None of us are fooled by PFI

The Government says private finance initiatives transfer risk, but they ultimately carry a high price

The Government says private finance initiatives transfer risk, but they ultimately carry a high price

As a High Court judge said in the High Court case of EDS versus National Air Traffic Services (Nats), the Government has nailed its colours to the mast of the private finance initiative (PFI).

But the Government loves PFI for computer projects for all the wrong reasons. It claims that PFI transfers risk to the supplier, which means that the contractor has the most to lose if a hospital or IT system is not successfully delivered.

Nobody is fooled. No IT contract is successful if there is an inequitable sharing of risk. Where PFI has been deployed on major IT contracts we have seen more costly failures than successes - at the Lord Chancellor's Department and the Passport Service to name only two. Now we know how the disease of PFI has infected and perhaps damaged irredeemably a £50m contract for a new "Oceanic" air traffic control system in Scotland.

One of the problems on the Oceanic contract was that when the project ran into trouble, not through the fault of one party alone, all the risk of delays lay with EDS. Its costs increased because the date for operational service was put back; and under PFI the supplier could not be paid until the system was in service. To mitigate its risks, EDS sought an advance payment, while agreeing in return to lower the overall price of the contract.

But the High Court heard evidence that Nats was in effect banned by the Treasury from making an advance payment because it appeared to contravene the terms of PFI. This added to tensions in the relationship, particularly as Nats had not wanted to sign the contract under PFI in the first place.

PFI suits the Government of the day - Labour or Tory - because it is off-balance-sheet.

It provides an endless supply of credit that has almost no impact - currently - on the money available to the chancellor to spend, save or give away.

Like hire purchase, payments are spread over 10 or more years - 14 in the case of the EDS Oceanic contract. In conventional contracts suppliers receive payments if they have met agreed milestones. Such payments collectively have an impact on the public sector borrowing requirement (PSBR), which at its most basic level provides an indication of how much money is available to the chancellor. But because PFI deals are off-balance-sheet, they have a minimal impact on the PSBR, at least during the lifetime of that particular government.

In this way PFI allows the Treasury to place billions of pounds of debt off the accounts, which gives a rosier picture of the UK's finances than would be the case if the contracts were paid for conventionally. But this off-balance-sheet accounting is close to Enron-style bookkeeping practices.

In the long run, PFI costs the taxpayer more, much more, and not only because the payments to suppliers are, eventually, much greater than in a conventional contract but because PFI for complex IT schemes encourages disaster.

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