Taking back the initiative

Written by Chris Huhne MP and published in Comment is Free: Private finance initiatives have had their day. Let's get back to honest finance and proper accounting on Wed 28th Nov 2007

The private finance initiative (PFI) began as a simple idea. Bring in the private sector to build and operate projects and to take risks that would no longer be shouldered by the public sector, and particularly the exchequer.

The advantages were real and immediate, not least for politicians trying to improve public services at the same time as satisfying the financial markets that their finances were in orthodox order.

If there was genuinely a shift of risk from the public sector to the private sector, then the capital cost of the project no longer had to be booked as public expenditure. Only the service charge payable to the PFI contractor needed to show in the accounts.

Both the Conservatives and Labour found a way to increase public sector capital projects substantially without having to account for the full capital cost of doing so. It was good for the borrowing requirement and for the sheen on the chancellor's finances. That was the theory.

The reality, however, has been failure on all fronts. PFI schemes do not necessarily deliver better quality than a publicly managed contract. They can, for example, introduce dangerously long reporting and command lines between those who ought to be responsible for a service and those who deliver: take a ward matron in charge of cleanliness and a cleaning contractor.

They are inherently costly compared with the alternative, not least because the costs of finance are higher for private companies than the exchequer borrowing with all the taxing power of the state. In theory, the higher finance costs reflect the increased risk taken by the private sector, but as we will see these risks are not convincingly shed.

And the early PFI deals, with no public share of gains from refinancing, have given financiers a gigantic free punt on falling interest rates at taxpayers' expense.

Moreover, PFI schemes tie contracting authorities into long periods of particular patterns of provision. If health authorities or others then need to change the configuration of the services, they have often to renegotiate the contract at considerable costs to the taxpayer.

And we now know the shift of risk is often a mirage. The classic example is Gordon Brown's own pet project, the disastrous Metronet scheme of maintenance on the London Underground. As soon as the contractor walks away, the public sector has to pick up the pieces because the alternative is too politically horrible to contemplate. So the liabilities boomerang back to the public sector.

PFI is an idea whose time has passed. Let's get back to honest finance and proper accounting.