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Study notes

Private Finance Initiative

  • Levels: A Level
  • Exam boards: AQA, Edexcel, OCR, IB

The Private Finance Initiative (PFI) is an important and controversial policy designed to change the model of funding for large-scale investment projects.

Revision Video: Private Finance Initiatives (PFIs)

PFI - revision video
  • PFI was first launched in 1992 by a Conservative government and was extended heavily by the Labour government of 1997-2010. At the end of 2011, more than 700 hospitals, schools, prisons and other public sector projects had been built under the PFI scheme
  • It encourages private investors to manage the design, build, finance and operation of public infrastructure such as new schools, hospitals, social housing, defence contracts, prisons and road improvements.
  • Typically a PFI contract is repaid by the government over a 30 year period
  • Under PFI, major projects including new infrastructure are built by the private sector, the government uses the resource over the long term for example between 25-30 years

Evaluation: What are some of the Benefits of the PFI?

  1. Efficiency: Belief that the private sector is better at managing investment projects and achieving overall cost efficiencies than the public sector
  2. Extra Investment: Extra funding can kick-start more projects – bringing economic and social benefits. The PFI provides private sector funds for projects that might prove difficult for the government to finance through higher borrowing and taxes e.g. 22 NHS trusts use PFI for building. Projects supporting health or education will improve productive capacity, increase economic growth and can therefore be funded out of future incomes that the projects help to generate
  3. Delivery: The private sector is not paid until the asset has been delivered. New PFI projects are nearly all fixed price contracts with financial consequences for contractors if delivered late. PFI firms pay tax which in theory could make the projects cheaper overall for the government
  4. Dynamic efficiency: Private sector better placed to bring innovation and good design to projects, higher quality of delivery, lowering maintenance costs. The bidding process for PFI projects creates competition at point of tendering

Evaluation: What are some of the Disadvantages of PFI?

  1. Debt costs: Since 2007 the cost of private sector finance has increased - financing costs of PFI are typically 3-4% over that of government debt. Some estimates find that paying off a £1bn debt incurred through PFI cost the UK taxpayer equivalent to a direct government debt of £1.7bn
  2. Inflexibility and poor value for money: Long service contracts may be difficult / costly to change – especially when the management of a project seems to have gone wrong. There have been many stories of flawed projects for example private firms contracted out to provide car parking, cleaning and other services in hospitals built and run as part of a PFI. Infrastructure may not designed to last more than the length of the contract and will need replacing or maintenance costs will be high
  3. Risk: The ultimate risk with a project lies with the public sector (government). Private finance agreements are complicated to organise and there is no guarantee that the private sector will make a better cost benefit analysis of a project than the public sector
  4. Administration: High spending on advisors and lawyers and the costs of the bidding process. The Royal Institute of British Architects estimated that the cost of bidding for a PFI hospital was more than £11 million
  5. Addiction: Governments can become addicted to PFI - "the only game in town" rather than using government borrowing for key projects. The PFI has added to public sector debt but created many private sector fortunes

The media is rife with examples of some of the wasteful spending built into the public sector procurement agreements that are part of PFI projects – for example the Prison Service renting computers for £120 per month, anger at rising car parking charges at many local hospitals, road and bridge projects over-budget (the M25 widening scheme cost £1 billion more than forecast. Another well known example is the kennels at the Defence Animal Centre in Melton Mowbray, which cost more per night than rooms at the London Hilton.

A good recent example of a PFI project is the Olympic Delivery Authority that delivered the 2012 London Olympic Games.

Case Study: Should the UK Government Build New Super-Prisons?

The UK government should close down more than 30 of the UK's most decrepit, poorly run jails and replace them with 12 super-prisons housing about 3,000 inmates each, new research suggests.

The proposed prisons would cost £3.75bn and are expected to save about £600m a year, according to a report by Policy Exchange, the right-leaning think-tank.

The age profile of the existing UK prison estate remains skewed towards older, less efficient and high maintenance establishments.

Around a quarter of prison capacity in the UK is in prisons that are Victorian, or older. Most of these are the traditional large, city-centre local prisons, such as Wandsworth, Wormwood Scrubs and Brixton. Another quarter of the estate is comprised of facilities constructed in the 1960s and 1970s, often to poor standards and designs and with poor materials

Opponents argue that housing offenders in huge buildings can increase reoffending and makes inmate management more difficult. Wandsworth, the UK's largest jail, has more than 1,600 inmates and inspectors have noted the challenges of managing its unwieldy population.

Juliet Lyon, director of the Prison Reform Trust, said introducing super-prisons would be a "gigantic mistake" and that money would be better spent improving mental healthcare, drug treatment and alternatives to custody rather than ineffective jail sentences.

North Wales has been chosen as the site of a £250m super prison which the Ministry of Justice says will create 1,000 jobs. It is expected to be built on a site on a Wrexham industrial estate by 2017. The new prison will be built as a Private Finance Initiative project.

Adapted from news reports, April 2013

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