Turning the screw on PFI scandal – David Behrens

How many council officials does it take to change a light bulb?

Ballooning PFI costs
Ballooning PFI costs

In Leeds, it seems, the answer is just one… as long as it’s someone who can write a blank cheque to a firm with a van and a set of ladders.

There are 92,000 street lights in the district, and the bulbs in nearly all of them are to be replaced with LED ones, which are cheaper to run. That would be fine, but for the fact that it’s only seven years since they were last upgraded – and that it’s costing the council £22.5m to repeat the process.

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It’s only a slightly more efficient way of going about things than re-hiring the old lamplighters who used to turn out every evening with long sticks.

Picture: PA

The arrangement is an outcome of the Private Finance Initiative, the discredited model conceived in the 1990s for commissioning large-scale public projects with minimal upfront costs. PFIs were foisted on local authorities by Tony Blair and Gordon Brown, with the aim of appearing to accelerate the building of schools, hospitals and other assets by allowing a private firm to raise the capital.

But it has long been obvious to anyone with a pocket calculator that the maths did not add up. Councils can borrow more cheaply than commercial concerns because they carry a lower risk, so why ask them to pay someone else’s higher interest rates?

Besides, public bodies will always be out-negotiated by professional deal-makers with profit margins and bottom lines to consider.

This is not just my view, but also that of Sir Howard Davies, chairman of the Royal Bank of Scotland and former director of the London School of Economics. He went on Question Time not long ago to say that, in his view, PFI was “a fraud on the people”, a device to make it look as though government was doing more than it actually was to invest in the nation’s infrastructure.

Sir Howard’s specific views on the PFI arranged by Leeds Council to change its light bulbs is not known. But it should be, because his bank – the one we all had to bail out a decade ago – is one of the equity holders in the light bulb firm the council contracted.

This is an outfit called Tay Valley Lighting, whose PFI with Leeds is estimated to be worth £326m, despite a capital value of less than £100m.

It is not the only appallingly-costed project to have emerged this week, in figures obtained by this newspaper.

Across Yorkshire, the cost of hiring private companies to build and maintain schools is nearly £100m more than had been forecast when the deals were struck. And the Mid Yorkshire Hospitals NHS Trust is having to pay £223m more than it planned for the building and running of privately financed hospitals.

The cost of these long-term, locked-in contracts is not just in the bricks and mortar but in day-to-day maintenance, which is the exclusive province of the PFI contractor and does not therefore need to be done at normal market rates. One hospital trust is paying £5,500 for a sink, and a school was charged £25,000 for three parasols.

These details are new but the folly of PFI is not. There was always an absence of logic in appointing a company whose costs would be higher than yours and which could then hold you over a barrel for years or even decades to come.

If the involvement of the company in question was really necessary, it could simply be offered a fixed price contract. Sir Howard acknowledged that much on Question Time, but he didn’t mention that his own bank might then lose out by not having invested in as many people as it took to change all the light bulbs in Leeds.

And therein lies the conundrum. For, while PFI has delivered very poor value to the likes of you and I, it has been a bonanza for the outsourcing sector. Its legacy, apart from the ongoing costs we still have to bear, will be a very deep distrust of the way that all public projects are financed.

We should bear that in mind when considering the business community’s case this week for not abandoning the controversial and already wildly-overspent HS2 rail network.

This is another blank cheque scheme, one that will uproot whole communities in the pursuit of shaving 20 minutes off the journey from Yorkshire to London. The CBI says the benefits will far exceed the costs. But after the scandal of PFI, we had better be sure we know exactly to whom those benefits will accrue.