Autonomous Geographies: privatefinanceinitiative

The Private Finance Initiative Explained

Introduced in 1992 by the Major government as a politically convenient means of financing large-scale public infrastructure works without “appearing” to raise public spending, the Private Finance Initiative (PFI) has since been mainstreamed under New Labour as its preferred tool for carrying out its “modernisation” agenda. As of October 2007, a massive £56.9bn worth of capital investment had been secured through the PFI to either refurbish or build new hospitals, schools, social housing, IT systems, roads, leisure centres and so on (HM Treasury 2007).

For much of the 20th century, it was public bodies that planned, designed, financed, supervised construction and finally managed the country’s infrastructure of new roads, schools, hospitals, and housing. Private firms would normally only be involved in design and construction. Under the PFI, this entire process is packaged into a lucrative long-term contract (normally 20 to 30 years) that only private consortia (each typically comprising a construction firm, a facilities management company and a bank to finance the scheme) can bid for.

Moreover, public services are “redefined” into so-called “core” and “non-core” categories with PFI schemes restricted to “non-core” services, in other words, providing the physical facilities (e.g. school), not the actual frontline service itself (e.g. education). To clarify, the successful consortium will design, build and privately finance the entire scheme up front and then take over the services related to the management and maintenance of the physical asset. In return, the PFI consortium will receive regular performance-related payments that cover the entire cost of the scheme and include a large profit for the companies involved frequently cited at between 7% and 20% of the total payment (see Spoehr et al 2002; Unison 2002). Fee deductions occur for the “unavailability” of a facility, or failure to meet agreed service performance levels in the contract (Hodges and Grubnic 2005:65).

There is now a wealth of documented evidence exposing the controversies and problems of the PFI across the public sector, particularly in hospitals and IT systems: it is proven to be on average 30% more expensive than publicly financed projects because of the higher cost of commercial borrowing, and is notorious for escalating project costs and delays, poor quality building work, service failure, worker exploitation, a lack of accountability and corporate profiteering (see Beckett 2007; Monbiot 2001; Pollock 2004; Unison ‘Positively Public Website’).

Despite this, public authorities continue to opt for PFI schemes, firstly, because it is often the only source of large-scale capital investment made available by government, and secondly, because the government’s Public Sector Comparator (PSC) model used to compare “value for money” between proposed PFI schemes and conventionally procurement approaches is inherently biased towards the PFI route. This is because it specifically ignores or minimises the costs associated with PFI, exaggerates its benefits, and makes a number of unfavourable and unfair assumptions about public sector performance (see Coulson 2007).

However, while the costs and risks of the PFI are of major concern, the real significance of PFI lies in the broader social restructuring processes it is helping to unleash. The combination of the PFI with the wider framework of marketisation creates what might be called a “neoliberal straitjacket” on the public sector and elected local councils. Whitfield (2001) argues that it is leading to the “privatisation by stealth” of all remaining public services, and, as a result, the growing power and influence of global capital over local and national government and economy. This is due to the multinational character of PFI consortia and the subsequent applicability of global trade rules governed by the World Trade Organisation that oblige national governments to irreversibly liberalise markets for services on a global scale.

References

Beckett, F. (2007) The Great City Academy Fraud. Continuum
Coulson, A. (2008) ‘Value for Money in PFI Proposals: A Commentary on the UK Treasury Guidelines for Public Sector Comparators’, Public Administration 36
Hodges, R. and Grubnic, S. (2005) ‘Public policy transfer: the case of PFI in housing, Int. J. Public Policy 1(1/2): 58–77
HM Treasury (2007) ‘PFI Signed Projects List’, October, http://www.hm-treasury.gov.uk, accessed 14 February 2008
Kerr D (1998) ‘The Private Finance Initiative and the Changing Governance of the Built Environment’, Urban Studies, 35(12): 2277-2301
Monbiot G (2001) Captive State. The Corporate Takeover of Britain. Pan Books
Pollock A (2004) NHS Plc: The Privatisation of Our Health Care. Verso
Whitfield, D (2001) Public Services or Corporate Welfare: Rethinking the Nation State in the Global Economy. London: Pluto Press
Spoehr, J. et al (2002), Partnerships, Privatisation and the Public Interest: Public Private Partnerships and the Financing of Infrastructure Development in South Australia, The University of Adelaide & The Public Service Association of South Australia
Unison (2001) Public Services, Private Finance: Affordability, Accountability and the Two-Tier Workforce.
Unison (2002), PFI: Failing our future A UNISON audit of the Private Finance Initiative
Unison Scotland (2007) At What Cost? A Unison report on the aggregate costs of PFI/PPP projects in Scotland – and some suggestions on a way forward, October, accessed 13 February 2008
Unison Positively Public Website, accessed 3 March 2008

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