What has been said?

One of the most eye-catching announcements of the Labour conference was on Private Finance Initiatives (PFIs), made by Shadow Chancellor John McDonnell, Jeremy Corbyn’s de facto second in command. He criticised PFIs as a “waste of taxpayer money” that subsidised the profits of “shareholders, often based in offshore tax havens”. Not only did he condemn them in the strongest terms, he went on to say no new PFI deals would be signed by a Labour government and that it would “bring existing PFI contracts back in-house”.

McDonnell’s framing of the PFI announcement seeks to highlight prospective tax evasion and profiteering from the public sector. It symbolises these two evils of the private sector that public opinion can be mobilised against as well as being a clear break from New Labour, who used PFIs regularly. McDonnell knows he is on solid ground with PFIs because they are an area of low public understanding, and public opinion has been hardened through years of negative news coverage.

While bold in its delivery, the policy announcement itself is perhaps unsurprising. Since Corbyn and his team took over Labour, there has been a marked increase in anti-private sector rhetoric, and an upswing in scrutiny of the involvement of the private sector in the delivery of public services. The 2017 manifesto called for nationalisation of utilities, the removal of private sector involvement in healthcare and greater public sector involvement in other policy areas.

The proposal to bring all existing PFI contracts back in house, if implemented, could amount to nationalising £200 billion worth of contracts that run schools, hospitals and prisons. However, this figure assumes the party’s willingness to compensate investors fully. This is by no means a given. A Labour spokesperson stated that Parliament would decide on the appropriate level of compensation, implying a possibility for sub-market rate levels of recompense.

The question that emerges after this is what the prospects are for PFIs in the short term and further into the future as well.

How did we get here?

First started in 1992 under John Major’s Conservative government, PFI use was expanded hugely under the Labour government with over 600 PFI contracts between 1997 and 2010. The aim of the sizeable expansion was to renew public infrastructure, something many people believed had been neglected until then, while remaining fiscally responsible. This was managed by the contracts being classified as private sector liability, keeping it off the government’s balance sheet, and therefore complying with Gordon Brown’s famous ‘golden rule’.

But by 2011 there was sustained criticism of PFIs from politicians. The Public Accounts Committee published a damning assessment which accused government departments of hiding the full costs of PFIs. It also was revealed through evidence that tax revenues from investors were being lost because of offshore arrangements. A second parliamentary committee concluded that PFI was “a waste of money” in 2011 and provided little benefit when compared with other borrowing methods.

Historically, PFIs also faced criticism for their inflexibility. In one instance, former Chancellor George Osbourne complained that he had struggled to buy a £40 Christmas tree from B&Q for the Treasury because the PFI contract requirements specified a £900 Christmas tree and decoration arrangement.  This was writ large for schools and hospitals, which found themselves tied into uses for new buildings, and the maintenance of them, that became obsolete. They were extremely difficult to change with PFI contractors, and as updates and renovation were needed they were far costlier due to the strict contractual requirements.

The larger more salient problem emerged with interest repayments on PFIs becoming a burden for schools and hospital trusts. In 2012 the South London Healthcare NHS Trust went into administration having run up debts in excess of £150 million. At the time, the Trust was spending 14% of its income on PFI repayments. Problems were exacerbated by austerity causing school and hospital budgets to stagnate while PFI repayments took up greater proportions of budgets year-on-year. With some campaigners now estimating £831m a year in profit for PFI investors in the health sector alone, this equates to a politically salient time bomb forming around the use of tax payer money.

To try to address these concerns, in 2012 HMT launched an updated version of PFI – PF2.  It was meant to increase contract flexibility, be more transparent, and better allocate risk. PF2 requires a public sector representative to sit on the board of the partnership, as well as much greater transparency around the financial interests of investors in the project.  Yet in the context of the financial crisis, which slowed the uptake of PFI contracts by government and private investors, PF2 has not radically changed the sector. Recent data shows for the year to March 2016 only two new projects were signed off under PF2. If this is the case, then PFI is largely an historic problem, with the major issue the current stock of contracts which need honouring.

Over time, the public cost of old PFI contracts has mounted up to just over £10bn a year and are predicted by the Treasury to still cost over £2bn by 2040. With growing discontent with austerity politics, figures like this can become more potent and politically agitating for the public. People would prefer money to be spent on new facilities, not paying off the interest on decades old buildings.  This is what Labour’s policy is primarily a response to, with the aim of freeing up year on year spending on PFIs which can then be invested elsewhere.

How is this affecting PFIs in the short term?

By refocusing public attention on PFIs, Labour can reinvigorate public discontent with the contracts and the nature of private investment in public services. Considering Labour’s new position of relative strength in Parliament, and their ability to influence the policy agenda, this may cause pressure to mount on the government to intervene once again in PFI policy. Although this would likely fall someway short of retrospectively adjusting the terms of current contracts.

Business leaders such as the CBI Director-General, Carolyn Fairbairn, were highly critical of Labour’s announcement, saying it would send investors “running for the hills”. Others have been more measured. Graham Vidler of the Pensions and Lifetime Savings Association said, “we need to understand the cost to pension funds’ investments in companies in receipt of PFI contracts and consider how they could be compensated. If this is not done, scheme members could lose out”.

While Labour may be willing to be anti-private sector and anti-big business these comments suggest PFI nationalisation may have ramifications for a wider section of society than the party’s leadership first thinks. However, this does not stop the reputational risk that comes with the issue re-emerging. The most likely short-term outcome from this is increased debate in the media, though with the slim prospect of the current government giving into examining the PFI contracts.

What are the prospects in the longer term?

Some cold water has been poured over the idea already. John Ashworth, the party’s Shadow Secretary for Health, whose prospective department is the largest user of PFI and PF2, has admitted his party’s plan may never be implemented. Ashworth commented that “NHS experts generally accept that it’s only a handful [of PFI contracts] which are causing hospital trusts across the country a significant problem, but let’s look at every single one in detail”.  He also said that it could “take years” to unravel individual contracts. This points to the possibility of a potential compromise, thanks to practicalities. Labour appears willing to review all PFIs, but the cost of nationalising all these contracts in terms of time, money and political capital may be too high. Ashworth’s reaction suggests that only some contracts would be at risk of nationalisation, at least in the short term, and if they do it will be those which cause a financial burden for hospital trusts.

It is not very likely that PFIs will be nationalised on day one of a Labour government. While no new PFI contracts would be signed, this is very close to the status quo anyway. Over time the party may be able to deliver some PFI nationalisation, but considering the raft of other proposals they have set out and the finite time they may have, it is not clear that they will be capable or willing to follow through to implement this bold announcement.

Labour is also a party that has been historically in favour of large infrastructure investment. To deliver this to its fullest extent they will need new ways of generating private investment in public infrastructure. There is a political consensus that PFI is not the way and PF2 has failed to take off. Unless a Labour government is willing to borrow billions directly off the government’s balance sheet, they will need something else.

PFI might just be a convenient whipping boy that is useful for political point scoring, or it might be a major plank of their programme for government. Either way it seems PFI contracts will be here to stay thanks to practicalities, at least in the short term, and there will continue to be considerable barriers to Labour fully implementing the policy in the medium term as well. However, considering the long running public scrutiny, it is clear that there is political mileage for Labour that would incentivise them continuing to press the issue further, fuelling concerns for PFI investors.