Public works dream turned into two decades of disaster

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IT WAS back in the autumn of 1992, just weeks after Britain’s last great economic disaster on “Black Wednesday”, that the then Tory Chancellor Norman Lamont announced a new way of financing public works schemes.

The Private Finance Initiative (PFI) would, he promised, allow great new public building projects to be undertaken using the efficiency of the private sector.

“Any privately financed project which can be operated profitably will be allowed to proceed,” he told MPs. “Government will actively encourage joint ventures with the private sector.”

And so PFI was born. Private companies were to bid for contracts to build, finance, maintain and own new public works schemes, with public bodies agreeing to pay a fixed-rate annual “rent” to use each facility. All the risk – and all the initial debt – would remain in the hands of the private firms involved.

But the scheme did not take off in the way Mr Lamont had hoped. Constraints had been put in place to ensure taxpayers did not lose out. As a result, private firms often found PFI risky and unattractive. Some early PFI schemes, such as the new Royal Armouries museum in Leeds, collapsed altogether – requiring the public sector to pick up the pieces.

With the election of New Labour in May 1997, however, everything changed.

The new Chancellor, Gordon Brown, saw PFI as a way of embarking on the massive programme of investment in public infrastructure he was sure the country needed, without racking up the sort of official debt levels which would shatter his own “golden rules” of economic prudence.

Within days of being elected, Labour had ordered a review of PFI, asking the Paymaster General Geoffrey Robinson to find ways of making the system more attractive to private companies.

The shackles were taken off – and the PFI industry exploded.

Over the next decade, PFI became the standard way of funding public works programmes, largely financing New Labour’s vast programme of school rebuilding and NHS capital investment. The Government set up a system of PFI “credits” – grants for PFI schemes – to encourage councils to use PFI when planning new projects.

But in 2011 PFI looks as discredited as the two Chancellors who promoted it.

Further high-profile projects – most notably the £30bn London Underground upgrade – have collapsed, at enormous cost to the taxpayer. Worrying reports surfaced of public bodies being charged vast amounts by their private “partners” to make minor changes to buildings – hundreds of pounds to change a light bulb, for example, or to install a new plug socket.

But most fundamental of all have been repeated concerns about the overall cost of PFI schemes.

Last week a devastating report by MPs confirmed PFI projects are proving to be hugely overpriced, typically costing 40 per cent more by the end of the contract than if they had been paid for in the normal way. Billions of pounds of public money, it seems, are being wasted.

“PFI projects are significantly more expensive to fund over the life of a project,” the report states. “PFI is also inherently inflexible. The Government should use PFI as sparingly as possible.”

But the use of PFI has been anything but sparing – the nation’s current liability for PFI deals stands at £36bn.

In Yorkshire more than 50 PFI schemes are currently in place, with councils and NHS trusts tied into expensive contracts running as far ahead as 2040.

Projects delivered via PFI in the region have ranged from new schools in Barnsley, Bradford and Hull to social housing developments in Selby; new fire stations in North Yorkshire to the gleaming cancer care unit at St James’s Hospital in Leeds. According to the Treasury, the region now owes more than £6bn in PFI payments, to be paid out over the coming decades.

“There’s a real element of the public being ripped off by the contractors,” said Leeds MP George Mudie, who sits on the Treasury Select Committee which produced last week’s report.

“But the ability to spend money ‘off balance sheet’ has just proved too great a temptation for each Government.”

The present Government, too, is desperate to keep official debt levels down. Elected on a deficit-reduction platform, the Tories cannot be seen to be borrowing vast amounts of money for public works.

So while current Chancellor, George Osborne has himself described PFI as “discredited” his department has continued to quietly sign off dozens more PFI projects.

In Yorkshire alone, 10 further PFI schemes are due to be finalised over the next year, committing the region to another £4bn of PFI payments over the coming decades. And many more still are in the pipeline, including an £84m plan for extra care centres in Hull.

“The Government should take this opportunity to look at each scheme again,” Mr Mudie said. “Those that are essential should be funded properly, on the balance sheet, not through PFI.”

The Government, however, refuses to close down PFI. Instead, it says it will reform the scheme to deliver better value for money.

Mr Osborne recently abolished future PFI credits and sent back several forthcoming projects to be renegotiated, reducing their cost to the taxpayer.

Nonetheless, the suspicion remains the Government will continue to use PFI as a way to keep big projects off the balance sheet – whatever the long-term costs.

Where region’s money is going

Yorkshire’s biggest individual PFI deals

1. Sheffield highway maintenance – £464m (2012*)

2. North Yorkshire and York incinerator – £322m (2012*)

3. Wakefield & Pontefract Hospitals – £311m (2007)

4. St James’s Hospital, Leeds – £265m (2004)

5. A1 Darrington to Dishforth – £245m (2003)

6. Bradford schools, Wave Three – £215m (2009)

7. M1–A1 link – £214m (1996)

8. Doncaster Interchange – £200m (2003)

9. Barnsley schools, Wave One – £149m (2009)

10. Leeds housing regeneration – £145m (2011*)

Figures relate to the capital value of each scheme; not the cost of contract

* Denotes a forthcoming scheme

Agreed deals in the pipeline for 2011–12 – and their total cost to taxpayers

1. Sheffield highways maintenance – £2bn (value of actual investment: £464m)

2. North Yorkshire and York incinerator – £1.4bn (value: £322m)

3. Leeds housing regeneration – undisclosed (value: £145m)

4. Leeds incinerator – undisclosed (value: £145m)

5. South Yorkshire waste plants – £750m (value: £138m)

6. West Yorkshire Police HQ – £215m (value: £109m)

7. Bradford incinerator – £350m (value: £105m)

8. Kirklees social housing – undisclosed (value: £77m)

9. Sheffield schools Phase Four – £75m (value: £23m)

10. Holt Park Wellbeing Centre, Leeds – undisclosed (value: £13m)