Hospitals and schools that depend on private finance initiative contracts are in danger of “serious disruption” unless they can find a way to cope when they expire in the next year, a report has warned.
There are 154 PFI-funded projects that will expire during this parliament, covering hospitals, schools and transport, and the government has failed to give details about how the transition to new arrangements will take place, according to the report from the Association of Infrastructure Investors in Public Private Partnerships (AIIP), chaired by the Labour peer and former frontbencher John Hutton.
Without a strategy to replace the contracts there could be “potential for serious disruption” to important elements of the public sector, the report said.
PFI was turbocharged under Tony Blair’s government as a way of building key public infrastructure without adding to the public debt. About 600 public sector organisations have their buildings, IT and essential infrastructure managed by a private consortium under a PFI deal, often lasting 30 years.
The deals have proved controversial, especially during the 14 years of Conservative government when spending constraints have restricted health trust budgets. Trusts have found they need to make cuts in non-PFI hospital spending while maintaining contractual obligations under PFI agreements.
Many trusts have embarked on legal action to force the PFI contractors to reduce costs or provide improved services.
The AIIP report, which followed a survey of PFI managers, said relations had become fractious, especially in the past five years, and there were now huge bills from the legal actions on the desks of public sector finance directors.
“Mistrust between the parties to some PFI contracts has emerged in recent years, with a perceived lack of assured performance,” the report said.
“This has occurred at a similar time to public sector financial and resourcing pressures. Many of our survey respondents considered that the public sector contract management teams managing the PFI projects they are working on lack adequate resourcing.”
Last year the Whittington hospital in north London stopped making payments to its PFI contractor after a wrangle over fire safety. The consortium went bust and the administrators of the consortium, in an attempt to recover debts, sued the trust to recover £56m.
The Cabinet Office, via its own agency, the Infrastructure and Projects Authority (IPA), is responsible for overseeing PFI deals and managing a smooth transition to a new set of arrangements once a PFI deal has expired.
According to an IPA report last year, written by two independent PFI experts, the growing level of contractual disputes have spawned “a lucrative and self-perpetuating disputes advisory market”.
It said the advisers made things worse by seeking to win for their side “at all costs”, leading to toxic relationships, most notably in the health sector.
The King’s Fund health thinktank report, written by Nicholas Timmins, a fellow of the Institute for Government thinktank, said there was still time to develop a strategic and detailed process to manage the transition. Only five of the 154 contracts expire before the end of next year.
However, more than half of respondents to the AIIP survey said they expected a further deterioration in relations between the public sector bodies and PFI consortiums over the next three years.
A Cabinet Office spokesperson said: “We note the report and will review its findings. The Infrastructure Projects Authority is committed to supporting the public sector to ensure private finance initiatives deliver vital public services and provide value for money.
“We will continue to help these organisations manage the end of these contracts and transitions between service providers, such as by providing expert advice and training through the PFI Centre of Excellence, to protect taxpayers’ money.”
