News

Controversial PFI contracts abolished by Chancellor in Budget announcement

Controversial Public Finance Initiative (PFI) and PF2 contracts that led to the stalling of the construction of major hospitals in Liverpool and Birmingham have been abolished by the chancellor in yesterday’s Budget announcement.

Speaking in the Commons yesterday, Philip Hammond definitively told MPs he would “never” approve another PFI contract—which contracts the delivery of projects out to private firms in exchange for government payments over several decades— while he was in the post, adding that the announcement showed the government was putting another “legacy of Labour behind us.”

Earlier this month, a report from the New Local Government Network found that 39% of council leaders said that they would be outsourcing less over the next two years.

Many will know the effects of PFI contracts after the collapse of infrastructure titan Carillion in January led to the stalling of the £335m Royal Liverpool Hospital and £350m Midlands Metropolitan Hospital— an issue that after months of concern that the projects would fail to be completed, required a government bailout in September and August respectively, and with the Midlands facility opening four years late.

Last month the Public Accounts Committee said that “lax” and “poorly drafted” PFI funding agreements to support the building of local authority waste processing plants have failed to deliver value.

Yesterday the chancellor said: “In financing public infrastructure, I remain committed to the use of public/private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector.

“But there is compelling evidence that the private finance initiative does neither.”

“I have never signed off a PFI contract as chancellor, and I can confirm today that I never will. I can announce that the government will abolish the use of PFI and PF2 for future projects.”

It is believed that the Treasury is looking at different routes of funding public sector projects. Hammond added that the existing 700 PFI and PF2 deals will be honoured, but no new ones will be signed. The government estimates that the contracts will cost around £200bn by 2040.

Last year a report by the Centre for Health and the Public Interest (CHPI) found that of 107 PFI contracts in England, companies had made pre-tax profits of £831m over just six years.

A new ‘Centre of Excellence’ will be set up within the Department of Health and Social Care to ensure proper management of the existing contracts, Hammond noted.

Carolyn Fairbairn, director-general at CBI, said: “The end of PFI and PF2 is not a huge surprise.

“The important question is how, working with the new Centre of Excellence, a new model of business working to deliver the government projects that would otherwise gather dust will be built.”

PwC’s capital projects and infrastructure leader Richard Abadie said PF2 is a policy that has delivered “very little,” since its introduction as successor to PFI.

“More important is how government will accelerate infrastructure investment to put us on par with our G7 peers, irrespective of whether publicly or privately financed.

“Nevertheless, the chancellor confirmed 50% of infrastructure investment is privately financed and will continue to be used where it delivers value and transfers risk.  I expect private finance will need to be used to build future infrastructure projects.”

Enjoying PSE? Subscribe here to receive our weekly news updates or click here to receive a copy of the magazine!

Image credit: PA Images