Anyone who has been involved with the public sector for a long time will have an equally lengthy list of buzzwords, concepts and models that, despite being popular at the time, have now been consigned to the dustbin of controversy. For many years, the private finance initiative, or PFI as it is better known, has been top of that list.
The model involves using private finance to deliver public services and infrastructure, with the contracting authority paying the private sector operator a monthly sum, or unitary charge, for services.
Famously, PFI was first launched by John Major in 1992, but it really started to gain notoriety when Tony Blair became prime minister in 1997. Under Blair’s Labour government, hundreds of PFI contracts were awarded across the public sector, including the NHS, local government and highways.
Those in favour of such deals argued that PFI would bring in private sector cash and expertise to reinvigorate schools, hospitals and other assets. Critics said that it was rather a canny way of getting much-needed investment, without having to place extra debt on the Treasury’s balance sheets.
The other big issue was the length of the contracts themselves. Many PFI schemes were typically between 25 and 30 years in length, locking public sector bodies into paying for them for a very long time.
Legal disputes
Now, many of the schemes are rapidly approaching expiry, accompanied by plenty of warnings and some fairly high-profile legal disputes between councils and their contractors.
In 2020, the National Audit Office estimated that there were more than 700 PFI contracts in existence, the bulk of which will start to expire from 2025 onwards.
The NAO report also highlighted the dangers that important infrastructure could be returned to the public sector in an “unsatisfactory condition” and that “services could be disrupted”, unless a consistent and strategic approach was taken to the handback.
And in September 2024, the Association of Infrastructure Investors in Public Private Partnerships published a report claiming that approximately 150 PFI contracts with a capital value of £6bn are set to expire during the lifetime of the current parliament.
The report noted that while PFI projects are “frequently well run”, mistrust between companies and contracting authorities has emerged in recent years.
It also highlighted an “adversarial approach” to contract management, which has emerged, frequently, with the use of third-party consultants.
In terms of how local authorities are preparing for the beginning of the end of PFI, a decidedly mixed picture emerges. A report published in November by the not-for-profit company Future of London found that several London boroughs are struggling to prepare for PFI contract expiry because of a lack of resources and in-house capacity.
The report highlights concern from London boroughs that PFI contract expiry will increase the financial strain on councils as they deal with the rising costs of temporary accommodation and adult social care.
“We talked to most of the boroughs affected and it’s clear that many feel under-prepared and under-resourced,” says Future of London chief executive Nicola Mathers.
“Our report also highlights practical approaches that boroughs can take now to ensure they are fully prepared and make the most of this opportunity to modernise services.”
In particular, it argues that some London boroughs see opportunities to update services and deliver better benefits for communities.
“We’ve got an absolute opportunity to reprofile our care homes to fit the 21st-century service we need to deliver,” says Fenella Merry, executive director of finance at the London Borough of Richmond upon Thames.
“So, it puts huge potential on the horizon that we didn’t have without that PFI expiring.”
Also in November, the cabinet at South Gloucestershire Council agreed to replace its 25-year waste PFI contract with SUEZ with a new eight-year contract.
Continual improvement
Under the new contract, there will be improvements to how the service is operated behind the scenes, with upgraded in-cab systems for better live reporting, communication with the crews and monitoring of day-to-day operations.
An app will also be launched for residents to use, making it quicker and easier to report issues, check collection days and find general waste and recycling information.
“The council has now worked with SUEZ for a long time, and this contract, which replaces an old, out-of-date PFI arrangement, will allow us to continue that partnership and continually improve the services that residents receive,” says Cllr Sean Rhodes, cabinet member with responsibility for waste and recycling services.
Others are feeling less positive. One local government figure who remembers the original PFI “goldrush” in the late 1990s and early 2000s is Cllr John Merry, deputy mayor of Salford City Council and chair of the Key Cities group.
Merry says he was heavily involved in some of the original contract negotiations back in the day and recalls how central government pressured councils to use PFI “in order to take things forward”.
“Now the PFI contracts are coming to an end, there are additional burdens, which could potentially be placed upon local authorities. And we are not really in a position to actually handle them, given our financial situation,” he tells PF.
“I don't think many of us are particularly keen on simply renewing the contracts, because they were drawn up in a different era and we're not in that situation anymore.
“The worst possible outcome would be for the PFI contractor to simply stay in position but raise their costs.”
Local authorities need additional support to find better contracts or service solutions, says Merry.
“Public private partnerships are not necessarily a bad thing, but the essence, to me, is the word partnership,” he adds. “It has to be based on a genuine coming together of two sides.
“Salford Quays was immensely successful because both sides took a mature attitude, whereas, in too many cases, PFIs simply handed over an area or service to somebody, saying ‘You run it and charge us accordingly’.”
Michael Berrington, a director at Local Partnerships, says there are three key workstreams for local authorities managing the expiry and handback of PFI contracts.
