The Starmer government, desperate to keep its public borrowing in check, is bringing back (in the words of a senior City of London banker) a “fraud on the people.”
In mid-November, the Confederation of British Industry (CBI), an influential business lobbying group, announced it was going to advise the UK government on how it could use private investment to build new schools, hospitals, prisons and transports projects.
A week later, the UK’s Health Secretary Wes Streeting revealed that a new generation of local NHS clinics in England will be built using private money. As the FT reported, the move “echoes the controversial Private Finance Initiative (PFI) policy” that was scrapped in 2018 after being judged poor value for money by the public spending watchdog.
Buy Now, Pay Later
First launched by John Major’s Conservative government in the mid-90s and then massively expanded by the Blair government thereafter, PFI — and its later incarnation, PF2 — were essentially a buy now, pay later scheme for government — with one added advantage: they allowed the government to keep many of its current liabilities off-balance-sheet.
Under PFI, instead of borrowing to build, the government began contracting with private sector firms to finance, design, build and maintain public assets, including hospitals, schools, roads, prisons, street lighting and military equipment. The contracts typically run for 25–30 years, and many of them are coming to an end soon.
The scheme was designed by and for executives from big banks, financial firms and building contractors that appeared on secondment to the government’s PFI Taskforce. The interest rates and other charges levied on the debt, many of them still outstanding, were crippling, as I detailed for WOLF STREET in 2018:
The interest rate on PFI deals can be as much as 2 to 3.75 percentage points higher than the cost of government borrowing. On some projects, returns to investors can be more than 25% a year.
Even without entering into any new PFI-type deals, the government has already coughed up £110 billion in fees and interest and will have to pay investors and companies another £199 billion between April 2017 until the 2040s for existing deals, which Hammond has already said will be honored. That works out at a total outlay of around £310 billion for 700 projects estimated to be worth a measly £60 billion.
According to a 2022 report by The New Statesman, NHS trusts still had around £50 billion left to pay on their PFI debt (that number has apparently shrunk to £44 billion today). Some NHS trusts are spending more servicing their PFI debts than on medicines for patients:
Sherwood Forest Hospitals NHS Foundation Trust spent more than double on its PFI repayments (£45.8m) than on drugs costs (drugs inventory consumed and purchase of non-inventory drugs, which amounted to £22.6m). That works out as more than £1 in every £8 of income it received from patient care activities, finance income and other operating income being spent on paying off PFI debt.
It was followed by St Helens And Knowsley Teaching Hospitals NHS Trust (which spent 12.1 per cent of its income on PFI, more than double its drug spend), University Hospitals Coventry And Warwickshire NHS Trust (11.7 per cent of income on PFI, 1.4 times what it spent on drugs), and North West Anglia NHS Foundation Trust (11.2 per cent, 1.2 times what it spent on drugs).
A further 21 trusts also spent more on paying back their PFI debt than on drugs, according to the accounting data…
Government figures from 2018 show the value of the initial PFI investments in the NHS was just £12.8bn, but the Department for Health and Social Care will have spent a total £80.7bn once they are all paid off (this figure includes services such as facilities management supplied by the PFI providers).
So, who benefits from these financing arrangements (because one thing is clear: it is not UK taxpayers)? An investigation by NHS campaign group Every Doctor revealed the complex layers of ownership that lay behind some of these opaque deals:
To uncover who ultimately owns each PFI project, we had to follow a Matryoshka-doll trail of holding companies. These intricate corporate structures reflect the way the projects were set up, with construction firms, facilities managers and banks each taking a stake through layered financing vehicles.
The convoluted ownership trail also makes it hard to see exactly who profits from the projects. To add to the confusion, stakes in PFI contracts are frequently sold on, meaning the firms now operating them are often not the same ones that originally built them.
Take, for example, Norfolk and Norwich University Hospital, one of the largest in the UK and one of the earliest PFI projects. It opened in 2001 and then was extended in 2004, again using PFI. Norfolk and Norwich University Hospitals NHS Foundation Trust is still paying a company called Octagon Healthcare Holdings tens of millions of pounds a year for operating the hospital.
But Octagon doesn’t ultimately own the contract, two companies called Semperian and Innisfree Group do. The latter is an investment fund based in Jersey, a tax haven, and the former is owned by South African-born property investor David Metter.
By the time the contract comes to an end in 2037, the NHS expects to have paid Octagon a further £1.2bn. That is a vast overpayment on the £229m it cost Octagon to build the hospital.
Arguably the most insane part of the PFI story is that none of it was necessary. As Richard Murphy pointed out in a recent podcast, “Government issues its own currency, so it can always fund investments (in that currency), and what’s more it can always fund investment more cheaply than the private sector.”
The private sector always has to pay a premium for the risks associated with private sector lending, and the government does not. In that case, the claim that there was first of all no money was just political theatre. The Government can always create the money it needs to fund any project that it thinks is worthwhile.
And the claim that it was cheaper for the private sector to fund these activities than for the State to do so was very obviously completely and utterly wrong. PFI was therefore all about ideology, false accounting, political shenanigans, helping the private sector, but not for one moment was it about necessity.
“A Fraud on the People”
Even Sir Howard Davies, former chairman of the Royal Bank of Scotland (RBS), one of the biggest beneficiaries of PFI, admitted as much on BBC1’s Question Time in 2018, describing PFI as “a fraud on the people” — a fraud that the Starmer government now wants to repeat:
The government can borrow money more cheaply than anyone else, and therefore if you’re going to hand over the total provision of a hospital to someone whose borrowing costs are going to be higher than yours, what is the advantage of doing that? Unless you’re absolutely certain they’re going to be much more efficient. And if you think they’re going to be efficient, why not give them a fixed price contract? Why hand over the whole thing?
I think PFI has been a fraud, and there has been a very interesting report by the National Audit Office today which shows just how much we have paid for the privilege of the Private Finance Initiative.
Davies said these words after the collapse of 200-year old UK infrastructure group Carillion, whose outsized role in delivering public services had earned it the moniker “the company that runs Britain.” The firm’s sudden demise exposed PFI as a form of giant ponzi scheme, while also laying bare the abysmal quality of auditing by the sharply conflicted Big Four accountancy firms.
There are also serious questions being asked about the quality of the building work undertaken by the companies contracted for the PFI schemes as well as concerns about what will happen to the buildings when the concessions end…
Nick Corbishley 