At the 2018 Budget, the Chancellor Philip Hammond announced that he will abolish the use of private finance initiatives (PFI) for future building projects.
PFI is a controversial approach to building and maintaining new infrastructure, such as schools, hospitals, roads and prisons. It involves a long-term contract with a company specially set up for the project – the public sector pays the company for providing the building and often associated services.
So how did we get here, and how soon until we say ‘goodbye’ to PFI?
The decline in new PFI projects
As you can see in the graph below, the number of new PFI projects has been declining for some time, from a high of 68 in 2004 to just one in 2018.
The use of PFI fell following the financial crisis, in part due to the introduction of tighter regulations on banks, which increased lending costs for long term debt. A reduction in available financing also led to costs and charges increasing for PFI projects.
Austerity also put a spotlight on some of the challenges of PFI: the projects are expensive, the requirement to pay fixed PFI charges became problematic as public finances were squeezed, and public bodies may have become more reluctant to commit for the long term if they feared further reductions in funding.
While the Government introduced a new model of PFI – PF2 – in 2012, few PF2 projects were started.
In January, the National Audit Office pointed out that – even though PFI is far from new – there still a lack of data on its benefits.
The Chancellor ends new PFIs
At the 2018 Budget, the Chancellor said the UK Government will not use PFI – including PF2 – for any new projects.
(Capital spending on public infrastructure is a devolved policy area, so this announcement does not affect the devolved administrations.)
The Budget document says that the model is inflexible and overly complex, and points to PFI being a potential risk to government finances.
Prior to this announcement, the potential for a few new PFI projects were being explored – a prison, two roads projects and for community and primary care estates within the NHS. The Government has said that it is still committed to the A303 and Lower Thames Crossing roads projects, presumably through a different model. However, it said that other long-term capital spending decisions – such as the health projects – will be for the 2019 Spending Review.
But PFI isn’t going away soon
Existing PFI projects will continue – the Treasury states that voluntarily terminating PFI contracts is rarely value for money because of the costs of the compensation that must be paid to break the contracts. It will therefore honour existing contracts.
Total payments for current PFI projects will be £10.3 billion in 2019/20 and will then fall as projects end.
Payments for some existing PFI projects will however continue for decades – PFI contracts typically run for 25-30 years.
The last PFI payment is due in 2049/50, for the Oxleas NHS Foundation Trust PFI – this is an unusually long contract, which was signed in 1998 and was for 52 years.
So, it may be that in 2049/50 we say ‘goodbye’ to PFI.
Budget 2018: Where has the Chancellor’s money come from? House of Commons Library.
Autumn Budget 2018: A summary, House of Commons Library.
Lorna Booth is Head of the Economic Policy and Statistics Section at the House of Commons Library.