Shadow chancellor John McDonnell’s plans to take Private Finance Initiative (PFI) contracts back into the public sector would not always provide councils with value for money, according to sector experts.
In a speech to the Labour Party conference this week, McDonnell said that PFI has racked up huge costs for taxpayers while handing out enormous profits to the private sector.
However, an adviser on a 2014 deal which saw a health trust borrow cash from a local authority to buy itself out of a PFI contract, said that taking a blanket approach could end up costing more.
Phil Lobb, lead partner for UK Public Sector Health at consultancy Deloitte, said: “The key point is the value for money test. Compensation for terminating these contracts would rarely represent value for money on PFI deals funded by bonds. Bank-funded projects might be slightly simpler.”
Three years ago, Lobb worked on a deal in which Northumberland County Council loaned £100m to Northumbria Healthcare NHS Foundation Trust to exit a PFI covering two hospitals.
He said: “In our case, we demonstrated it would be value for money, but you certainly can’t say it would be possible on all projects.”
He said that one scenario where buying out PFI deals could make financial sense is where annual increases in unitary payments to PFI providers are based on a historically high rate of annual interest.
But council accountancy expert Stephen Sheen said discussions over interest payments due could be tricky.
“The government covers the minimum revenue provision on the original capital costs under PFI plus interest. But it is often a notional calculation. Unless there was an agreed fixed rate of interest, it could be a tricky conversation.”
Lobb also said that local government PFI deals had specific factors—absent from central government deals—which could affect the value for money calculation.
He said: “A council thinking of terminating a contract might save some money but lose the PFI credits which the government pays it. Why would you do it and end up in no better position?”
Misunderstood
Other experts voiced concerns that the benefits of PFI deals to the public sector are widely misunderstood.
Andrew Edkins, director of the Bartlett Institute of Real Estate at University College London, told Room151: “The PFI contracts might cost a bit more than traditional public sector funding, but the private sector is taking the risk off the hands of the public sector. They are contractually obliged to provide services to a set standard. Under traditional funding models, services tend to deteriorate because those budgets are an easy target for cuts.”
He said that research carried out by his department showed that PFI deals provided better service levels at a lower cost than through traditional funding.
It is uncertain that a public buy-back of PFI contracts would save money, according to Mark Pickering, director at treasury adviser Arlingclose. He said: “It could go either way. There could be savings on the debt financing side, since government can borrow cheaper than banks, even allowing for an early redemption premium, but there may be extra costs on the service provision side as some of the private sector efficiencies within the contracts may be lost.”
Meanwhile, Bronwyn Maddox, director at the Institute for Government, said: “Breaking PFI contracts is legally difficult and expensive.
“It is not clear from Corbyn’s speech that Labour has a plan for handling this process, or for managing the organisations and contracts once they are back in public hands.”
The day after McDonnell’s speech, shadow health secretary Jon Ashworth rowed back from McDonnell’s assertion to conference delegates that all PFIs would be taken back into public hands.
He told BBC Radio 4’s Today programme: “We need to look at every single PFI contract and see if we can renegotiate them and get a better deal for the taxpayer.
“This could take some time. It is not a thing that happens overnight.”
