PFI’s distorting mirror

‘New’ PFI will probably be similar to ‘old’ PFI. The UK government must try to persuade us that it isn’t.

You know those “before” and “after” pictures used by companies to promote the miraculous effects of their dieting/beauty products? The key to these images being visually arresting is that image B looks substantially different from image A – you have to look hard to persuade yourself that it really is the same person.

But what if the “before” and “after” pictures looked almost exactly the same? That would have you scratching your head, wouldn’t it? However, this may be precisely the conundrum with which critics of the UK’s Private Finance Initiative (PFI) procurement tool are forced to wrestle. After the verbal mauling administered to PFI by a number of government ministers – Francis Maude, for example, said many PFI deals were “ghastly” – this may come as something of a surprise. After all, a year ago, Chancellor George Osborne was talking of a completely new delivery model for UK infrastructure after himself describing the existing model as “discredited”. 

And yet, if this week’s reports in the Financial Times are accurate – and our own conversations with industry professionals close to the Treasury suggests they are – “new PFI” will effectively be “old PFI with a little tweaking around the edges” when it’s unveiled (probably a month or so from now). Changes will reportedly include doing away with the “soft” services around facilities management that have caused such a furore (the now-legendary £300-plus cost of changing light bulbs for example). But the essentials of the model will remain firmly in place.

Does this add up to a Damascene conversion? Maybe it should, since much of the PFI baiting has been unjustified. It’s true that, in the early days of PFI – and we’re now going back to the 1990s – equity investors were able to generate windfall gains upon refinancing that the public sector did not share in. But this was more due to the naivety of procuring authorities than any sleight of hand on the part of the private sector. And, in any case, market efficiency has long since sliced the fat from the equity returns. This in turn may explain why most PFI investors would probably be entirely comfortable with some kind of capped return formula – along the lines of Scotland’s non-profit distributing (NPD) model – were it to be incorporated into PFI mark II.

Further, the government has done little to defend PFI from some of the more wild accusations that have appeared in media reports. For example, outrage has been expressed at the total cost of a project compared with the build cost. Now, anyone who’s ever taken out a loan or mortgage should be able to see through this one. Given that asset life can extend over multiple decades, it’s a naïve comparison – and, almost invariably, the government would be unable to deliver the project as cheaply on its own. There has also been criticism of annualised payments on the basis that they effectively mortgage future generations, but why should future beneficiaries of an asset not be expected to contribute to its cost?

The reality is that a government which came to power with a ‘value for money’ agenda found in PFI a handy stick with which to beat the previous administration (which embraced and accelerated PFI)  for alleged budgetary sloppiness. But that opportunism is now being overtaken by pragmatism – and that’s what really lies behind the ‘conversion’. The government is taking flak for an apparent inability to deliver on its ambitious infrastructure plans and knows that PFI holds the key to getting deals flowing through the pipeline.

The challenge it faces now is to present PFI mark II as a genuine makeover, offering a substantially better deal for the taxpayer. That, after all, is the only way to appease the critics. And that’s why it’s useful that a distorting mirror gets held up to PFI image A – it allows the soon-to-be unveiled PFI image B to look gratifyingly different from its predecessor.