What is a PFI and why are they bad for Local Government?

What is a PFI and why are they bad for Local Government?

What is a PFI Contract?

A “Private Finance Initiative” (PFI) is a method of providing funding for major capital investments such as schools, care homes, hospitals, etc. They have been used to give the appearance of reducing public-sector borrowing because instead of borrowing directly from the Government through the Public Works Loan Board, local councils and other bodies do not need to finance the projects themselves. This keeps the borrowing off of the government’s books.

They allow the private sector to put up the capital investment themselves and then the Government or council will pay back those private companies the loaned money with interest often over 25 to 30 years.

On top of that many contracts also allow the PFI companies to run the facilities and or deal with the maintenance of the buildings and charge extra for doing so.

PFIs are supposed to improve project completion and transfer some of the risks associated with constructing and maintaining these projects from the public sector to the private sector. Financial advisers such as investment banks help manage the bidding, negotiating and financing process.

Why is this bad thing?

On the face of it, PFIs sound like a great idea but the reality is somewhat different. Firstly the repayments are themselves extremely expensive. Private businesses obviously expect to make a profit on both the capital that they invested and the risk they took on building the project in the first place. However, a lot of the contracts that were signed were far, far too biased towards the PFI company and arguably public bodies have ended up overpaying on these long-term leases.

Secondly, the interest payments have given extra profit to the PFI companies. To protect themselves against volatility in the financial markets PFI companies protected themselves by building in high-interest repayments. However, the reality is that interests rates have been historically low over the last ten years or so. This has left councils and others paying far more than they otherwise would have done.

On top of those costs, there are also the costs of running the facilities. This is where you hear horror stories about PFI companies charging £300 to change a light bulb in a school or a hospital for example. The truth is the private sector has better and more expensive lawyers and negotiators than the public sector and were simply able to get contracts signed that gave them ridiculous profits.

Government – both local and national – seemed just happy to push costs further down the line and focused on the short-term and the fact they wouldn’t have to find the money themselves up front.
Overall spending on these contracts is significantly higher than they are worth, to the benefit of the private firms running them and to the taxpayer’s detriment. This has led to £200 billion pounds nationally being due to be paid out over the coming years for £60 billion worth of buildings.

These schemes have been described by a Government Select Committee as an “extremely inefficient way of financing projects”. And a recent report (18th January 2018) from the National Audit Office (NAO) has shown that using PFI contracts can cost 40% or more than relying on Government money.

How this affects Northamptonshire

During this financial year according to the Centre for Health and the Public Interest Think Tank, Northamptonshire County Council will have paid out more than £58m in the capital, interest and service elements of their five PFI Contracts.

It has been reported that the largest contract the council has is for the building 41 schools in Northampton and although the original capital cost was about £230 million, the council will end up paying back £918 million over 30 years!

What can be done?

Getting out of a contract is highly complex and expensive which is why they are still so many of them in existence.

To renegotiate a contract both sides have to agree. Currently, there is little incentive for the PFI companies to agree to any changes that will reduce their income. However, Stella Creasy (an influential backbench Labour MP) has proposed a windfall tax on PFI companies. The intention is that the threat of a future one-off tax will encourage them to the table to renegotiate their deals rather than expecting individual councils or health trusts to do it themselves.

On 21st February there will be a debate and vote on an amendment to the Government’s Finance Bill in Parliament to bring in a windfall tax on the excess profits these companies make. The idea of this is to act as an incentive to get the PFI companies back around the table to renegotiate so councils and other public sector bodies may be able to get a better deal or end the contracts in a reasonable manner.

This means that any MPs that genuinely want to free up council cash so it can be spent on local public services and for their communities, could and should put their money where their mouth is by co-signing this amendment and voting for it.

I will be writing to all seven of Northamptonshire MPs and asking them to do exactly that. Why don’t you? Their addresses are:

philip.hollobone.mp@parliament.uk
bonep@parliament.uk
tom.pursglove.mp@parliament.uk
chris.heatonharris.mp@parliament.uk
andrea.leadsom.mp@parliament.uk
michael.ellis.mp@parliament.uk
andrew.lewer.mp@parliament.uk

 

Photo by J D Mack

About The Author

Mick Scrimshaw

Mick Scrimshaw is the Leader of the Labour Group at Kettering Borough Council, the Shadow Cabinet Member for Finance at Northamptonshire County Council. He has a public record of standing up for Kettering as a County Councillor for the Northall division in Kettering, Northants and since May 2015, a Borough Councillor for the William Knibb ward. He is a keen cyclist and also runs a family business with his wife.

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