‘It’s time to tackle one of the biggest drains on public spending – PFI’

Anyone paying a mortgage negotiated following the disastrous Liz Truss budget knows why we need to protect the public from bad debts. As Labour introduces the Budget Responsibility bill to put a ‘fiscal lock’ on spending plans to do this, it’s time to also tackle one of the biggest drains on public spending.

Private Finance companies have caught local and national governments in exploitative deals for decades – with tough choices ahead we cannot ignore just how expensive these 700 projects are and could be for decades to come.

Just as we might advise constituents to consolidate their debts to help reduce repayments to avoid personal bankruptcy, so we should look at how governments borrow and tackle these legal loan sharks of the public sector.

Governments of all persuasions have used PFI – with the last Labour government granting an average of 55 PFI contracts per year and the last Conservative one continuing this trend with the “PF2” scheme up until 2018. Consequently, the UK exchequer currently has £151bn of repayments outstanding on such deals. The NIESR estimates councils are spending £18bn every two to five years, of which £4.2bn is interest, on PFI debt repayments. That’s a quarter of this year’s ‘blackhole’ in public finances the Conservatives left Labour with and three times more than will be saved by restricting access to the winter fuel payment.

NHS spends billions on PFI, while profits companies involved make are eyewatering

PFI enables public bodies to only declare repayments, but the real costs have been disastrous – in the same way a payday loan or BNPL deal savages someone’s bank account. For many NHS Trusts, the percentage of their total budget spent on PFI can be up to 13%, with some spending more than £2bn a year. Centre for Health and the Public Interest research shows this can be more than their yearly spend on drugs.

During the pandemic in 2020, Norfolk and Norwich University Hospital paid £66m to service its PFI commitments, the same as it spent on clinical services including lab equipment, surgical tools and PPE. At the same time, the profits the companies involved make are eyewatering – with University College Hospital in London, £200m has already been paid out in dividends to shareholders from this scheme alone, with millions more to come.

READ MORE: Socialist Health Association warns Labour under-funding risks NHS ‘decline’

Private finance is not just stripping the NHS of valuable funds. In 2019, the Hanson School in Bradford reached a debt of £4.16m after being locked into an exorbitant PFI contract. It’s now referred to as the UK’s “orphan school” as no one wishes to take it on as a result. Similarly, Liverpool City Council pay £4m a year for Parklands High School, which was built under PFI but closed due to falling school rolls. They have roughly £42m left in repayments, whilst the provider Equity Solutions posted annual profits of around £340,000 from this project alone.  Innisfree – incorporated in Jersey – owns 260 schools in such projects.

These numbers reflect how the relatively small group of companies which oversee PFI contracts officially take on the cost of the risk of building new resources – schools, roads, hospitals. In reality what they get is the ability to print money because whatever the bills incurred, the public sector doesn’t let schools or hospitals go bust.

‘It’s time we put PFI properly on the books’

The Chancellor’s Budget Responsibility Bill, which will be debated in the House of Commons today, will mean that the Office of Budget Responsibility will be required to review major fiscal announcements which cost at least 1% of GDP. Whilst individually no PFI contract meets this threshold, cumulatively they easily fall into this category. That’s why I’ve tabled amendments to ensure that private finance deals would be covered by the same rules – because it’s time we put PFI properly on the books so we can see what it actually costs.

For the avoidance of doubt, concerns about PFI don’t mean that borrowing to build infrastructure in partnership with the private sector is always a bad thing. It’s that these contracts are inherently a bad deal – and one which if we do not address and learn from in working with the private sector could continue to mean our debts damage our capacity to deal with issues such as RAAC in schools and the new hospitals so desperately needed.

The good news is that just as with measures to tackle private debt, if there is a will there is a way out of this nightmare.  The Department of Health has reviewed existing PFI contracts to see where they could be consolidated, cut in cost and even in some cases rightly cancelled. With so much profit from this industry currently going overseas, if we are to work with the private sector we should require any company involved to pay all taxes in the UK. We can also learn from how we ended payday loan sharking by capping the total return on such contracts. Given that we already cap the returns to be made on defence contracts, to fail to do so when it comes to repairing our schools and hospital costs makes little economic or ethical sense.

Applying the ‘fiscal lock’ to future work with the private sector on infrastructure will help us not only better understand whether such deals are value for money, but also how to manage the costs of repairing broken Britain in a way that doesn’t repeat the damage already done. Before we ask pensioners to pay more for heating, we should ask how we pay less for PFI.

READ MORE: Sign up to our must-read daily briefing email on all things Labour

SHARE: If you have anything to share that we should be looking into or publishing about this story – or any other topic involving Labour– contact us (strictly anonymously if you wish) at [email protected]. 

SUBSCRIBE: Sign up to LabourList’s morning email here for the best briefing on everything Labour, every weekday morning. 

DONATE: If you value our work, please donate to become one of our supporters here and help sustain and expand our coverage.

PARTNER: If you or your organisation might be interested in partnering with us on sponsored events or content, email [email protected].