Feature Story

The credit crunch hits PFI

John Tizard, Director at the Centre for Public Service Partnerships discusses the significant effects that the financial crisis has had on PFI projects

The era of major new build PFI and PPP hospitals had passed before the credit crunch and wider international financial crisis hit the entire PPP and PFI market. There continues to be a significant desire and requirement to use PPP and PFI to fund infrastructure in community and primary healthcare – not least through the LIFT programme – and to implement the programme of 'polyclinics', though it was never going to be the case that all of these be procured through PFI deals.

At the time of writing, there is no – or next to no – capital available to finance any PFI deal that has not already been closed. However, this situation is very unlikely to sustain, not least because if banks and investment companies cease to invest they will wither. The current capital market crisis will at some time begin to recede but it is likely that it will leave a longer-term mark on PFI and wider PPP policy and programmes in health and other sectors.

PFI and PPP should remain an attractive investment for domestic and international investors given the government commitment to make payments for 20 to 30 years. The markets are global and capital and expertise is very mobile – the UK and the NHS will have to convince that it is a good investment.

If the cost of capital and/or debt increases or becomes more difficult to secure, the value for money equations, which are undertaken on PFI deals, may tip over against the use of PFI. However, it is critical that full lifetime costs and value is used in such calculations; and the decision should be taken on a case by case basis.

In these circumstances, all other things been equal, it might be appropriate to consider financing through models such as the Credit Guarantee Scheme and other forms of funding through government bonds and public finance. Government can borrow more cheaply than the private sector. Should this be the case, it will still be desirable to transfer risk to the contractor and its consortium to seek on time and to budget contracting for infrastructure build. The government has to be able to exert the same pressure and incentives on contractors in these circumstances as would a commercial bank or other private sector investor. This will still require PFI model contracts rather than traditional public procurement models.

Recession-driven fiscal forecasts and the commitments that government has made to stabilise the financial markets are likely to lead to less public money being available to finance capital schemes and potentially revenue schemes through the next spending review and possibly the current one, even in the NHS. This means that there may be less investment and related revenue expenditure, so government and NHS trusts will potentially start looking to other forms of PPP to drive up choice, innovation and value for money. In PFI deals this may lead to the separation of infrastructure from service provision with the latter being subject to more frequent re-competition and allowing for in-house provision where this ensures value for money. It may mean new forms of NHS partnerships with other public sector agencies: the third and business sectors.

Given the financial markets, economic prospects, and evolving health requirements change is inevitable. It will now be faster.