Hard times call for a new rebate on PFI deals

Jesse writes in the Financial Times.

Financial Times

The public sector is facing falling headcount, businesses are struggling with the legacy of high taxation and slow growth and voluntary organisations are bracing themselves for cuts. In this time of fiscal retrenchment, all parts of government must do their bit. But the private finance initiative, in particular, offers potentially huge savings.

Before the election, the Conservatives were highly critical of the PFI. But, as yet, little has been said by the coalition about its future. Legally, it sits in public-private limbo. It is not part of the public sector, since its consortia are made up of private contractors. But nor is it entirely private sector, as these same consortia manage hundreds of public projects, from roads to schools and hospitals.

These projects are paid for by the exchequer on 25- or 30-year contracts, with contractors typically aiming at 8-10 per cent annual returns. Not a windfall; but a healthy taxpayer-guaranteed return, especially in a recession. Given this, I have launched a campaign for contractors to contribute a “rebate” to the public purse, by reducing the interest payments they receive from public institutions.

Some £210bn of PFI capital assets remain outstanding. A McKinsey study last year suggested that a reduction in interest charges paid to contractors by NHS hospitals of just 0.02 or 0.03 per cent could save £200m. (The NHS constitutes about one-third of the PFI debt.) Taken across all existing contracts even this modest rebate could save £500m-£1bn.

It is important to note that these savings would not go to the Treasury, but would instead be remitted back to each hospital or school. They would provide a pound-for-pound impact on the funding of each institution, from the bottom-up, meaning a lot more medicine, surgery and school books. Indeed the savings would be especially important since many PFI institutions – such as hospitals which have contracted out almost all of their non-clinical costs – will find it much harder to manage their costs down than will non-PFI ones.

There is an obvious objection: these are private companies with commercial contracts signed with willing counterparties. So it should be no part of government policy to set aside, tear up or rework these contracts.

True enough. But mere encouragement from government might be enough to do the job, for the government has many points of contact with the different PFI consortia. For example, one of the largest contractors, Semperian, has stakes in 106 separate PFI or public-private partnership projects. These multiple points of contact give the government a much louder voice, while an individual hospital or school is likely to be ignored.

Just as importantly, many investors in these companies are themselves public authorities. The largest investor in Semperian, for example, is Transport for London. TFL and other public bodies may find it convenient to push fairer treatment for transport, health or education projects, rather than allowing contractors to make huge sums at a time of austerity.

So the government does not lack the influence to encourage PFI providers to rebate a portion of their revenue. And the idea that our public services are getting a bad deal here is gaining momentum, with the chief economist of the King’s Fund health think-tank recently calling for the NHS to renegotiate its PFI commitments. Indeed, there is a direct precedent for exactly this sort of rebate in the so-called “voluntary code”. The code was agreed in 2002 after several PFI providers made huge windfalls refinancing deals. Under it, 30 per cent of gains from existing projects were returned to the taxpayer. The ratio is 50 per cent for new deals.

There are also other hidden opportunities in this area. Use of space in many PFI hospitals remains below international standards. In the long term there is scope to re-open current PFI deals, to relax some restrictions and make more economic use of hospitals’ non-clinical space and land holdings, and then to remit more value to the public purse. The contractors will get what they are owed, but the taxpayer could benefit, too.

All that is still in the future. But what we need now is a new voluntary code promising a modest across-the-board rebate. PFI consortia have played their part in rebuilding Britain’s infrastructure. But they must play their part in rebuilding the nation’s finances too.

The writer is MP for Hereford and South Herefordshire