Private Finance Initiative (PFI) continues to have a legacy in the education sector, with repayment costs being 3.3 times larger on average than the value of the infrastructure they built, according to new research by the National Institute of Economic and Social Research (NIESR). The news comes just as the Labour Party government has been eyeing yet more PFI-style deals – and therefore, the report should ring alarms bells.
PFI: the worst government credit card ever
The report explores the use and impact of PFI, finding that £13.5 billion is spent by local authorities every two-to-five years on PFI repayments. Between 2018 and 2023, £4.2 billion (31%) of all PFI spending by local authorities was on interest rates alone.
Despite delivering over £80 billion worth of public assets over the years, the PFI model was retired in 2018 after becoming synonymous with high costs and inflexible contracts and due to the ‘fiscal risks’ it posed to the public sector.
845 schools have been built and/or are maintained by a PFI contract, covering nearly half a million pupils. This new analysis finds that PFI schools are financially worse off than non-PFI schools, after controlling for key characteristics. In particular:
- PFI schools are more likely to be in debt than non-PFI schools.
- PFI schools spend 5% less on ICT budgets and 4% less on staff compared to non-PFI schools.
However, there is, no significant evidence that PFI schools are more likely to be failing than non-PFI schools.
The study also looks at the financial accounts of PFI providers, finding that:
- Eight companies own 80% of all PFI schools projects.
- £1 billion has been made by PFI companies in pre-tax profits from all contracts: £300 million has been distributed as dividends.
Of these eight companies, five are registered in offshore tax havens.
Risk/benefit analysis – or just don’t bother?
While many consider the PFI experiment to be a failure, the current government may look to reintroduce a new version to finance its ‘decade of national renewal’, given the updated spending rules still do not leave sufficient headroom to finance all this expansion through conventional fiscal policy.
However, to do so it will need to learn from the lessons of the past, which will remain challenging given the lack of institutional knowledge over the use and impact of PFI.
Author of the report and NIESR senior economist Max Mosley, said:
The core question that remains for the government to answer when considering a reintroduced PFI model is whether these risks are worth it. It is argued that removing the limits from infrastructure projects can be achieved with simple adjustments to fiscal rules or by simply removing investment from fiscal rules altogether.
The judgment the government must make is a simple risk and reward one: whether the risks of introducing the Public Private Partnership model outlined in this work are better or worse than the risks to further changes in spending rules. It is the view of this report that it would be difficult not to side with the latter.
Featured image via the Canary
