Hi,
Firstly, an apology from me as the e-mail hasn’t been sent out for the past couple of weeks. I’ve been on holiday in Mexico (for which I make no apology!) and had planned to continue writing this e-mail whilst away.
Unfortunately, it turns out I was being a little bit optimistic. I’ve heard it said that a family holiday isn’t a holiday at all – its just looking after the kids in a different location. This turned out to be very much the case, so with the best will in the world I wasn’t able to sit down and write while I was away.
But the good news is, I’m back! In the last issue I promised something slightly different and I’m hoping this issue will deliver. There’s something for everyone here – a learning point for those less experienced readers about a fundamental FM concept, coupled with some of my (possibly controversial) thoughts on the future and a chance for you to have your say as well.
Before we get going, a quick reminder that you can see all previous issues by going to the Vault, and that enrolments are open for the IWFM Qual-in-a-Week, our flagship course which gives you the chance to gain an IWFM Level 4 qualification in just a single week. Click here for more details.
Right, let’s get into it. This week, we’re looking at PFI.
So what is PFI?
For those of you who may be newer into the industry or who haven’t encountered PFI before, it’s worth explaining exactly what it is and why it exists in the first place.
PFI, and its slightly more modern incarnation, PF2, is a method used to design, build, finance and operate public sector assets. It’s actually classed as the 4th method of FM service delivery, and we briefly mentioned it way back in Issue 10 of this newsletter in March. However, there’s a lot more to it than simply a way to deliver FM services.
PFI stands for Private Finance Initiative and is a means by which the public sector can use private finance to fund large-scale infrastructure projects such as the building and operation of hospitals, schools, prisons or transportation.
Instead of having to find the money to invest in a new project from tax revenue or borrowing, the government will commission a private company over an extended period (anywhere between 10 and 50 years) who will design, build, finance and operate the asset in return for a monthly fee (called a unitary charge – think of it as a monthly mortgage payment) throughout the duration of the contract.
This private company will usually be a Special Purpose Vehicle (SPV), which is a company specifically formed to deliver the project.
SPVs usually consist of partnerships between a financier (to provide the funding), a construction company (to design and build the asset) and an FM company (to manage the asset over the long term).
Using a PFI model allows the government to undertake large-scale infrastructure projects without having to find large chunks of money up-front, meaning that they don’t have to reallocate funds from other departments or increase the levels of public sector debt.
Of course, they do have to find the money at some point, but it’s spread over many years (decades, even!) and so appears to be, on the face of it, more manageable.
The roots of PFI actually lie in the almost bankrupt Callaghan government way back in the 1970s which made use of early forms of Public-Private Partnerships, but the more formalised concept of PFI was introduced by John Major’s government in the 90s and really took off under New Labour in the late 1990s and 2000s. However, it’s fair to say that they began to suffer from some controversy later on.
PFI is Dead
Unfortunately, by the latter stages of the last decade it transpired that a large proportion of PFI projects did not represent good value for money for the taxpayer. There were also issues around service quality and accountability, which led to a negative public perception of PFI as a concept.
This was often exacerbated by a breakdown in relations between the private service providers and their public sector clients, leading to a culture of distrust and a constant battle between providers (trying to squeeze additional profits out of the contract) and clients (trying to claw back fees or impose financial penalties).
Another issue with PFIs were some of the assumptions made in the contract. For example, provisions were often made to accommodate inflation, but these provisions were based on RPI at the time of writing the contract and did not accommodate for future changes in the level of inflation.
So a contract written in the 90s could include an annual increase of 7-9% based on RPI at the time, an amount which would not change even when inflation dropped to around 2%, representing a large discrepancy between the actual level of inflation and the price increases experienced by PFI clients.
In some cases, it actually worked out cheaper in the long-run for the client to go to the bank and borrow hundreds of millions of pounds to buy themselves out of their PFI contracts.
As a result of these issues and declining public perceptions of PFI, then-chancellor Philip Hammond announced the end of PFI in his 2018 budget. No new PFI projects would be commissioned, while existing projects would continue until their expiry dates at which point assets would transfer back to the public sector who would be free to choose their FM delivery model from the usual options.
