Private Finance Initiatives (PFI) have been a part of the political scene since the latter part of the last Conservative government which lost office to New Labour in 1997. New Labour, and in particular the then new Chancellor of the Exchequer (and currently Prime Minister), Gordon Brown, immediately jumped on to the PFI band wagon.

So what is it? The Whys and Wherefores

So what is PFI used for and how does it work?

Well, as the name suggests a PFI is an initiative to use money raised by the private sector to finance public sector projects. The kind of projects we have seen PFI and its derivatives used for include building schools, hospitals and transport infrastructure, as well as for "running" public service buildings such as those occupied by HM Revenue & Customs. In effect, instead of government having to raise money to build hospitals, schools and roads etc., the private sector raises the money and does the building etc. Sounds good, doesn't it? It almost seems too good to be true, which is, of course, exactly what it is, but we'll expand on that lower down this article by way of an analogy!

Gordon Brown is a strong proponent of PFI schemes to the extent that, in the last ten years, legislation has been introduced to force any large public undertaking to consider PFI against the benefits of undertaking the expense in the more traditional way by raising the finance by the government borrowing the money and/or through taxation. The comparison between the two methods of "costing" is loaded in favour of making thew PFI the cheaper option. Essentially, the costing of the traditional way is fudged upwards by various "optimism" formulae and other means, which makes the PFI appear the less costly. As part of the PFI deal, the private company building the hospital or school usually gets a deal to "service" the building. Also, it is quite common for needs to change both before and after the building is constructed. These changes are charged for at (usually) very high rates. So what is the big attraction to PFI for the private companies and for government?

Let us use the construction of a new hospital as an example. First, let us consider what the government gets out of it. The single largest benefit is that the government does not have to raise the hundreds of millions required to build the hospital. It can turn to the electorate and say, "Look we got you a new hospital, and it did not cost you hundreds of millions of pounds". If the Chancellor of the Exchequer has also said, "You can judge how good a Chancellor I am by the fact that I shall never borrow more than forty percent of what the country's economy makes in a year", then he can turn round and say, "Look I told you how good I am, I kept to my borrowing rules", and on a superficial level he is right. This is what Gordon Brown did. From the private companies' perspective, they get to build and own a hospital, and they get guaranteed income for say, thirty years, to go with, and pay for, that building. They also usually get a fat profit. As I said above, it looks like a win-win situation, and that is certainly how it is portrayed over and over again.

Unfortunately, the truth is somewhat different. PFI is a terrible mistake for us the tax payers, and also for the users of these facilities. How can this be? Unfortunately, public sector employees simply do not have the skills nor experience of negotiating to match the skills of the well paid negotiators of a large private company. The private companies do this all the time, the chances are the public sector employee will only ever do this once. It should be of no surprise that the contracts are often weighted heavily in favour of the private company. Also, the public sector is constrained by government political dictats. Anectdotally, there is plenty of evidence: Time and time again, PFI costs have significantly overrun their budgets and the private companies have not had to pay for these overruns. When a small change is requested, the private company makes swingeing charges to cater for the change. The buildings are often not as well built as their public sector counterparts would have been.

The government continues to persist with the policy of advocating PFI because the spending is "off the government balance sheet". This means that the expenditure does not show as a large borrowing in government figures. Instead, it shows as a much lower annual operating cost. In other words, the government spends a huge amount paying the PFI company to "service" the building on an annual basis. Many of the contracts are for thirty years. If the needs change in this time, the requirement to keep paying does not! We end up with less flexibility at much greater overall cost.

A "Real World" Analogy

By way of showing how awful this deal is, here is an analogy:

Say my brother earns £20,000 a year. I make a rule that I tell all my friends about: I shall never borrow nor let my brother ("Bill") borrow more than, say four times annual earnings (which in his case would be £80,000). If I ever do that, I tell all my friends to ridicule me for the rest of my life. The problem is that my brother wants to live in a house that costs £120,000 to build! What do I do? Well, I go and see a friend, let's call her "Sarah", and I say to her, "Look, if you pay for this £120,000 house and let brother Bill live in it for thirty years, I'll get him to pay you a nice amount of money".

