The last PFI project, but not the end of PFI

With the local authority PFI programme ending, Rob Hann looks back at what has been achieved.

After 18 years the local authority PFI programme is about to come to an end. Admittedly, central government support (formerly known as PFI credits or PFI grant) ceased to be available to local authorities soon after the Coalition Government came to power, following the austerity measures which took hold. However, a few projects survived the funding cull and were allowed to progress through to contract and financial close. All of those tail end PFI projects have now closed with the exception of one extra-care housing project assisted with PFI credits provided by the Department of Health.  

The completion of the PFI programme provides a time to reflect on the key features of the initiative and what it has delivered in terms of investment and future legacy across the local government spectrum.

When PFI was first introduced into local government in 1995/96 local authorities were already lagging behind many other parts of the public sector where the PFI had been introduced in 1992. Local government was regarded as ‘too difficult’ given the diverse nature of its functions, the comparatively lower value of projects promoted by local authorities and the complex myriad of laws and regulations which tended to be a disincentive to investors considering doing business on a long-term basis with local authorities. The organisation I joined from local government in 1996, the 4ps (or Public Private Partnership Programme to give it its full title) was established by the Local Government Association specifically to address those problems and remove obstacles to long-term contracts and investment by way of central government PFI funding for the sector.

It is now perhaps hard to believe that back in the mid-1990s there were no PFI schemes in existence, no standardisation of PFI contracts (SOPC), no proper process for determining which schemes should receive PFI financial support from central government and a wealth of legal, vires, financial, sector specific and other problems to resolve to make long-term contracts a possibility for local authorities and their private sector counterparts. The first task I had to address as the only lawyer in the small 4ps team was to find a way of addressing the concerns over local government vires which had severely put off banks and other funding institutions from doing business with local authorities. The Local Government (Contracts) Act 1997 proved to be the answer to that particular conundrum. Other reforms followed including a loosening of the then capital finance system to permit long term investment through service contracts.

The main intention of PFI was to engage the private sector in the design, build, finance and operation of public infrastructure, with the aim of delivering good quality and well maintained assets that provided value for money for the taxpayer.

The contracting approach was eventually adopted across a broad range of sectors with varying degrees of success and engagement by diverse public bodies. HM Treasury reports that over 700 PFI projects have reached financial close, securing private sector investment of around £55bn. With that money, hundreds of new schools have been built; thousands of new homes have been constructed and existing houses refurbished to decent, modern standards; roads and other transport links have been developed, including a modern and fast tram system at my home city of Nottingham; waste infrastructure projects to meet recycling and landfill diversion targets have been delivered; health facilities and joint service centres constructed to meet the needs of local people and to better focus service delivery by diverse providers. These are just some of the tangible benefits which have been possible through investment on a standardised basis and with some central government financial support across the local government spectrum. Moreover, the legacy from such capital investment will continue for decades to come as contracts put in place over this period, serve out their respective contract terms.

The focus in economic and fiscally constrained times, however, has been and remains to revisit those contracts to ensure value for money is secured over the whole contract term, as promised in the respective business cases underpinning these projects. In some cases, re-engineering of requirements and specifications will be necessary and appropriate and the change processes built into PFI contracts are examined and used in earnest to deliver savings and efficiencies.

The PFI was always controversial. It had (and perhaps still has) many detractors and critics. Some of those criticisms have been valid. Some were acted upon in the early years of the PFI being developed in local government with the introduction of SOPC (standardisation of PFI projects), the standard form change protocol to facilitate better, more effective and efficient change in long term contracts, and the project review group and its scrutiny of new projects before funding was approved for individual schemes. Unfortunately, whilst not unique to PFI, the introduction of (then) new procurement rules (competitive dialogue) in 2004 did little to help the reputation of the PFI and added to the popular view that such projects were extremely expensive to procure and had become an expensive ‘gravy train’ beloved of professional consultants.

Whilst terminating funding for new PFI projects, the Coalition Government did recognise that the programme had exhibited many strengths. These included the private sector’s project management skills, innovation and risk management expertise, such as ensuring buildings are delivered to a high quality, on time and budget and that assets are maintained to a high standard throughout their lives.

The Government’s replacement of PFI, namely PF2, builds on the foundations of PFI and does not abolish all that went before. PF2 is very much a development of an existing methodology. PF2 seeks to develop a risk sharing approach through joint ventures.

But PF2 has yet to achieve anything like the degree of interest and buy-in with local authorities that PFI achieved over the past two decades. Part of the reason for that is the absence of financial incentives to local authorities to engage with a centrally promoted, untried and (as yet) untested procurement methodology. PF2, currently at least, seems to be aimed at large central government infrastructure projects rather than smaller individual local authority-led schemes. This may change of course when the current pilots run their course and new schools are provided using PF2 but at the time of writing there are no signed PF2 schemes and it remains a largely unknown quantity outside of HM Treasury or central government circles.

The organisation I work for, Local Partnerships (the successor body to 4ps), continues to offer support to both central and local government to deliver savings and efficiencies through better contract management and improved commercial knowledge of the contracting features within PFI contracts. Any public body with an existing operational PFI project should contact Local Partnerships and tap into the experience which has been garnered for delivering savings.

I end this short look back at the PFI by paying a personal tribute to colleague who was instrumental in helping to develop many of the underlying building blocks of PFI: David Locke, my great friend and work colleague at 4ps and Local Partnerships for many years, passed away in 2014 at far too young an age. His legacy though can be seen all around us in the tangible form of public infrastructure developed as a result of PFI funding he helped so many local authorities to secure.

Rob Hann is Director, Legal Services at Local Partnerships LLP. He can be contacted This email address is being protected from spambots. You need JavaScript enabled to view it..