This study was completed as part of the BA (Hons) Business in Property programme at the University of the West of England. The work is my own. Where the work of others is used or drawn on, it is attributed to the relevant source. This dissertation is protected by copyright. Do not copy any part of it for any purpose other than personal academic study without the permission of the author. The Private Finance Initiative is a policy created about two decades ago and developed scrupulously, ever since.
It was originally brought about as there was a general consensus that tax payer’s money was not efficiently used when government was procuring buildings to provide public services. Thus PFI was conceived to enhance public service delivery through private finance and as an enhancement, providing greater VFM through the transfer of risk to the private sector. This study looks at each PFI apparent benefit and analyses whether they provide what the UK Government promised they would. PFI plays a considerable role in the provision of public service delivery.
PFI has been a very controversial policy and has been audited and reviewed many times. The Treasury has been under immense pressure to develop PFI so the policy can provide VFM. A review of the relevant literature is undertaken, with reference to PFI projects specifically. PFI does not appear to deliver any of these benefits at present. This can contributed towards the European Procurement directive which brought about barriers to the bidding stage and thus made the PFI market uncompetitive.
This is a scheme designed to deliver new schools, new and improved hospitals and improved infrastructure for the benefit of today’s and future generations. The International Financial Services (2003) identify that with PFI accounting for some 15 % of public sector capital investment since 1996 under the policy of PFI and Public Private Partnerships (PPP) what cannot be argued is that significant levels of capital expenditure are being pumped into public services through this policy.
In 1979 with the conservatives coming into power many policy and legislation changes were introduced within rafts of policy reform aiming to reduce public expenditure. Within public services the introduction of Compulsory Competitive Tendering (CCT) was introduced to expose all “blue collar” defined activities e. g. ground maintenance, refuse collection etc to private sector competition and this changed the landscape of public sector provision irrevocably with major private sector companies borne from this era.
This quest for cost effectiveness in public service revenues was allied by the continuing policy debate on capital projects. In 1981 the National Economic Development Council (NEDC) formulated the “Ryrie Rules” which stated that “decisions to provide funds for investment should be taken under conditions of fair competition with private sector borrowers” with HM Treasury (1988) stating that “such projects should yield benefits in terms of improved efficiency and profit from the additional investment”. In 1989 the Ryrie Rules were abolished.
John Major then the general secretary to the treasury in a speech to the Institute of Directors (1989) commenting that they had “outlived their usefulness were seen as incomprehensible and set impossible hurdles” this major shift in policy was intended to further the conservative party belief that further private sector involvement was required to deliver public service reform. Importantly the government was looking to stimulate private sector interest to “bring forward schemes that are privately financed which offer value for money for the user and the tax payer”.
The Ryrie Rules were subsequently amended so that contracting out, mixed funding and partnership schemes could be used as governance models and that private finance could only be introduced where they offered “cost effectiveness”. Significantly HM Treasury (1992) instructed that privately financed projects “had to be taken into account by the government in the public expenditure planning”. This fundamentally brought the position on policy back to that of the labour government in 1977 with capital expenditure contributing to PSBR.
Within the 1992 Budget Statement which set out PFI guidelines the then chancellor of the Exchequer, Norman Lamont, articulated the transfer of risk as an integral part of PFI projects and where this risk stayed with private sector “public organisations will be able to enter into operating lease agreements, with only these lease agreements counting as expenditure”. It is important to contextualise this time in public service financing with other public policy reform that was occurring at the time.
Prior to the conservative government in 1978 the public sector could be considered as fully vertical integrated providers from setting policy (or translating national policy) specifying services and actual delivery. The conservatives set about changing this programme to one of Public Management and through deregulation, policy reform and government re organisation sought to introduce market principles into public services. Within this the public sector became the enabler whereby it specified the outcomes required using procurement instruments provided through legislation e. g. CCT for revenue based activities and PFI for capital schemes .