Sarah replies, "Sounds okay to me. But I would want my interest costs on the money I borrow to finance the purchase and building work to be paid by Bill, let's say at 10% per annum". Well, both Bill and I know he could borrow the money for considerably less than 7% but hey, if we do it Sarah's way, we have not broken my golden rule. So, I agree on behalf of Bill.

Then Sarah says, "Oh, and you have to use my cleaning company to clean the house for four hours every week at a cost of £20 an hour". I know I can get a cleaner for between £6 and £8 an hour, but, hey, I have not broken my borrowing rule, so I agree (for Bill). "And", Sarah adds, "of course, I would want my maintenance company to do the maintenance at our usual rates." I can't see anything wrong with that, so I agree. "And one more thing", she says, "I would want your whole extended family to be liable for payments related to our agreement. I need to know that I am guaranteed payment and I also want to know for sure that at the end of thirty years, Bill will vacate the building and not give me any trouble." All that is understandable, I suppose.

I have to be quite "assertive" with Bill. He does not seem to like this deal. Eventually, Bill signs the agreement (although his handwriting is a little shaky - it is difficult for him to write with both arms twisted behind his back). And off we go. The house is built (after some delay) and Bill moves in, but he soon discovers that he can't get his wheel chair over the kitchen step. I suppose I should have stopped short of assertively breaking his legs when he would not sign the agreement... Anyway, I tell him, all he has to do is put in a small ramp.

On one of her visits, Sarah asks me to go over to Bill's house for a few minutes, so I pop over. When I get there, Sarah is standing by the kitchen door looking at a wheel chair ramp that Bill and his neighbour have installed. She tuts and shakes her head disapprovingly. Then Sarah says she wants to take me to the bedroom. At first I think, "but we don't have that sort of relationship", then it dawns on me that she has a different agenda and is indicating the bedside lamps. She also complains that the light bulb on the landing has been changed. Sarah is not happy about any of this and insists on having someone from her company come over and do the "maintenance". I have to agree. Bill is furious but I point out the clause in the contract that, after all, he signed!

Bill's house is in the north but unfortunately Sarah's maintenance company is in London. Bill gets a visit from a cheery-enough cockney ramp expert who installs a new bespoke ramp. A week later an electrician comes and changes the landing light bulb, and "installs" the bedside lamps. He goes, and a couple of hours later Bill's circuit breaker/fuse triggers and he has no electricity. I phone Sarah and she says not to worry about it - she'll get an emergency electrician out to Bill. Five hours later another electrician turns up on the last train from London, and flicks the MCB back on: It had blown because the first electrician had not wired the plug correctly. After a couple of weeks Bill gets an invoice for £4,500 plus VAT for all this work. Obviously, I tell him to accept it as those people had to come all that way at an unsociable hour. Anyway, he doesn't have to pay it all, because I had got my extended family to guarantee Sarah's contract payments and any excess is now their responsibility. Bill's neighbour says that we have been conned, and that he could have done all the work for £20. He seems oblivious to the fact that we did not have to pay all the money, anyway - my family had to cough up. I do not mention that Bill is paying 10% interest and that the cleaner is costing £20 an hour. Bill complains that the house is still dirty and after a few weeks, sadly, he passes away. The doctor says MRSA got hold before they could do anything about it. Poor old Bill.

But there are two sides to every coin and although my family are sad at the loss, they cheer up when they realise that they will no longer be paying £1,000 invoices for someone to come up from London to plug in and unplug the television. My sister says she might live in the house. But her husband is a surveyor and he says the quality of the workmanship is terrible. The family phone Sarah as the house is no longer needed. Bill's contract with Sarah is very well drafted. Eventually, they reach an agreement whereby the family no longer have to pay Sarah for the house, for the maintenance of it, nor for the cleaning. The family pay off Sarah. She gets £140,000 for the loss of the contract income. She had been getting more than £30,000 per annum from Bill and the family. When I suggest that the family must be very happy with the deal, they all look at me strangely. Importantly, I can hold my head up and say to everyone that I did not break my borrowing rule and that neither did Bill. I put these strange looks down to their respect of me.

It occurs to me that it would be nice if Sarah, who made this all possible, could be given some sort of medal or honour. A damehood, perhaps or an OBE... If I had a political party, I bet she would contribute genorously to it. Sarah also mentioned that she'd like me to do some consultancy work for her company.