Private Finance Initiative: where did all go wrong?

What is PFI?

PFI deals were invented in 1992 by the Conservative government led by Sir John Major, but became widespread under Labour after 1997.

The schemes usually involved large scale buildings such as new schools and hospitals, or infrastructure projects which would previously have been publicly funded by the Treasury.

The projects are put out to tender with bids invited from building firms and developers who put in the investment, build new schools, hospitals or other schemes and then lease them back.

Lease arrangements for PFI projects are long term, often 25 years or longer.

Why were they so popular?

PFI deals became popular in government from the end of the 1990s, under the then chancellor Gordon Brown, because they allowed ministers to secure large sums to invest in popular projects, such as new schools and hospitals, without paying any money up front.

Repayments are made over a long time scale, usually between 25 and 30 years but occasionally as long as 60 years, but at a high rate of interest.

That meant that large debts were stored up for future taxpayers – which now have to be repaid.

Under a Treasury sleight of hand, PFI debts do not form part of the deficit balance sheet.

When did it start to go wrong?

Even as far back as ten years ago unions began to give dire warnings about the future cost to the country of PFI schemes.

In April a scathing report by National Audit Office found that each household will pay nearly £400 next year to pay for hospitals, schools and motorways.

The price tag for repaying PFI firms will reach £8.6 billion next year alone, with the taxpayer owing a total of £121.4 billion on public projects which are worth only £52.9 billion.

Many PFI deals tie local authorities into expensive catering, cleaning and maintenance contracts, meaning the total bill to the taxpayer is £229 billion. In one case, a school was charged £320 for a plug socket.

An investigation by The Daily Telegraph in January revealed young people starting work this year will pay taxes for the Government’s Private Finance Initiative until they are nearly 70.

Labour’s last health secretary, Andy Burnham, who was in charge of 221 PFI projects, admitted last year: “We made mistakes. I’m not defending every pen-stroke of the PFI contracts we signed.”

Where is the money going?

Private contractors who agreed PFI deals with the Government are set to make billions of pounds in profit, with some due to see returns of up to 71 per cent.

An almost unknown City company, Innisfree, with only 14 staff, is the largest single player in the PFI market, owning or co-owning 269 PFI schools and 28 hospitals.

According to accounts filed at Companies House, Innisfree’s profit margin was 53 per cent last year. A successful FTSE 100 company makes margins of around 6 per cent. David Metter, the founder and chief executive of Innisfree, owns almost three-quarters of the company and collected pay and dividends of £8.6 million last year.

The PFI deals include:

A hospital which charged £52,000 for a job that cost £750. Demolishing a shelter for smokers resulted in the PFI contractor charging £2,600 a year for the “extra cleaning”.

A hospital in Bromley, south London, which will cost the NHS £1.2billion, more than 10 times what it is worth.

An empty school which will cost taxpayers £370,000 a year until 2027. Another school had to pay £302 for a socket, five times the cost of the equipment it wanted to plug in.

Military dog kennels which would have ended up costing more per night than a room in the Park Lane Hilton, London. The deal to replace facilities at the Defence Animal Centre in Melton Mowbray resulted in the sacking of the contractor and the scrapping of the contract.

In Belfast, a school closed after seven years but the PFI contractor must be paid £370,000 a year for the next 16 years.

What can be done?

Some hospitals have managed to use break clauses to get out of their PFI contracts but the government could be forced to bail out struggling trusts.

The National Audit Officer report said that in future Government should have the power to cancel or substantially renegotiate PFI projects where it could be proved that taxpayers were not receiving value for money.

They added that civil servants should use the state's huge buying power to obtain better deals, and boost their skills to avoid being outwitted by private sector counterparts.