The first is continuing to manage the PFI contract itself as it draws to a close. The second is planning and preparing for the contract expiry.
The third is deciding on future service provision.
He adds that, typically, local authorities should start planning the end of a contract seven years before it is due to expire. This is in line with guidance from the Infrastructure and Projects Authority.
This may involve finding the original documentation, surveying the assets themselves and looking at what kind of service the council wants to have in the future.
“It’s important to give yourself two years to get all your information in order and to raise the issue within the authority. Then give yourself a further five years to really run the expiry process and prepare for the end of the contract,” says Berrington.
He warns that there will have been many regulatory and policy changes since the original contracts were drawn up, including health and safety, technological requirements and climate change, all of which will need to be taken into account.
And he emphasises that it is important to have a single point of contact in the local authority who is responsible for delivering the transition. They should be separate from the day-to-day operations of the contract.
PFI REIMAGINED
Infrastructure investment partnerships
The Future Governance Forum think-tank recently published a report on infrastructure investment partnerships, which could provide a model of public-private collaboration in the future.
Forum deputy director Adam Terry says the government should devise a new infrastructure framework, which sets out delivery models and makes clear what kind of projects should be supported, and under which circumstances.
He adds that the infrastructure investment partnerships model should be adopted within this framework, as one of the “tools” available to take these projects forward.
Both public and private stakeholders would have to be committed to an ongoing dialogue, he says, with a strong emphasis on social value within the contract itself.
This model, he adds, is based on the approach taken in the Australian state of Victoria, where core infrastructure investment is developed alongside some commercial development, and the Welsh Government’s mutual investment model.
It is also important, says Terry, to establish a new national regulator, which could act as an arbitration body in case disputes arise between the two parties.
The infrastructure investment partnerships could also work with combined authorities or regional mayors, he adds, and the government should regularly publish a credible pipeline of projects to help keep the private sector up to speed with possible opportunities.
“One of the defining characteristics of this model would be the idea that you use it strategically,” he tells PF. “You should be able to choose where it is most appropriate to use the model.
“One of the criticisms of PFI in the past was that it was a case of ‘sign the contract and forget about it’, whereas this is about creating a genuine, meaningful partnership. You also need sophisticated capacity on the government’s side to design contracts [that work] for both partners in order to build trust in the first place and then to actively manage that contract, so [there are] no surprises later on.”
Condition of assets
It is worth noting that the Future of London report also recommends that councils should agree on the condition of assets at least five years before expiry, to avoid costly disputes.
Vickie Hacking, a principal adviser at the Association for Public Sector Excellence, says many local authorities are also facing a challenge in getting to grips with the sheer scale of the contract handbacks.
She adds that concerns have been raised regarding the resources and capability of HR and legal teams to manage the handover.
"The end of PFI contracts has also been viewed as a potential opportunity to build in-house capacity and make financial savings, with many councils undertaking options appraisals,” she tells PF.
“However, there are a number of potential challenges when bringing an asset back into council ownership, including whether PFI buildings will meet current net-zero strategies.
“The cost of retrofitting buildings such as schools and leisure centres to reduce their carbon footprint could be substantial.”
Hacking adds that earlier PFI contracts tend to be less sophisticated than later ones and may also pose more issues in a handover.
“Early engagement and clear communication with stakeholders is key to making any transition as smooth as possible,” she says.
In terms of whether the expiry of some PFI contracts will end in legal battles between the local authority and the provider, Craig Elder, a partner specialising in public procurement and infrastructure projects at law firm Browne Jacobson, says it is likely that there will be some disputes, particularly around the content of any “handback plan” to bolster the existing terms of the project agreement.
This is particularly the case where the PFI is relatively sketchy around the exit process, or sets out few details in relation to the required condition of the assets on handback.
“It should also be borne in mind that, particularly as there is no continuing ‘PFI market’, project companies will be incentivised with as little cost as possible,” says Elder.
“And there is fertile ground for debate around the extent to which, for example, assets have been maintained in line with contractual requirements.”
Different era
Of course, the original PFI “goldrush” took place in a very different era, and there is no escaping how the financial landscape has also changed for local authorities. The Local Government Information Unit’s head of research, Dr Andrew Walker, says the end of PFI demonstrates one of the “fundamental problems” of uncertainty in local government finance.
“Local government finds it so hard to plan ahead and to think strategically about how to use its assets,” he says.
“Though they are constantly being told to be more businesslike and innovative, to sweat their assets and so on, the lack of certainty in their funding model – which Whitehall has consistently failed to address – makes this kind of smart forward-planning very difficult indeed.”
Many in local government still feel unsure about how the financial landscape might change under the current Labour government. The era of PFI might be coming to an end, but if ministers want to see more schools and roads being built, then they will have to find a funding solution that works for all the parties concerned.
