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A profound but unjustified belief in contractors has tainted PFI

Paul Finch
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Carillion’s collapse should not obscure the fact that PFI has delivered a huge public construction programme, writes Paul Finch

Tim Harford, the economics commentator, gave a brilliant speech at the British Council for Offices’ annual dinner last week. These events are usually the province of stand-up comedians, mimics or politicians with anecdotes, so it was refreshing to hear from someone who made you think, rather than just laugh.

His proposition was that wishful thinking is far more widespread than we might imagine; that it is just as likely (sometimes more likely) to afflict experts as others; and that we should remind ourselves that this universal condition can be addressed – provided we are conscious of it. 

In a brilliant visual example, he showed two slides, one of a genuine Vermeer, one of a crude forgery by the notorious Dutch dealer and supplier of art to the Nazis, van Meegeren. The contrast between the genuine and the fake could scarcely have been more marked, yet the greatest Vermeer experts in the Netherlands verified the forgery as genuine because it met certain conditions the experts had themselves laid down: that there were certain missing Vermeer paintings; that the subject matter would be this or that, and so on. The forgery appeared to fulfil the criteria and the experts fell for it. 

Currently, everyone has a view about what went wrong with Carillion. A new form of wishful thinking is taking over: if only the railways were run by a nationalised industry, it would be far more efficient than the companies that have in fact increased rail travel by an extraordinary amount since privatisation. 

The amount greedy PFI consortia charge to change a light bulb has to be experienced to be believed

We could have borrowed money more cheaply than the private sector and used public-sector organisations to build all those schools and hospitals and prisons and motorways far more cheaply and efficiently. 

This is, of course, rubbish. It was private-sector contractors, from time immemorial, who built all this stuff. They often competed for work on a fixed-price basis, and were at risk if they failed to deliver. Yet, to judge by the bleating now going on, it is all Whitehall’s fault that Carillion went bust, because the Treasury insisted on fixed-price contracts, whatever that phrase means for a PFI contract. And how dare the taxpayer try to transfer risk to contractors? That’s the contractor’s job when they are dealing with subcontractors.

To recap: PFI was an idea which started when John Major was at the Treasury. He oversaw a rule change: if a contractor invested £90 million in a £100 million project, then only £10 million would appear in the Public Sector Borrowing Requirement figures, instead of the full £100 million as previously. This was partly to meet a key criterion for joining the Euro. (Brussels subsequently diluted this criterion, thereby allowing weak economies into the single currency, storing up horrendous problems that are with us to this day.)

It is fair to say that the Treasury, having become PFI converts, then became zealots. Why not let contractors get their hands on everything from school meals to prison security? Some PFI theorists even wanted them to employ teachers, nurses and doctors.

The wishful thinking involved concerned a profound but unjustified belief in the brilliance of a construction sector that couldn’t make decent returns putting up buildings. Why give a contractor a 25-year cleaning contract? Does anyone in the private sector do that? The amount greedy PFI consortia charge to change a light bulb has to be experienced to be believed. 

And yet, and yet … PFI has delivered a huge public construction programme (pictured below: Library of Birmingham, designed by Mecanoo, built by Carillion), which benefited architects as well as building users. 

What went wrong? How we snatched defeat from the jaws of victory will be the subject of next week’s column.

Birmingham library (12945792964)

Birmingham library (12945792964)

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