The chancellor has announced the Treasury will not sign any more private finance initiative contracts, describing the model as “inflexible and overly complex”.
PFI and its successor PF2 will not be used in future contracts for private infrastructure, and a new unit within the Department of Health & Social Care will be used to manage existing contracts.
However, it is unlikely that the government will abolish all kinds of “public/private partnership” deals, as its long-term investment plans are predicated on around £3bn coming from private sector investment.
The government is also currently assessing a business case for a type of public/private partnership between the NHS and private companies to deliver major capital projects, known as regional health infrastructure companies.
Speaking in his Budget speech, Philip Hammond said: “In financing public infrastructure, I remain committed to the use of public/private partnership where it delivers value for the taxpayer and genuinely transfers risk to the private sector.
“But there is compelling evidence that the private finance initiative does neither.”
Mr Hammond’s announcement reversed some of his previous statements, the chancellor saying in 2016 the government would develop a “new pipeline of (PF2) projects”.
The Budget red book said that PF2 has not been used since 2016, and noted that the Office for Budget Responsibility’s fiscal risks report identified the contracts as “a source of significant fiscal risk to government”.
Back in January the National Audit Office found the contracts had cost taxpayers billions of pounds more than public sector alternatives, with little extra benefit.
Mr Hammond said that “nearly 90% of those contracts were agreed by the last Labour government, leaving the nation with a bill of more than £200bn to pay off”.
“Labour’s policy is to terminate all these contracts, triggering the ruinous penalty clauses that they themselves agreed to in the first place, adding tens of billions more to an already enormous bill, a classic Labour solution: pouring good money after bad,” he added.
“I will not do that. We will honour existing contracts. But the days of the public sector being a pushover must end. We will establish a centre of excellence to actively manage these contracts in the taxpayers’ interest, starting in the health sector.”
HSJ said it understood some work has already been carried out nationally by a handful of staff to assess where there is scope for savings to be made from a centre of excellence. It is unclear to what extent this would be expanded under the new plans.
Creating a central team to manage projects was one of the options assessed in a report by the Centre for Health and the Public Interest earlier this month, which said it could deliver around £15m of annual savings.
Around 100 health trusts have PFI contracts, with some carrying interest rates of more than 10%. Four trusts’ annual repayments equal more than 5% of their turnover.
In his 2017 report, Sir Robert Naylor said around £10bn was needed to transform the NHS estate. In response, the Department of Health & Social Care suggested that around £3bn of this would come from private sector investment.