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15 January 2019
During the course of his Budget speech on 29 October 2018 the Chancellor, Philip Hammond, said: "I have never signed off a PFI contract as Chancellor and I can confirm today that I never will". It might be nit-picking to point out that PFI as a procurement route was replaced by PF2 in 2012 so there is little chance that Mr Hammond would ever sign a PFI contract, but the wider point is that he went on to say that the Government has now abolished the use of PFI and PF2 for future projects. The Government will not however take back control of existing PFI contracts but will instead allow these to run their course and establish a centre of excellence "to actively manage these contracts in taxpayers' interests starting in the health sector". This step was taken in the face of "compelling evidence" that the Private Finance Initiative neither delivers value for the taxpayer nor genuinely transfers risk to the private sector.
There may be some debate about what a "genuine transfer of risk" is as opposed to the transfers of risk from public to private sectors that have actually taken place. The report issued by the Public Administration and Constitutional Affairs Committee (After Carillion: Public Sector Outsourcing and Contracting) found that there were fundamental flaws in the way the Government awarded contracts because of "an aggressive approach to risk transfer". The report, published on 9 July 2018, found that ministers tended to spend as little money as possible when awarding contracts whilst forcing contractors to take unacceptable levels of financial risk.
PFI has always been controversial but the basic premise of leveraging private finance into public infrastructure schemes was not new when PFI was invented and will undoubtedly be with us after PFI has gone. It is unlikely that any Government will in the foreseeable future have enough funds available to fund the massive infrastructure projects that the National Infrastructure Assessment has indicated are vital in order to allow this country to have a properly functioning infrastructure in the twenty first century. The big question is what will replace PFI and PF2?
The Public Administration and Constitutional Affairs Committee suggested that rather than going for lowest cost it is more important that the Government should learn "how to effectively manage its contracts and relationship with the market". When PFI was introduced by the Conservative Government in the early 1990s one of its aims was to transfer debt off the public balance sheet. Whilst the committee found this a "shocking" admission from the Government, this I recall was not a secret when we began to draft PFI contracts in the mid-1990s. PFI would, it was felt, provide "value for money" for these schemes. Notably, "value for money" was never properly defined. There was also much talk of the optimum risk curve, a sensible distribution of contractual risk to the parties best able to bear it. I am not entirely convinced that goal was achieved in many cases. Given its political sensitivity, there will probably never be a satisfactory resolution to the issue of whether PFI provides value for money or simply loads unnecessary debt on the public sector. The choice facing the public sector at the time, however, was not between traditional methods of procurement and PFI but between PFI or nothing at all.
From the construction sector's perspective, of course, the spectre of the Carillion collapse is tied into a number of disastrous PFI projects that Carillion was involved with including the construction of the Royal Liverpool University Hospital and the Metropolitan Midland Hospital. The number of PFI contracts has in fact been declining rapidly from a high of 68 in 2004 to just one in 2018 but notwithstanding this, there are a number of new PFI projects which are being explored – a prison, two roads projects and community and primary care estates within the NHS. If the Government is going ahead with these proposals it is clearly going to have to come up with an alternative way of funding them which will be attractive to the private sector.
My involvement with PFI began with drafting the construction elements of PFI projects, continued by way of disputes in the construction phase of these projects and now concerns issues relating to the operation of the assets and the correct application of the payment mechanisms. Soon I suspect we will be looking at the handback provisions. Given its complexity, political sensitivity and knife-edge financial arrangements it is hardly surprising that PFI has proved to be so problematic and it is highly unlikely that anyone will be sorry to see it go. The real question is what will replace it.
A different version of this article originally appeared in Building magazine.
For further information on this topic please contact Simon Lewis at Womble Bond Dickinson (UK) LLP by telephone (+44 191 279 9000) or email (firstname.lastname@example.org). The Womble Bond Dickinson (UK) LLP website can be accessed at www.womblebonddickinson.com.
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