Everyone seems to love to hate the Private Finance Initiative.
Yesterday, the Public Accounts Committee raised further questions about the cost effectiveness of the concept in a report claiming that the current model of PFI doesn’t offer value for money.
The charge sheet against PFI is getting longer: procurement processes aren’t competitive, contracts are inflexible, whole-life costs don’t appear to be lower, efforts to transfer risk may be flawed, and the completion of projects may even be slower than under conventional delivery. What’s more, in the post-financial crisis world, it appears that the cost of capital for PFI projects may be twice that of government gilts. So it seems increasingly implausible to argue that PFI represents a good deal for taxpayers relative to conventional procurement.
Having established that a policy crime has been committed, recent select committee reports from both the PAC and Treasury committees even go on to identify a motive. The Chancellor’s second fiscal rule – that public sector net debt must be falling in 2015-16 – gives strong incentives for government to deploy PFI to keep infrastructure spending off the Government’s books. This was also an imperative of Gordon Brown’s 40% of GDP sustainable investment rule.
So it’s deeply unfashionable to defend PFI at the moment. There are few legitimate benefits over conventional procurement, and, if wriggling out of fiscal rules can be described as a benefit, one nefarious one.
But branding PFI a rip-off isn’t the same thing as concluding that we should stop doing it. There’s little point in comparing PFI to some hypothetical alternative conventional funding approach. Rather we need to compare it to what would happen if PFI were disallowed. With the existing fiscal rules, if you can’t build a school by PFI, it probably just won’t get built at all, since departmental capital spending has been slashed. So the real comparison in most cases is between a pricey PFI hospital or no hospital at all. Whether it’s worth the higher price-tag depends on the social value of the project compared to that cost.
Establishing the social value of such investment is all but impossible. But, as successive governments have been so keen on PFI – including ones that pilloried the concept in Opposition – it seems clear that society would prefer to have these things built than not, even if they do involve a large credit card bill.
That successive governments feel the need to invent complicated private finance wheezes to get round their own fiscal rules only serves to underline the absurd incentives created by the way that investment spending is treated in the National Accounts. The only real alternative which will achieve the desired level of investment is to unblock the public finance route by recognising publicly financed assets as such, rather than just counting their cost. But unless and until that argument is resolved, it seems like PFI, or some variant of it, is the only game in town.
That argument would stand at any time but right now, with the economy in recession, it’s more important than ever. The UK economy is trying to move from growth fuelled by government and household consumption, to growth powered by investment and exports. With the exports route closed off, the investment lever is the only one that government has to pull. Having boxed itself in on publicly financed investment, it needs to continue to find a way around its own rules in order to support output.
So PFI might be a rip-off, but less investment would be far worse than expensive investment at the moment. And until we have a more sensible approach to accounting for infrastructure investment, that looks like the choice we face. Perhaps the next select committee report should focus on tackling that underlying problem.