PFI has been a lousy deal. As estimated a few years ago, the UK state stands to pay £304bn to acquire assets with a 2012 capital value of £56bn – the kind of interest rate usually meted out to poor families by Wonga and Brighthouse.

John McDonnell: Labour would bring PFI contracts 'back in-house' Read more

The anti-PFI animus at Labour’s conference is understandable and of course shadow chancellor John McDonnell reaps applause by attacking his party’s past. In the noughties Labour gave PFI a huge boost: you will build nothing unless through PFI, Alan Milburn once instructed the NHS on Tony Blair’s behalf; Gordon Brown literally buried the scandalous truth of London tube financing in a hole in the ground.

Then, Labour said it could not raise investment funds by borrowing. But that was and remains a political not a fiscal calculation. The Office for Budget Responsibility says national debt would now be 2% of GDP higher if public rather than private finance had been used in PFI deals;in the light of the effects of the financial crash on public debt, that’s puny. And it’s also true, as the Commons Treasury select committee has said, that borrowing under PFI has typically cost twice the rate at which the state could have borrowed - a difference that has grown during the era of low interest rates since 2008.

PFI doesn’t pass the sniff test. Studies found no difference in the costs of design and construction compared to conventional public investment. PFI contracts have tended to be ultra long term, building massive inflexibility into the running of schools, hospitals and other public institutions, which can’t re-procure facilities management or other services at lower cost during the lifetime of the PFI.

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Yet unwinding this great chunk of public spending isn’t going to be easy, or even possible. Where will McDonnell find the money? There are about 700 existing PFI contracts, worth £59bn, for which nearly £5bn a year is paid out in finance charges.

If the UK is short of negotiating skill for Brexit, where are the lawyers to be found to unravel PFI contracts? Some deals have only just started, like the Midland Metropolitan Hospital in Sandwell, a PFI deal with a capital value of £297m, that is supposed to open in 2019. The contractor, Carillion, is in commercial difficulties but stands to do exceedingly well from a contract that would bring it not just interest charges but payments for the facilities maintenance and other services that have been bound in, to be financed by an annual NHS payment of £20m.



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No one disputes that rip-off profits were made by investors in earlier deals. But McDonnell will have to contend with Labour councillors and Labour members of the Scottish Parliament and Welsh Assembly, who are up to their eyes in PFI commitments, past and present and value the products. In Wales, Labour claims have beneficially reinvented PFI, with the Wales mutual investment model, through which the public sector can claim a share in the profits from privately-financed investment.

Most PFIs are in health, education, transport and defence plus £5.6bn worth of projects in Scotland. Accounting for PFI is notoriously hard, because they mix in payments for services that appear in a separate column from capital charges. Some PFIs still don’t even appear on the state balance sheet because private companies retain nominal control – £2.5bn worth of school buildings, for instance. Accountants distinguish PFI from leasing and “service concession” arrangements.

If McDonnell became chancellor he would need immediately to commission a Domesday Book, listing PFIs and outsourcing deals. The two often cross over and many of McDonnell’s supporters lump them together, even though outsourcing usually doesn’t involve asset creation and transfer.

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But it’s not just a question of buying out contracts, even assuming McDonnell could find the money: Whitehall departments, councils and other public bodies simply don’t have the capacity to take over the IT, facilities management and service commitments embedded in many PFIs.

For the past 17 years, for instance, the Home Office has been embroiled in developing and operating the Airwave digital radio system for police, fire and ambulance services; a highly critical National Audit Office report on a potential successor to Airwave highlighted the costs of both the old and new systems. The building the Home Office occupies, in Marsham Street belongs to a private company and so is not recorded as a public sector asset, even though the Home Office pays rent, service and other charges, with an option to buy at the end of the 29-year “partnership”.

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