Friday, 15 October 2010

How good is the private finance initiative (PFI)

The Private Finance Initiative (PFI) has been one of the most significant broad based public policy developments of the last fifteen years and affects substantially the delivery of public services in most parts of the public sector in the UK. PFI aimed to bring the private sector more directly into the provision of public services, with the public sector as an enabler and, where appropriate, guarding the interest of the users and customers of public services. It is not simply about the financing of capital investment in services, but about exploiting the full range of private sector management, commercial and creative skills and the delivery of certain support services. The PFI policy has been enthusiastically adopted by governments of both major political parties, and over £50bn of capital formation has taken place in the public sector through the PFI.

However, PFI has also generated a huge amount of criticism and controversy. PFI projects are supposed to demonstrate good value for money in the use of public resources compared to the publicly funded equivalent. Also some transfer of project risk to the private sector is supposed to be achieved. Some will argue that it is impossible for the private sector to do this and make a profit while others will say it is achievable through grater innovation in service design and greater efficiency in delivery

Thus a key question is how effective has the PFI policy been in achieving these (and other) objectives. Because of political sensitivities any such evaluation of PFI is a difficult task because of the lack of evidence in the public domain or a lack of reliability in using what evidence is available. Using publicly available information the author undertook a research project aimed at identifying and assessing the effectiveness of the PFI compared to traditional financing routes. The key conclusions were:-

• There is some indication that the PFI model has resulted in additional capital spending in public services over and above what might have been achieved through a publicly financed route. In other words there is some additionality achieved through PFI.
• It is often claimed that PFI is better at curtailing capital cost over-runs. The evidence suggests that capital cost over-runs might have been reduced through PFI, although the reasons for this are not clear.
• Caution must be expressed about the results of many individual PFI project evaluations because of the difficulties of accurately forecasting the costs, and the possible incentive for public sector managers to understate the projected costs of the PFI route in order to get the go ahead for a project.
• Many if not most PFI projects lack any rigorous evaluation of the impacts on service quality.
• The various “external” evaluations of PFI projects that have been undertaken have not reached a unanimous conclusion. In these circumstances, one has to wonder whether there is some bias at play, and whether the methodologies used by each evaluator are comparable.
• Health PFI projects do not seem to have done as well as PFI projects in other areas. This is possibly due the exclusion of large volumes of service activity from health PFI projects, or to the fact that health PFI projects are generally smaller in size than the average PFI project.
• PFI has succeeded in shifting large amounts of liabilities off public sector balance sheets but high levels of risk now exist,

Overall it seems that the jury is still out on the merits of PFI. Unfortunately, the jury will probably never reach a verdict because certain key information about PFI was just not collected, was manipulated for political purposes or has been lost. Hence, all we can do is ensure that for future PFI projects the data required to make an assessment of the projects is collected and is available.

Copies of the research paper referred to above are available, on request, from the author.

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