PFI Westminster Hall Debate

On Thursday 23 June I spoke in a debate in Parliament on the Private Finance Initiative. The debate was on a campaign to encourage PFI providers to give a voluntary 'rebate' to the taxpayer. Why on earth would they do this, you might ask! Well, there are huge public infrastructure projects needed – offshore wind and marine, nuclear power etc, and fellow campaigners and I believe only those who acknowledge the 'excessive' profitability of some PFI deals, and who are willing to renegotiate a fairer deal for the taxpayer, should be able to bid for future deals.

PFI projects are where private companies are commissioned by public sector bodies to provide new hospitals, school buildings and other infrastructure projects with funding from banks, and then recoup the money over many years from the public body concerned. The advantage of PFI projects is that they provide infrastructure without direct Government funding. They are therefore 'off balance sheet' in terms of our national debt. All the risk in the project is theoretically borne by the PFI provider and therefore if the project is not delivered the private company loses out, rather than the taxpayer.

The problem, however, is that some PFI contracts have proved to be highly expensive as well as highly inflexible. The financing and the project specification are inextricably linked together and therefore any changes to the project also require a recalculation of the funding, often leading to exorbitant extra charges. The only way to avoid this is by having the exact specification for a 25 year contract laid out in advance which is, in the case of a school or hospital for example, impossible to do. The second problem is the cost of providing the loan. At the moment Government bonds can be issued at an interest rate of 3% to 4% whereas bank debt is closer to 6%, plus a further 2% to 3% profit margin. The net cost to the taxpayer of PFI now works out therefore at 8% or 9% versus Government funding at 3% to 4%.

There are only a handful of serious PFI providers in this country – far too little competition! For many years, in funding new infrastructure projects, PFI has been the 'only game in town'. In my speech in Parliament I suggested an alternative, which is to take a radical approach to the establishment of the Government's Green Investment Bank. I explained:

"the green investment bank should be a bank in its own right. It should be listed on the London stock exchange and the Government should have perhaps a 10% shareholding in it. The UK high street banks should have the opportunity to purchase up to a 15% shareholding each, and the final 15% to 20% shareholding should be offered at a highly discounted rate to the British taxpayer. We would therefore have a bank with an undoubted triple A credit rating that would be able to fund itself extraordinarily cheaply—somewhere between Government gilts and triple A bank finance—and access the international capital markets, including very long-term funding."

I think that the GIB could be a real alternative to PFI. It would immediately inject more competition into the market. It could also be a significant competitor to the UK banks in the small and medium sized business market, in the low carbon industries Britain desperately needs to develop.

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