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PFI was supposed to take the risk out of development, but its legacy is liability

There are hospitals without patients and schools without pupils, yet we are still paying millions for them, writes Chris Stokel-Walker. Why aren’t councils making deductions where there is non-performance?

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Parklands High School closed in 2014 but still costs taxpayers £4.3m/year Photo: Ken Biggs/Alamy
Parklands High School closed in 2014 but still costs taxpayers £4.3m/year Photo: Ken Biggs/Alamy

Cast your eye over the carcass of the Royal Liverpool Hospital and it looks less like a patient on its deathbed, more a hale and hearty bystander. The outer structure of the hospital is sleek and modern, with cream and dark-grey fascias cut through by a great, glassed, middle section with wall-to-ceiling windows stretching up its several storeys. Inside, the wards and reception areas are sterile and gleaming clean – that toothpaste-white and the odd, minty green that you only see in hospitals and courtrooms.

 

It’s a £335m triumph except for one fact – it’s not open to patients.

 

Private finance initiatives (PFIs) were introduced by John Major’s Conservative government in 1992 and embraced by successive governments – most readily, Tony Blair’s Labour administration. On the face of it, they are a perfect proposition for both the private and public sectors: companies receive contracts to complete public projects, such as hospitals and schools; they handle the risks and deal with the upfront costs; after they complete the work, the public sector gets shiny new buildings; in return, the contracts permit the companies to recoup their costs and make an eventual profit with annual interest.

 

For years, PFI was “the only show in town”, says Dexter Whitfield, a director of the European Services Strategy Unit, which looks at the efficacy of PFI projects. “If a local authority or NHS trust wanted to have a new building, it had to use PFI.”

 

At its peak, PFIs were an engine for building infrastructure: 60 projects broke ground in the 2007/08 financial year, private cash helping the country to continue building, even as a huge crash loomed around the corner. In all, there are now around 700 deals involving private sector financing of public sector infrastructure.

 

The collapse of Carillion brought work on Royal Liverpool Hospital to a standstill, but significant structural issues will take more work, time and money to fix

 

The Royal Liverpool’s 646 beds were meant to be available for patients in March 2017. But two years on, the hospital is only 80% to 90% complete. The collapse of construction company Carillion played a hand in bringing work to a standstill, but significant structural issues have been identified that will take more work, more time and more money to fix.

 

Travel 100 miles south and you will find another of the at least 127 hospitals and other facilities that the Centre for Health and the Public Interest at the London School of Economics believes were built off the back of PFI. The Midland Metropolitan Hospital lies on 16 acres of new land outside Birmingham. With trees and a giant atrium, it’s more like a greenhouse than a healthcare facility.

 

It comes at a cost of £353m and it, too, isn’t finished. The project was meant to take five years from its announcement by the then-chancellor George Osborne in 2014, but it won’t be complete until 2022 at the earliest – if at all. Carillion’s liquidation left a giant gap in construction that the local NHS trust is struggling to fill. Best estimates reckon finishing the project, which is around two-thirds complete, will take at least £125m more. So, for now, its 669 beds lie empty, its 15 operating theatres dormant.

Midland Metropolitan Hospital cost £353m but may never be completed. Photo: Jon Lewis/Alamy
Midland Metropolitan Hospital cost £353m but may never be completed. Photo: Jon Lewis/Alamy

 

Chancellor Philip Hammond scrapped PFI and its successor, PF2, as a mechanism for financing projects in October. The independent Office for Budget Responsibility called them a “source of significant fiscal risk to government”. But taxpayers have already bought into the PFI experiment for £110bn, with another £199bn of payments to come over the next two decades. So why did they happen in the first place?

 

It’s a question to which no one really knows the answer. The House of Commons’ Public Accounts Committee (PAC) asked the Treasury to justify using private finance, which carries interest rates 2% to 3.75% higher than those of government loans. Charles Roxburgh, second permanent secretary at the Treasury, told the committee: “What we have not done is gone back and [quantified the potential benefits]. That would be a huge amount of work.”

 

“There’s been very little evaluation of the impact of PFI – that’s the problem,” explains Allyson Pollock, director of Newcastle University’s Institute of Health and Society. She’s been a vocal critic of PFI in the health service. “It’s one of those issues that people have failed to address, look at, monitor or evaluate.”

 

For her, the biggest issue is one of affordability – PFI takes money away from health and education that could be better spent on things such as staff and books. “It’s taking so much out of public services at a time when public expenditure is decreasing,” she says. “If you’re draining money out to bankers and shareholders, then it’s not good – and it’s hard to evaluate the impact properly.”

 

Nevertheless, until they were scrapped, PFI and its lookalike successor remained key ways of funding various parts of the public sector. “It was an ideology, a religious belief,” says Pollock.

 

Worse, public expenditure rules were changed to favour private finance. More and more buildings were thrown up using PFI, which makes it harder to adapt and change, and which often have regular issues.

 

The result is a nation of white elephant projects. “There are examples of buildings that sit empty, all because payments have to be paid for services that are delivered, even if the building isn’t being used,” says Pollock.

