The scandal of PFI

Jeremy Corbyn and his Shadow Chancellor, John McDonnell, made an announcement earlier this week that if Labour wins the next election it will end the scandal of private finance initiative (PFI) contracts which have been responsible for financial woes in a whole host of hospital trusts, schools and other public institutions.

Labour’s promise consists of two parts. Firstly, they have vowed to scrap the will not enter into any new PFI contracts. Secondly, there is talk of plans to review, and where possible, transfer existing PFI contracts to the public sector.

Traditionally, governments borrowed money to invest in various infrastructure projects and government initiatives. Whilst some people are of the opinion that government spending and taxation essentially equates to theft, I take a more pragmatic view. My taxes pay for schools, police, roads, lighting, healthcare and a whole host of things which I consider to be essential to civilised living.

Having said this, I also hold it to be true that governments can be incredibly wasteful – our own being no exception. Private sector businesses usually have to be competitive and lean, otherwise they’re overtaken by rivals and collapse. Governments, on the other hand, can seemingly keep spending to their heart’s content, regardless of the benefit this provides.

PFI contracts attempt to leverage this by using taxpayer’s money to fund operations delivered by the private sector.

The private sector formed consortiums, borrowed money, and built and operated assets in return for payments from the public sector. Due to exceedingly poor negotiating skills on behalf of the public sector, many of these contracts pay out double-digit returns to the private sector; returns which are still collected today, even though interest rates are at 0.25%.

In some cases, this has meant that the cost of funding these contracts works out at as much as 20x the cost of government borrowing. In an era of ultra-low interest rates, PFI companies are making excessive profits and consequently bringing public sector bodies to their knees.

Governments of all stripes have ignored this, as funding infrastructure through PFI contracts has remained ‘off balance sheet’ i.e. not included in the total government debt.

Currently, there are more than 700 PFI projects (686 are operational) with a capital value of £59.4 billion and promised repayments of more than £250 billion. The profitability of these contracts is off the scale; for example, the private sector has invested £12.4 billion in the NHS assets but will receive payments of more than £80 billion.

Between 2010 and 2015, PFI companies building and operating hospitals have made £831 million profit from the NHS. Over the next five years, these companies are forecast to make profits of £973 million from the NHS.

Whoever wins the next election should immediately cap the profits that companies can make from PFI contracts. Terms should be renegotiated to squeeze out excess profits. The Government should place additional taxes on PFI companies for making excessive profits – if we go after payday loan sharks, surely we can get to the bottom of this shameful fiasco too!

In the event that PFI profits have been transferred to tax havens, the government should secure repatriation of all funds. This should be accompanied by a demand for the lost taxes. No doubt some would resist that.

These steps would undoubtedly go some way to reducing the outrageous costs of PFI contracts and hopefully provide some relief for the institutions screaming out for funding.

This problem lies not with Labour and not with the Conservative party, but with governments of all stripes. No sane taxpayer could honestly say that these corporate profits should reasonably be funded by the British taxpayer. We should end the scandal and draft immediate legislation to prevent such foolery reoccurring.

Sign up to receive the latest content, fresh from the press.

I don’t spam! Read our disclaimer for more info.