Cabinet papers from 1995 show early worries over PFI

Senior UK ministers warned in 1995 and 1996 of serious problems with prime minister John Major’s flagship private financing of public projects, anticipating issues that plagued the scheme in the following decades.

Cabinet papers released on Tuesday show that Downing Street pledged to “push forcefully ahead” with its Private Finance Initiative, despite technical delays, tendering problems and concerns that departmental budgets would be squeezed.

The initiative, which the Conservatives introduced in 1992 and the succeeding Labour government extended, invited companies to finance, build and operate infrastructure such as schools and hospitals that would be used by the public sector.

Conceived as a mechanism to save money and introduce private sector discipline to public services, it ended up locking government departments into inflexible contracts and decades of steep repayments.

Correspondence between senior government figures indicated such problems were emerging in the early days of PFI, with ministers complaining of a lack of training for civil servants, delays and funding issues as key proponents worked to smooth the procurement process and press ahead with the scheme to avoid “political embarrassment”.

Both George Young, then transport secretary, and education and employment secretary Gillian Shephard wrote to William Waldegrave, the chief secretary to the Treasury, with worries that a transfer of risk to the private sector would be used to justify budget cuts, even as repayments ate into public funds.

Sir George, now Lord Young, feared PFI would offer “false comfort” by easing short-term cash flow problem, but did not take into account future costs, which could result in a “very substantial reduction in programme outputs”.

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He said the Treasury’s approach failed to recognise that the ministry’s budget would be taken up by PFI payments, which would increase from £130m to £285m a year by the end of the 30-year contract period.

An unwillingness to allow for rising costs, he wrote, meant that if action was not taken there would soon be no room for new projects, either conventionally funded or under the PFI.

Former British prime minister Sir John Major gestures during the arrival of Britain's Queen Elizabeth II and Britain's Catherine, Duchess of Cambridge to visit Kings College, to open Bush House, the latest education and learning facilities on the Strand Campus, in central London on March 19, 2019 (Photo by Niklas HALLE'N / AFP) (Photo credit should read NIKLAS HALLE'N/AFP via Getty Images)
The government of prime minister John Major pushed ahead with its flagship private financing of public projects despite warnings from senior ministers © AFP via Getty Images

In recent years, the costs of private funding for public services has rocketed: last year the National Audit Office found schools built using the mechanism cost 40 per cent more and hospitals, 60 per cent more than the public sector alternative. At the end of 2017-18, government accounts recorded 704 PFI contracts with a capital value of £57bn according to the Office for Budget Responsibility, the official watchdog.

While acknowledging the concerns raised in 1995-6, Mr Waldegrave, chancellor Kenneth Clarke and other ministers were insistent on the benefits of PFI.

Mr Waldegrave wrote to Sir George saying that “private finance should replace conventional public funding” and that new incentives for PFI projects should be introduced, while Downing Street staff boasted of a “deals not rules” approach.

Ministers pushed ahead with the scheme even after a July 1996 meeting brought to light serious problems, with the Treasury reporting progress to be “painfully slow” and characterised by “delay and missed deadlines in all departments”.

A brief to the prime minister the same month revealed that of 89 PFI projects, 1 was ahead of schedule, 22 on schedule, 60 behind schedule and 8 either abandoned or under review.

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But Number 10 opted to push ahead with the project, with Simon Walker, a policy adviser, writing that “PFI is a government economic flagship and there is real danger of political embarrassment,” and circulating a draft speech in which the prime minister announced the scheme was “here to stay”.

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