Private Finance Initiatives were fashioned in the 1990s, designed by John Major’s Conservatives but enthusiastically embraced by Tony Blair’s Labour. They allowed significant investment in schools, hospitals and other infrastructure projects without the government needing to foot the cost up front. They were popular with politicians as PFI debts do not form part of the deficit balance sheet and typically spread over 25 years, they were able to invest in popular investment programmes like Building Schools for the Future (BSF).
Unions were quick to question the long-term costs of PFI, highlighting their fears more than a decade ago but since then, a steady stream of stories about the seemingly outrageous cost of seemingly simple tasks has highlighted the limitations of the scheme.
One PFI hospital was apparently charged £333 to have a new light bulb installed under the terms of their maintenance contract. An empty school will cost taxpayers £370,000 a year until 2027 and another school had to pay £302 for a socket, five times the cost of the equipment it wanted to plug in. Perhaps the most absurd was for military dog kennels which would have ended up costing more per night than a room in the Park Lane Hilton, London.
The National Audit Office put together a scathing report in April 2017 finding that each household in the UK will pay nearly £400 next year to pay for hospitals, schools and motorways.
So the narrative has become that construction firms are extorting vast profits from the public purse. But in many cases, contractors have lost out as well and it is the financiers of PFI that have seen the benefits. An almost unknown City company, Innisfree, with only 14 staff, is the largest single player in the PFI market, owning or co-owning 269 PFI schools and 28 hospitals and enjoyed a profit margin of 53 percent last year.
In contrast, Costain said it had incurred losses of £15.1m in 2016 from the £397m subcontract to design, construct and commission 46 waste facilities across Greater Manchester, awarded in 2007. Amey announced that jobs on the £2bn Sheffield highways PFI deal will be redeployed after the firm forecast first-year losses on the project, and among Carillion’s current woes is the Royal Liverpool Hospital PFI where there have been significant project delays and technical problems.
So PFI’s unhappy legacy is not only a long-term drain on public finances and on the profits of industry contractors, but it has also fed a negative narrative around the construction sector. At a time when the industry needs to attract talent to fill skills gaps, the industry is tarnished with stories of £330 light bulbs. The outstanding work carried out on marquee projects like Cross Rail is being obscured at a time when construction wants to attract people from outside its traditional core including millennials, women and minorities.
The poisoning of the construction industry’s reputation might well be PFI’s most unpleasant legacy.