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these rebate options as unrealistic. With government capital spending set to fall by an unprecedented 59% over the next fi ve years, from £49bn in 2010/11 to £20.6bn by the middle of the decade, ministers have no strong incentive to antagonise PFI sponsors or other investors. Chan- cellor George Osborne’s Comprehensive Spending Review speech last year prom- ised to ‘avoid the errors’ of the early 1990s by slashing spending on new capital investment. However, the reduction in capital budgets that occurred in the early 1990s was signifi cantly less radical than the one outlined in the Review documen- tation. The chancellor must be looking to the private sector to fi nance this huge shortfall in capital investment. A closer look at the reality on the ground reveals that this is exactly what is happening. PFI projects are being allowed to proceed to fi nancial close, and business cases for new projects are being signed off. Lord Sassoon, in a speech to the annual dinner of the Public-Private Partnerships Forum lobby group in November, confi rmed that the govern- ment remained committed to the PFI, and that such arrangements would continue to play an important role. The pipeline of PFI schemes approved by central government is growing again after a period of hiatus. Transport Secre- tary Philip Hammond gave the go-ahead for the Intercity Express Programme and the second phase of the Nottingham tram scheme in January. Contracts for legacy projects under the Building Schools for the Future programme continue to be signed (and some less advanced schemes may re-emerge after their cancellation was judged illegal by the High Court in February). In any case, Education Secre- tary Michael Gove’s antipathy towards
ANNUAL £800m PFI BILL – BUT NOW PLANS A FURTHER £2.5bn WORTH OF SCHEMES
FIRST MINISTER ALEX SALMOND CASTIGATED SCOTLAND’S
Photo: PA
Private fi nance, public defi cit? The case of Queen Alexandra Hospital
T e £256m Queen Alexandra PFI Hospital in Portsmouth was completed in July 2009, and opened in October that year. But the trust has struggled to meet the annual revenue cost of the deal. Chief executive Ursula
Ward has said that despite cutting 700 jobs and closing wards, an extra £30m will have to be saved in the next fi nancial year. A peculiar feature of the Queen Alexandra PFI is the use of ‘credit guarantee fi nance’, in which 91.5% of the money to build the scheme actually came from
the public sector, rather than the banks or commercial bond issues that normally fi nance these projects. Although the fi nance was public, it was guaranteed by a private sector insurer, and priced on the basis of ‘contemporary market norms’ – that is, well above the rate at which the government can borrow on its own account. T e diff erence between the government bond rate and the loan rate is, in eff ect, profi t for the Treasury. But neither the Department of Health nor the trust gains from this arrangement, in terms
the BSF was unrelated to the PFI’s key role within it. The Department for Edu- cation will reveal a new private fi nance model for the free schools programme later this year.
In the health sector, six schemes totalling £2bn are currently being pro- cured, including two large Merseyside schemes and projects in Papworth, Stan- more, North Tees and Sandwell. Lansley scrapped Labour-approved plans for a publicly funded hospital in Hartlepool last year, claiming it was unaffordable. But the trust will shortly seek approval for a new business case, this time on a PFI basis.
The gap between the Westminster government’s rhetoric and the reality on the ground corresponds almost exactly
of lower annual charges, compared with purely private PFI schemes.
Last June, Carillion sold its
shares in the hospital to HSBC Infrastructure Company Ltd. Carillion, which had invested £12.1m in the deal, earned £31.3m from the sale. HSBC bought a further 15% of the scheme from Royal Bank of Scotland for £13.4m in October, and now owns 89.9% of the equity and 100% of the loan note interest. It expects to earn £160m from the scheme over the remaining 30-years of the contract.
with the situation north of the border. At the Scottish National Party conference on March 12, First Minister Alex Salmond castigated the previous administration for landing the SNP government with an annual PFI bill of £800m – a ‘toxic Labour legacy’, as he described it. But Holyrood is now planning to add
signifi cantly to this bill, with a £2.5bn programme of new schemes in health, transport and education. These will be structured according to the so-called ‘non-profi t distributing’ version of the PFI, which was introduced by the previous Labour-Liberal Democrat administration in 2003. This involves the private sector earning its money as a return on loan stock, rather than a dividend on share capital, hence the ‘non-profi t’ tag, but its long-term cost to taxpayers is similar to that of the classic PFI model.
In recent years, the public’s view of the PFI has deteriorated rapidly. Nobody talked up their commitment to the scheme in the last general election. Politi- cians in Westminster and Holyrood have learned that it is preferable to continue with private fi nance to plug the capital shortfall while saying the opposite. As long as this remains the case, investors will have the upper hand in negotiations. Payback time for PFI contracts is still a long way off.
Mark Hellowell is a lecturer in health systems and public policy at Edinburgh University
APRIL 2011 PublicFinance 33
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