According asset) but the public sector provides

According to the Infrastructure and Projects
Authority (IPA) over £300 billion is required to be invested in infrastructure by
2021. There are various ways by which the government can pay for infrastructure.
Historically, most of the finance for investment in infrastructure is drawn
from tax receipts and/or government borrowing, and the government intends to
spend up to 1.2% of gross domestic product (GDP) each year on economic infrastructure
between 2020 and 2050.1 However, a significant proportion of the
planned infrastructure will also be privately financed. One private financing
route is a Public Private Partnership (PPP) such as PFI and PF2. There are over
700 PFI and PF2 projects in the UK. Over the last 20 years capital investment
using PFI and PF2 has averaged around £3 billion a year – this is
relatively small in comparison to publicly financed government capital
investment which currently amounts to around £50 billion a year.

 

The fundamental difference between conventional public
procurement and PFI procurement for capital investment relates to which party
raises finance for the asset’s construction. In conventional procurement
the private sector is still involved (private contractors build the asset) but
the public sector provides the finance. When the public sector procures an
asset using PFI, a private company – a Special Purpose Vehicle (SPV) – is
formed and it raises finance from debt and equity investors to pay for
construction. Once the asset is constructed and available for use the taxpayer
makes ‘unitary charge’ payments to the SPV over the contract term, usually 25
to 30 years. This charge includes debt and interest repayments,
shareholder dividends, asset maintenance, and in some cases other services like
cleaning. These payments will be agreed at the start of the contract and some
or all of them will be linked to inflation. All of these aspects remain in the
PF2 model which replaced PFI in 2012; the costs and benefits of PFI discussed
in this report also apply to PF2.

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HM Treasury made the introduction of PFI possible in
1989 when it retired the ‘Ryrie-Rules’ (which had discouraged public sector
projects from being privately financed) and announced that it would allow
additional privately financed investment in roads. In 1992, the use of PFI was
extended to other sectors and the name ‘Private Finance Initiative’ was used
for the first time.2 Other changes were later introduced to allow
for PFI to be used within local bodies, for example the Department of
Health and Social Care provides a Deed of Safeguard for PFI health deals which
guarantees PFI payments. (HM Treasury – National Audit Office, 2018)

 

Many countries around the world have adopted PPP’s
and PFI’s in similar forms to that seen in the UK. Paul Drechsler, chair of the
Confederation of British Industry (CBI), however, questioned recently why PFI
“does not work here in the UK but does elsewhere. This may lead us to assume
that issues encountered with PFI in the UK are less an issue with the model
itself and more its implementation and management by government bodies.

 

1         
Why PFI

 

PFI was created in order to address the belief that
construction engineers are better trained to understand risk in construction
than civil servants in government departments or local councils. It was
conceived following the desire of the US and UK governments, Reagan and
Thatcher, to increase significantly the role of privatisation in their
economies. This desire was evidenced by the sale of many public utilities,
water and rail most notably. It was this ideological bent that underpinned the
large scale adoption of PFI in seeking to reduce risks shouldered by the
government and drive efficiencies in project delivery.

 

An early example of PFI being used was for the
channel tunnel, which encountered numerous financial and contractual
difficulties  before major restructuring
allowed it to eventually operate as intended. Since then PFI has often been
used for hospitals and schools, projects which typically have large capital
costs that struggling government departments would struggle to meet. During the
years of the Blair government, it became incredibly attractive to Labour to use
PFI as a funding model for many of these projects. PFI allowed large eye
catching construction projects to go ahead whilst keeping the treasury balance
sheets free of huge short term spending. This helped Labour look good in the
eyes of the public and would become one of the key desirable features of PFI,
namely the use of balance sheet incentives which reduce demands on departmental
budgets and are not shown in figures of public debt. 

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