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King's Fund - An unhealthy end looms for the private finance initiative

The private finance initiative (PFI) was controversial from day one. Ten thousand or so days later it still is, as the first of these 25–30-year contracts for the private sector to finance, design, build and maintain public assets, including hospitals, come to an end.

A report in the Financial Times recently highlighted ‘toxic’ relationships, shouting matches, aggressive conduct and the first of what risks being a slew of lawsuits as these contracts come to a close. Things are worst in the health sector, if a recent, and decidedly anxious, independent report commissioned by the government’s Infrastructure and Projects Authority (IPA) is to be believed.

Under PFI, rather than borrowing to build, the government contracts with the private sector to finance, design, build and maintain public assets. These have ranged from hospitals and schools to roads, prisons, street lighting and military equipment. The contracts typically run for 25–30 years.

Big money is at stake. There are some 700 PFI contracts with a capital value of £57bn, and around £160bn still to be paid for their use and maintenance.

Everyone is worried

Everyone is worried about how these contracts will finally end: those in the public sector who hold them; the PFI industry itself; the National Audit Office; and the IPA, which is the government’s centre of expertise on PFI and all other major projects.

The big question is whether the government is doing enough to provide the huge amount of support that individual hospitals, schools and others are going to need to avoid what the Financial Times dubbed ‘a bitter end' to the UK’s use of the private finance initiative.

Proper maintenance was a big attraction of PFI

PFI has been controversial for a whole variety of reasons. But one real attraction was the obligation to maintain these hospitals and other assets well so that they would be handed back to the public sector in fine working order.

This was attractive not least because governments of all colours tend to cut capital expenditure, which includes maintenance, when times are tight. This has led to a bill for backlog maintenance in the public sector of at least £37bn. Some £10bn of that is in the NHS. As a result, areas involving patient treatment are being closed ‘all the time’,  NHS England told MPs recently.

Disputes are growing – not least in the NHS

But while the promise of high-quality maintenance was there, it is the reality that is causing the current angst. As the National Audit Office has noted, with dry understatement, ‘measuring the condition of an asset can be a subjective process’. There can be vastly different views about the quality of the estate. In addition, as cash-strapped hospitals and others have sought to manage their PFI contracts more vigorously – looking for reasons to make deductions from the annual payments because of defects – relations have deteriorated.

According to the IPA’s report by two independent PFI experts – the White Fraiser report – this has spawned ‘a lucrative and self-perpetuating disputes advisory market’. One in which the advisers make things worse by seeking to win for their side ‘at all costs’. Hence increasingly toxic relationships, most notably in the health sector.

More central government support looks to be needed as these contracts end

While there is plenty of guidance on managing the end of a contract, and some central support, the fact remains that these exit negotiations are still being done by individual hospitals and others, usually by people who have not done this before and are likely only to do it once, while the PFI industry has always been more concentrated and hence more expert. To the outside eye, this looks like a less than balanced equation.

The White Fraiser report finds both the public and private sectors at fault for the current relationship and calls for it to be completely ‘reset’, both to manage current contracts better and ensure an orderly exit.

One dispute – over who is liable for a fire at the Whittington Hospital in 2018 – is already in the courts. Without action, the report says, ‘we expect the current trend towards increased disputes and deteriorating relationships to accelerate’, with those disputes wasting large amounts of time and money and risking service disruption.

This remains rescuable

There is still – just – enough time to do this better. Only from this year  does the number of contract exits really start to rise. Just five of the health deals are due by the end of 2026/27.

The government and the industry clearly both need to invest now in contract expiry in order to avoid wasting money in the long run. Failure to do so will be good for lawyers, bad for public services and the public purse, and damaging for both the private sector and government. The government may have abandoned the use of PFI in 2018 but it still needs private investment. A poisonous end to PFI will not encourage that.

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