunity.  The need for clear policy on PFIs is an important and immediate priority for Andy Burnham and the Labour health team.

The PFI legacy

The attraction of PFIs is that they, supposedly, reduce public sector financial risk, through the private consortium shouldering much of the burden.  They incentivise on time and within budget delivery.  Furthermore, PFIs are an opportunity to increase capital spending without having to fork out the capital upfront.  Payments are delayed (not avoided) and more often than not the debt is kept off the government balance sheet, which cannot be done through direct government lending.

As a government we found them helpful in allowing us to build hospitals, motorways, and schools without breaking the “Golden Rule” of debt not exceeding 40% of GDP.  And, while the Tory rhetoric of the last 3 years might lead us to believe that they now reject this avenue of funding, the rate at which they are enthusiastically signing off private finance suggests that is far from the case.

It is important to clarify a few points.  One, the state the Tories left NHS in required hospitals to be built urgently, which in turn meant government debt of some description.  Two, the majority of trusts in the UK which have private finance initiatives will be able to repay them without problems.  Three, most of the financial difficulties facing trusts are not due to PFIs; rather shocking mismanagement of assets and staff costs reaching, in some cases, 70% of the trusts budget.  Finally, PFIs were the vehicle through which much of the improvement in the NHS between 1997 and 2009 was brought about (101 out of 135 hospitals build were through PFIs).  Simply put: we would not have been able to do a lot of what we did without them.

However, many, including myself, see such a heavy reliance on private finance as unwise.  A number of trusts are suffering from the burden of repayments.  The value-for-money argument has shown to be questionable and conventional procurement may have been more suitable in many cases.  The public sector has found difficulty in ensuring that risk is truly transferred to the consortium and, possibly most troubling, PFIs have undoubtedly passed the bill onto the next generation.

A way forward

The next Labour government is unlikely to reject PFIs out of hand (a presumption, not an endorsement).  With this in mind policy which makes private finance work for the public is the order of the day.  Labour should undertake a number of commitments to show we are serious about addressing challenges associated with private finance.

First, a hard limit on the amount of capital spending in the NHS through PFIs.  A percentage.  The shadow health team should be able to reach non-arbitrary figure.  Like the “Golden Rule” of debt to GDP ratio that gave Gordon the reputation of the Prudent Chancellor, this would give Labour policy on private finance real credibility.  Furthermore, putting pressure on the new Health Secretary to join us in this pledge would be good opposition politics, as Jeremy Hunt would likely cut of his corporate hugging, bell ringing arm before agreeing.

Second, all PFIs should have to be kept on the books of the national account.  This will refocus future PFI decisions away from “can we build this and hide the cost?” towards “what is the best value for money?”.  Keeping PFIs on the books will make the public sector comparator of direct government borrowing more favourable, because governments can almost always borrow at a lower rate than private companies.

Finally, Labour should commit to the reopening of contracts that are not providing value-for-money, and the refinancing of debt where the interest rate has fallen (which normally happens after the construction phase of the project when risk falls).  This commitment should be on both current and future PFIs.  It will be deeply unpopular with consortiums, but this is a workable option, as proven by the Ministry of Defence.  If Andy  Burnham and his team were feeling really brave, the debt could even be restructured so that the current generation of taxpayers pay more for the services that they are currently enjoying; reducing the burden being passed on to the next generation.

Labour’s commitment to PFI’s during the last government is an issue that the opposition Labour health team is going to have address  This is best done through sensible, moderate and forward looking policy.  Based on the presumption that no future government, of any colour, is going to renounce their use, policy to ensure PFIs work for the public is urgently needed.