Magazine article Public Finance

The PFI Just Can't Deliver

Magazine article Public Finance

The PFI Just Can't Deliver

Article excerpt

The question preoccupying the Private Finance Initiative industry is whether it has a long-term future. At Unison we have to hope that the answer is no, above all because of its effects on public service delivery.

The high costs of the PFI and the poor quality of the services it provides are having a knock-on effect on huge areas of the government's policy and on its efforts to contain costs and improve the quality of public services.

The most corrosive effect of the PFI comes from its huge cost - £198bn from 2004 to 2033 for 600 projects with a capital value of £57bn. A study by Professor Jean Shaoul at the Manchester Business School shows that the extra costs of the PFI for the hospital programme alone is £480m every year. Furthermore, we can expect these figures to be adjusted upwards as the service payments are periodically reviewed.

The most recent Public Accounts Committee report casts doubt on the competitiveness of these reviews and shows that 'benchmarking and market testing, which might have been expected to improve prices during the contract period, have in practice increased prices by up to 14%'.

There is also evidence of schools and hospitals paying more than was expected at financial close. In some cases, schools have faced retrospective, renegotiated price rises. Take cash-strapped Haringey council in London, where secondary schools face a bill for backdated 'variations' of £2m, plus increases of over 50% on the cleaning contract following review.

The PAC report crucially shows that faced with these price increases, some public authorities cut back on service levels or seek savings in the non-PFI parts of services, as PFI payments are ring-fenced.

Higher costs have an impact on the functioning of hospitals and schools. There are examples of job cuts, of hospital beds mothballed and wards closed. This cannot be sustainable for a government committed to improving public services.

The higher costs of the PFI are justified, we are told, because risk is passed to those best able to handle it. But while the private sector takes on some risk for cost and time overruns, the more fundamental risks of failure stay with the public sector.

It also retains demand risk - the number of patients or prisoners or pupils - with the result that if demand changes, the public sector picks up the bill.

The public sector also continues to underwrite risky projects, such as the Channel Tunnel Rail Link, which was kept going by a £4bn cash injection in 1998. More recently, the collapse of the London Underground public-private partnership with Metronet has left the government shouldering debts of more than £2bn, while the contractors walked away with losses of just £350m. …

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