Do you have an exit buddy?

Dave Ayer, CIPFA Property Networks Manager

As Benjamin Franklin once said - if you fail to plan, you are planning to fail. Former Chancellor, Philip Hammond killed off the prospect of any new PFI projects in his 2018 Budget. As a result, there are 204 Private Finance initiative (PFI) contracts in England due to end over the next ten years. Despite this, how much planning is underway by across the public sector to transfer the assets to new management arrangements? The National Audit Office (NAO) have concluded that there is not enough with imminent risks to securing value for money during the expiry negotiations. 

In 1992, the Conservative government introduced the Private Finance Initiative (PFI) and branded it as a new form of public-private partnership. Tony Blair’s Labour government embraced PFI, embarking on an ambitious infrastructure programme of new hospitals, schools and highways.

PFI was in reality just another form of privatisation. The key principles were the transfer of assets and the consequent risks to the private sector. It was particularly attractive to central government because it transferred the debt required to fund projects to the private sector, keeping the public sector borrowing requirement lower than it would be otherwise. The debt, private sector profits and ongoing maintenance of the assets for the 25 to 30 year term of a PFI contract is paid through regular annual payments by the public sector. By 2011, there was around £300 billion of debt owed by the public sector to PFI companies for assets worth just £50 billion.

PFI began to face growing scrutiny - it was heavily criticised by the National Audit Office and parliamentary select committees for failing to demonstrate value for money. Even the concept of risk transfer was difficult to sustain as ultimately, it became clear that the public sector not only carried the liability, but also the risk due to some high profile failures. Despite attempts to revive PFI with the introduction of PFI2, Philip Hammond announced in his 2018 Budget that no further PFI or PF2 projects would be approved. In the end, only a dwindling number of companies were left participating in the PFI market as investors grew increasingly reluctant to place their funds in what they saw as a declining market with increasing risks.

What is the scale of today’s challenge? There are 700 operational PFI contracts in the UK. These contracts will cost the public sector £168 billion in payments over the next 30 years for assets valued at £57 billion. 328 different authorities are responsible for these contracts, with 182 of them responsible for just one PFI contract. 82% of these contracts are managed locally by NHS trusts and local authorities. The NAO predicts a risk of increased costs and service disruption if organisations are not adequately prepared for expiry.

CIPFA has assembled a team of legal and PFI experts who have experience in negotiating exits from PFI contracts and will be holding a series of webinars to guide authorities through the process starting 16 September. This first webinar will provide an essential roadmap for the successful handover of PFI assets in a fair and equitable way which ensures continuity of service delivery.