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How the Sir Humphrys squandered the benefits of PFI

Paul Finch
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Government mandarins failed to spot the flaws in the PFI systems they imposed, says Paul Finch

The media in general seems to have very little idea about the principles and practice of PFI, partly because we (well, the Treasury) chose to overcomplicate it, simultaneously shedding the advantages it could bestow in favour of Byzantine contracts which suited bidding consortia, rather than the taxpayer.

Let’s keep it simple: PFI generated a vast public building programme without the government having to fund the initial capital cost (via bond issues or taxation). Contractors and their financial partners would raise the money, build the buildings, maintain and repair them, and hand them back to the public sector at the end of the contract period, usually 30 years.

The maintenance contracts meant that the condition of the buildings should be as they were in year two, post-snagging. Nobody seems to mention this.

The public purse would pay a sort of super-rent to cover all this. Of course, if you had the money it would be cheaper to pay up-front rather than borrow, but that is the case when you buy a house on a mortgage. It is the price you pay for having the use of something before you own it.

And while it is true that government can borrow money more cheaply than the private sector, this doesn’t mean it will in fact do so, especially in times of economic downturn: quite the opposite.

Anyone who thinks that the pre-PFI way of funding and maintaining public buildings was some sort of ideal is either too young to remember what it was really like or living in cloud cuckoo land. Routine skimping on repair and maintenance created a vast stock of seriously below-grade buildings, which was one of the issues that prompted the PFI construction programme.

Anyone who thinks pre-PFI funding was some sort of ideal is either too young to remember what it was like or living in cloud cuckoo land

To give one example: when local authorities handed over buildings occupied by polytechnics to the polytechnics themselves in 1989, they were giving a hospital pass – inadequate and in some cases illegal buildings that had to be vacated as hazards to life and limb.

The consistent failure to complete infrastructure projects either on time or budget added to pressures to change the rules of engagement on public procurement. Roads were the first place where this happened, and the results were spectacular: it become the norm for DBFO projects (Design, Building Finance, Operate) to meet budget and time targets. Government thought it could do the same with buildings.

But things didn’t work out so well here. For one thing, there was an untested idea that, in a competitive market situation, quality would rise. Anyone familiar with Design and Build contracts 20 years ago knew that this was highly unlikely to happen, and indeed it didn’t. There was almost a race to the bottom because, instead of inviting builders to fund and construct good designs already procured, the decision was taken to go the whole hog and make contractors responsible for the design.

I remember the sense of shock among CABE commissioners when we saw the first wave of PFI school designs, many of which were seriously sub-standard. With Department for Education backing, we were able to introduce a review system, initially chaired by Ken Shuttleworth and subsequently by Paul Monaghan, which squeezed rubbish out of the system. Once the contractors realised that their architects’ designs were being reviewed on an equal and fair basis, they all upped their game.

I remember the sense of shock among CABE commissioners when we saw the first wave of PFI school designs

Alas, the underlying belief that contractors should oversee everything became fixed in politicians’ and civil servants’ minds. Hence, as I mentioned last week, the nutty awarding of long-term cleaning and catering contracts which have nothing to do with construction. PFI became a proposition about how you ran the world, not just built things.

Needless to say, clever-clog mandarins failed to spot several flaws in the PFI system they imposed. For one thing, asking the same limited groups to bid for huge contracts meant that they would have to price in the risk of not winning, or cut bids to dangerous levels to win work, hence Carillion.

Cynical finance directors saw PFI contracts as tradeable commodities, where there was no clawback for the public purse when deals were refinanced. The mega-professional services groups smelled taxpayer blood and have feasted copiously. Lawyers have had a field day. The cost of bidding was absurdly high, partly because many of the contracts were far too big, while negotiating periods were far too long. Other countries used PFI much more intelligently.

But what is undeniable is that the PFI construction programme gave us new buildings years or decades before we would have built them under former procurement regimes. The critics never acknowledge this, nor do they evaluate the benefits of having something now rather than in 10 years’ time. Anticipate more heat than light in the great Carillion post-mortem.

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