With the recovery still in doubt and pressure on public finances mounting, Mike Hollin assesses the value of PFIs to public services and underlines the importance of reading the fine print before signing multi million pound contracts.
PFI sounded like a great idea at the time. It stands for private finance initiative and it is a way of creating public-private partnerships by funding public infrastructure initiatives with private money. Surely it is an ideal way of delivering public services with lots of upside?
Clauses and Charges
The one slight drawback for the public purse – in other words you and me as taxpayers – is that the contracts that have been drawn up have no break clauses – and they have fixed charges. Take the Fire Control Project launched in 2004. Nine new control centres - state of the art. Only one snag, by the time the project was cancelled in 2010 it had cost £469M against a planned cost of £120M.
The cost is still rolling on as the PFI contracts had no break clauses. Would you sign a 25 year mortgage at a fixed cost with no break clauses? You would if it was 0%, but those were not the terms of the Fire Control Project.
So the upshot is that four of these buildings are still empty as few companies want to use them. So how do you encourage companies to take the buildings? Obvious of course, you offer “subsidies” for companies to move in - one subsidy recently given was worth £1.2M.
PFIs in Good Health?
In the health sector, many Trusts in the NHS now have “fixed” costs for PFI deals that have years to run. This makes their monumental challenge on addressing cash shortfalls even more complex. There are a significant number of reports in the public domain that all identify the folly of agreeing to long contracts without break clauses. So why are the same mistakes still being made? The lesson to learn here is simple: don’t agree to any contract that does not have break clauses.
What do you think of PFIs? Do they add value? Share your comments below.