14 NOV 2018


It may not come as a surprise for many in the industry, but for any potential PFI investors still in doubt then the chancellor used his autumn budget to deliver the fatal blow to any new Private Finance Initiative contracts.

Philip Hammond was hoping to send a clear message out to the construction sector and investors that this government meant business, saying the “days of the public sector being a pushover” were over.

MPs in the Commons were told that PFI deals no longer represented value for money and while he had never signed off the use of a PFI contract, or its successor PF2, the announcement would now end the future use of the financing method.

But with no deals of note signed since 2016 and just four transactions posted with a value of around £500m in 2015 - way down on the £7bn plus value of 55 transactions of 2009 – then does the statement of intent hold much value?

The idea of putting to bed PFI contracts is also nothing new. In 2017, shadow chancellor John McDonnell promised a radical review of all PFI contracts if Labour was to win the next general election, saying "we'll bring these contracts and staff back in-house".

"This is arguably more an announcement to neutralise Labour's position on private finance than a material change in government policy."
Alexander Jan, chief economist at Arup.

At the time McDonnell said PFI has cost taxpayers over £28bn paid to private sector investors and shareholders. While a freedom of information request conducted by the law firm Collyer Bristow recently showed that just £32m was withheld from PFI providers, confirming government fears that tax payers are over-paying for poor service.

Alexander Jan, chief economist at Arup, believes party politics is definitely a factor behind Hammond’s statement. He says a programme of fiscal devolution which allows local authorities to retain the growth in their tax bases and leverage finance is now required on the back of this.

The economist said: “This is arguably more an announcement to neutralise Labour’s position on private finance than a material change in government policy. In overall terms, the government appears to be tilting towards a policy position in which drawing from public sector sources is once again seen as the norm. Examples of this include the removal of the cap on local authorities’ use of housing revenue accounts to leverage borrowing, the expansion of the Housing Infrastructure Finance programme and an expansion of the government’s Help to Buy scheme.”

Colin Wilson, partner at international law firm DLA Piper, believes the lack of confidence expressed by the chancellor and Labour’s previous threats of nationalisation, are clear signs of a "lack of trust between the public and private sector". 

“The need for infrastructure investment in the UK has never been higher, especially in the transport and energy sectors, yet our need continues to exceed the capital budgets that are available," he added. "There are many partnering alternative models available for government to adopt to facilitate this investment as opposed to the PFI model. It is important, however, that the public and private sector finds a way of forging effective partnerships, working together to structure these projects so as to ensure their successful delivery when they are brought to market."  

From the outside it appears that only Highways England Stonehenge and Lower Thames Crossing projects will be impacted moving forward with both using PFI deals. Arup economist Jan believes a switch to more traditional contracting will be implemented through conventional government expenditure as part of the agency’s £30bn Vehicle Excise Duty (VED) budget announced by Hammond. All the money for these schemes is now set to come from public finance and Highways England's own budget.

Simon Rawlinson, head of Strategic Research and Insight at Arcadis, added: “The end to the use of the PFI for social and economic infrastructure is good politics as no deal has been signed since 2016. However, finding the finance to plug the gaps left by the EIB - which the budget does not address - along with public sector expertise to deliver publicly funded programmes, may prove to be longer-term liabilities."


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