Long Live PFI
To all intents and purposes, it looks as though PFI is dead. In fact, since 2018 we’ve been teaching on our courses that PFI is only relevant to those who end up working on a legacy contract, the number of which are gradually dwindling as they reach their contract expiry date.
But perhaps we haven’t necessarily seen the end of PFI after all.
It’s long been accepted that public infrastructure in the UK is in dire need of investment. We need more hospitals, more schools, more prisons, more means of generating power and better transport facilities.
We’ve also been repeatedly told that the public finances are in a dire state, that there’s no money left. Only last week, new chancellor Rachel Reeves hammered this point home in her statement to the House of Commons.
Both the current and previous governments have emphasised economic growth as the means with which to raise funds in the long-term to improve public finances and raise living standards across the country. But realistically, without investment in infrastructure, the required growth will likely remain out of reach.
Additionally, sustained growth takes time. Even if the government were to find the silver bullet required to kickstart the economy, it would take time for that growth to be reflected in increased tax revenues, certainly at the levels required for the investment that we so desperately need.
With public sector borrowing at dangerously high levels and with the new chancellor’s strict rules around fiscal responsibility, it’s unlikely that significant borrowing will be the answer.
Alternatively, there is a school of thought that believes in raising the funds via the Bank of England. However, it’s generally accepted that this approach can have serious effects on inflation – something that is unlikely to appeal to anyone given recent history.
So how do we square this circle?
I’d like to suggest that the answer may lie in PFI.
An unfair reputation
Personally, I think PFI gets a bad rap. Don’t get me wrong – there are plenty of examples of poorly managed PFI projects which have rightfully earned their bad reputation. However, I think scrapping the entire concept is akin to throwing the baby out with the bathwater.
The National Audit Office (NAO) assessments of PFI in the 90s/00s actually showed large trends of private sector efficiencies outshining past government project overspends.
In addition, they found that government client satisfaction, despite vested interest alternative views, was actually significantly higher than under pure government project management by around 50%.
The NAO upheld the original DWP (PRIME) PFI as a shining example of the way forward – rare praise indeed from the NAO, who do not have a strong track record in delivering compliments publicly.
By revisiting the concept and learning from previous mistakes, PFI can be made to work. With a combination of strong governance frameworks, more flexible contracts that ensure positive outcomes for both clients and contractors, fair and transparent procurement processes, effective contract management and proper legislation and regulation, PFI could be the answer to many of the issues we face today.
In fact, PFI models have been implemented successfully in a number of countries – Canada, Australia, France and the Netherlands to name just a few – covering a range of public assets including hospitals, educational facilities and transport. Even here in the UK there have been examples of well executed PFI projects, including the previously mentioned DWP PFI, the redevelopment of the London Underground and the construction of the Dartford Crossing.
So with a desperate need for investment in infrastructure, why rule out an idea which, with proper management and execution, could solve some of the very real problems that we currently face.
With its ideas for GB Energy and the National Wealth Fund, the new government has already suggested a willingness to utilise private finance for investment. I think this could be taken a step further by revisiting the idea of PFI (although perhaps a rebrand is needed to make it publicly and politically viable).
I also think that this should be investigated sooner rather than later, while past performance is still fresh in the minds of those with experience of setting up and managing PFI projects.
Over to you
I’d love to get your opinions on this, so I’ve set up a short survey where you can let us know your thoughts.
Do you think the resurrection of PFI is a viable solution to the infrastructure problems we face, or should it be consigned to the dustbin of history once and for all?
You can either just answer the yes/no question or you can leave a comment. Any insights may well be shared in next week’s newsletter. If you’d prefer to answer anonymously, just leave the name and e-mail fields blank.
You can access the survey here.
And on that note, that’s all for this week!
Depending on the responses to the survey, we may revisit this topic in greater depth next week, or we may begin a fresh topic.
In the meantime, have a great week!
Chris and the Xenon Team
P.S. If you haven’t already studied or started studying for an IWFM qualification, which will cover topics like this in depth and fully assess your understanding, you may want to have a look at our guide to the IWFM Qualifications which will give you a full breakdown of how they work and what’s involved in the different levels. You can download it here.
P.P.S. If you’re already considering taking a qualification but don’t know which level to go for, a good starting point is our One-Minute-Leveller tool, which will ask you a few questions and give you a recommendation based on the result. You can access it here.