 

“ Part of that reticence to pick up on problems in the servicing and delivery of PFI contracts could be driven by fear, as well as a gross difference between the legal might and the abilities of private and public sector bodies. Rees says she has heard from peers who have advised
on big PFI cases that councils are wary of taking large providers to task because they are very aggressive in defending their case legally”

 

Many of these PFI projects are poorly built and have restrictive contracts. Build a school through PFI and find your pupil numbers dry up? You can’t just shut up shop and redevelop the building into something else – at least not without paying punitive fees to the company that financed it.

 

“The contract is written specifically for these buildings to operate as schools,” says Whitfield. “I haven’t been party to this kind of conversation, but I can imagine the private sector and its lawyers saying: ‘You want to convert it into this? That’s going to change the payments.’”

 

“We’re locked into very long-term contracts,” says Pollock. “That reduces the flexibility and innovation possible within the buildings, because every time you want to change, you have to renegotiate the contract. We’re also locked into allowing the banks and the investors to make enormous profits and returns on the interest payments and the contracts. This is the legacy we have given to the next generations to come.”

 

Drive half an hour south from the Royal Liverpool and you’ll come across the fading sign for Parklands High School in Speke, Liverpool. The school, built through a £100m PFI contract, opened in 2002; it closed in the summer of 2014 after pupil numbers dropped and teaching became unsustainable.

 

Bright blue plastic chairs now sit stacked neatly on top of desks in spotless classrooms that haven’t heard the sound of children’s laughter for five years. A sports hall stands disconsolately empty. Signs point to a performing arts centre that will never be used.

 

Liverpool City Council pays £4m a year to the company that built this empty, unused school. It’ll continue doing so until 2028. The government’s Infrastructure and Projects Authority (IPA) told the PAC it was a “very unfortunate situation”.

The £335m Royal Liverpool Hospital, set to open in 2017, is 90% complete Photo: Rodhullandemu
The £335m Royal Liverpool Hospital, set to open in 2017, is 90% complete Photo: Rodhullandemu

 

What’s particularly galling for PFI’s detractors is that contracts only seem to benefit the private sector – while companies bring in £10bn a year in public payments for under or non-performing projects, analysis by law firm Collyer Bristow shows local authorities withhold just £32m for poor performance.

 

“We were looking to investigate what the market was like in terms of how PFI was working – whether these lifetime contracts were still working well and efficiently, or whether they were not working as well as they could be,” explains senior associate Catrin Rees. “I’ll leave it to you to think about why a law firm would do that, but it wasn’t out of the goodness of our hearts.”

 

What she found was shocking – a fraction of a percent of payments withheld on multibillion-pound projects that seemed riddled with problems. “We anticipated there would be more,” Rees says. “You should be able to make deductions where there is non-performance. But it seems councils and local government bodies aren’t making deductions they might otherwise be able to do.”

 

Whitfield calls it “laughable” before correcting himself. “That’s the wrong word,” he says. “It’s not laughable – it’s a disgrace.”

 

Part of that reticence to pick up on problems in the servicing and delivery of PFI contracts could be driven by fear, as well as a gross difference between the legal might and the abilities of private and public sector bodies. Rees says it is “indisputable” that there is a lot of non-performance in PFI contracts, but she has heard from peers who have advised on big PFI cases that councils are wary of taking large providers to task for non-performance (or overly restrictive contract terms) because the providers are very aggressive in defending their case legally.

 

This problem is likely to become worse as more derelict ghosts of the PFI experiment pop up, and each side’s position becomes more and more intractable. “The contracts tend to be very, very complicated, plus they’re getting quite old now,” says Rees, who worked on a school PFI dispute two years into her now 14-year legal career. “People who negotiated them might not necessarily still be at the firms that negotiated and put the contracts in place; neither might the people in the public bodies and the contractors. They’re expensive things to litigate.”

 

“Whitfield calls it ‘laughable’ before correcting himself. ‘That’s the wrong word,’ he says. ‘It’s not laughable – it’s a disgrace’”

 

As a result, cans get kicked down the road. “All these legal questions deter change,” says Whitfield. “They’re so complex that people think: ‘I’ll deal with that tomorrow,’ and a month turns into a year, a year turns into two or three, and these places sit empty.”

 

When John Major first mooted the idea of PFI, it was seen as the saviour of the public sector. But what will history make of the PFI revolution with the benefit of hindsight, empty eyesores dotted around the country and us all around £310bn poorer?

 

“It is one of the scandals of our time that these projects have been insufficiently scrutinised and evaluated,” says Pollock.

 

She’s not alone in her verdict. “When you look at it overall, it’ll be seen as a mistake,” says Whitfield. “A very expensive mistake – and a complex mistake as well.”

 

Just how expensive that mistake is, we still don’t fully know. The PAC recommended that by April, the Treasury and the IPA should publish data analysing the benefits of PFI and what they will do to evaluate the value for money of current projects. According to chief executive Tony Meggs, the IPA has employed a single member of staff “pretty much on a full-time basis”, to try to analyse the costs and benefits of all 700 projects.

 

They’ll have their work cut out.

 

Chris Stokel-Walker is a journalist and communicator specialising in digital culture and influencers. He has written for The Times, Sunday Times, The Economist, Bloomberg, the BBC and Wired

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