Policy Explainer Private finance initiatives

Taking A Toll

It said the department is considering handing over the income from tolls to a private consortium in return for a cash injection that would reduce the cost to the public purse.

Officials are considering a scheme that allows investors into the bidding process to finance some or all of the project in return for a lease that could run for 125 years to recoup the initial building costs.

Rachel Reeves, the Chancellor, has promised to involve the private sector in large infrastructure projects to fill the £22bn hole she has identified in the government’s finances after years of under investment in the public realm.

Water companies are also being encouraged by regulator Ofwat to launch private finance initiative-style schemes to deliver new infrastructure including reservoirs and pipelines.

Phoenix Rising?

The private finance initiative (PFI) was scrapped by central government in 2018 after the collapse of Carillion and a scathing National Audit Office report, which said it delivered poor value for taxpayers.

But since Labour won the general election there has been growing optimism among investors that Reeves will unleash a new era of private sector investment in infrastructure.

So far, the chancellor has rejected reviving PFI, which was used by Tony Blair’s government to pay for building new schools and hospitals, typically over 30 years, but became associated with costly and inflexible contracts.

Bringing back the Conservatives’ reformed version of PFI, known as PF2, is also seen as unsuitable by advisers to Reeves. A straightforward investment contract that guarantees a return over a longer period, but which leaves in place the commissioning and building of the tunnel under the Thames, near Dartford, could be a more attractive option.

Peer Review

In June, Lord John Hutton, the Labour peer, warned that NHS hospitals, schools and other public services risk being disrupted unless Sir Keir Starmer’s government acts quickly to quash a surge in legal disputes over PFI contracts.

In an interview with the Financial Times, Lord Hutton, chair of the Association of Infrastructure Investors in Public Private Partnerships (AIIP), said that there were “red lights flashing” over 150 or so PFI contracts that are coming to an end.

Relationships between several public authorities and the private sector over PFI contracts that are winding down had turned “toxic”, a Treasury report noted last year. Most of the disputes are over maintenance and the condition of the properties, and the AIIP is calling for the Treasury to play a more active role in managing problems on behalf of public authorities, so they get settled before they reach court.

Disputes that have already made it to the High Court include a case about who is liable for a fire in 2018 at the Whittington Hospital, north London; a row over service failures and defects at Tameside & Glossop Integrated Care NHS Foundation Trust; and one over service failures at North Kent Police Station.

Hutton said in the report that Labour was “open” to the reinvention of PFI in some form.

“We have a dialogue with [Labour] and they have been very open to us,” Hutton said, adding that PFIs had been wrongly maligned and that there was a “misunderstanding over whether they were value for money”. However, he warned that if the government does not act to prevent a wave of litigation it could deter investors.