Budget 2018 - whither PFI?

In a calculated move towards the stance of the Labour party, the Chancellor announced in his Budget Statement that Government will no longer use Private Finance 2 (PF2), the successor to the Private Finance Initiative (PFI) in England. PFI saw a handful of iterations in its 15 year lifespan whilst PF2 has only been used 6 times since it was launched in 2012. This article considers the impact of this announcement on current projects, those in the pipeline and the future shape of public/private investment.

Government cannot of course mandate non-Governmental bodies such as local authorities which remain free to adopt the procurement strategy and contract methodology that best fits their requirements. Devolved Administrations will make their own decisions in this regard – the Scottish Government had already rolled out the Scottish Futures Trust model some years ago. However the Government has now woken up to the criticism levied by, amongst others, the National Audit Office, Office of Budget Responsibility, Public Accounts Committee and the polarisation of opinion in the national press following the Carillion collapse. This suggests that it will be a brave public sector body that will wheel out PFI or PF2 without modification and without calling it something else.

The Chancellor announced that existing PFI and PF2 contracts will not end because of this change of position, the Government will honour its commitments, and acknowledged that the high upfront cost of compensation means that it is rarely value for money to voluntarily terminate a PFI or PF2. Examples do exist of course where large deals of this nature have been terminated or unpicked (whether for reasons of cost, inflexibility or change in requirement) whilst demonstrating overall value for money. Greater Manchester Waste is perhaps the largest example, also Hexham Hospital. There will be many other examples where public bodies wish to follow suit, move on from PFI to deliver better services and value but cannot afford to do so.

What the Chancellor is not doing is providing public bodies with PFI commitments any lifeline by way of funding to cover high costs of change or termination where it is in the overall public interest. He is not adopting Labour’s likely route which will likely terminate PFI arrangements in full or part whilst converting PFI investment into something akin to a Bond. A question remains whether the Bond secures the planned return or just the actual investment/monies lent plus interest – so the battleground would be whether public service contractors and lenders considered they were being short-changed and the impact this would have on future confidence in public/private outsourcing and projects.

Further, he is not offering a common platform, a centrally developed alternative model for securing long term provision of assets and related services. Neither is he removing the inevitable question mark that will sit over the highly developed PFI and PF2 contract documents – these drew much of their robustness from established, industry contracts.

What he is offering, and this has been visited several times by Treasury, National Audit Office and the Infrastructure and Projects Authority amongst others, is to look to develop best operational practice to maximise value through a Centre of Best Practice. Based in the Department of Health and Social Care (DHSC), to provide support for contract managers at a number of NHS Trusts, the scope seems unduly limited given the coverage of existing PFI and many other contracts that used the template for PPP and other projects.

Looking to the future, there is an expectation that there will be a substantial increase in the delivery of infrastructure – beyond HS2, Crossrail2 and the major Highways programmes. The billions promised in the budget for the NHS may cover operational costs and staffing issues however much will go in major capital investment including equipment and new and reconfigured facilities. Infrastructure investment is a reliable antidote to a potentially sluggish economy or recession and the cash cannot all come from the Government. Indeed, Government acknowledges the important role of the private sector in public services and works delivery – including delivering private finance into projects where it demonstrates best value. The casting down of PFI and PF2 risks creating a vacuum then delay and expense to allow time for the creation of the replacement, acceptable standard form of contract.  

The National Infrastructure Commission (NIC) was established to provide independent, expert advice on the UK’s long term economic infrastructure needs. In July 2018 the NIC published its first ever flagship National Infrastructure Assessment (NIA). This is a once-a-parliament assessment, making recommendations to Government across all areas of economic infrastructure, out to 2050. The Government has published its interim response to the NIA. This sets out the Government’s track record of investment, and new steps taken at Budget in response to NIC priorities. The Government will formally respond to the NIA in 2019, publishing a comprehensive National Infrastructure Strategy.

So the Treasury and the DHSC better get a move on and deliver the new commercial, contractual and financial model that will facilitate on acceptable terms the involvement of both private capital and public services contractors in major projects. Failure to move in this direction risks dissuading the private sector due to the uncertainty or additional costs of settling commercial terms. A vacuum risks opening up in the model for public/private funded schemes that will be less easy to fill than England's celebrated pot holes swept up in a £30 billion package for England's roads.

David Kilduff is Head of Energy, Infrastructure & Government at law firm Walker Morris LLP. He can be contacted on 0113 283 2643 or This email address is being protected from spambots. You need JavaScript enabled to view it..