Out-Law News 2 min. read

Labour pledge on PFI contracts would be challenging, says expert

The Labour Party's plans to "bring existing PFI contracts back in house" would raise considerable costs and challenges, an expert has said.

A future Labour government would not only enter into no further contracts with the private sector under the private finance initiative (PFI), but would also revisit existing contracts, shadow chancellor John McDonnell told the party's annual conference.

McDonnell said that Labour would "put an end" to the use of PFI, and reduce the costs of the contracts to the taxpayer. He also pledged a better balance of infrastructure investment between London and the regions, as well as promising to nationalise the rail, water and energy industries and Royal Mail.

The speech contained no details of the mechanism a future Labour government would use to bring the management of PFI assets in-house, whether this would include staff and how any such transfer would be paid for. The speech raised "a raft of questions that need consideration" including exit payments, employment and regulatory considerations, according to infrastructure law expert Jonathan Hart of Pinsent Masons, the law firm behind Out-Law.com.

"Like it or not, PFI and its variants have delivered a range of social and economic infrastructure for the UK which probably would not exist but for the engagement of project financed solutions," he said.

"PFIs have been, and continue to be, very important to jobs in the construction and services industry. Now, more than ever, private finance, not just from banks but from pension funds including those of local authorities and public sector employees are looking at the very limited category of assets in which to invest. Appropriate long-term investment represents an extremely important market, and supplement to paying for projects directly out of UK plc's capital funds," he said.

"Given stated objectives of bringing contracts 'back in house', nearly all PFI contracts contain specific provisions to deal with early termination of contracts and payment of financial compensation in such circumstances. Employment law and other regulatory aspects of such changes would also be hugely complicated and require extensive renegotiations. Any policy to bring existing PFIs to an end would need to factor in these kinds of costs and challenges - a feature which has been recognised in the changes of language on Labour policy around, for example, nationalising rail franchises," he said.

PFI was introduced in the early 1990s as a way of using private sector skills and finance to deliver public services. Under a PFI contract, the private sector obtains finance to design, build and operate a facility for the benefit of the public, in return for which the public sector pays a monthly fee for its use and management over the project's 20 or 25 year lifespan.

In his speech, McDonnell said that the public sector was due to make nearly £200 billion pounds in payments to the private sector "over the next few decades" to fund existing PFI contracts. The NHS alone has paid £831 million to service PFI contracts over the past six years, he said.

The UK Treasury has been reviewing the performance of individual PFI contracts "for some time now", said Jonathan Hart. He noted that Scottish government plans to end the use of PFI, albeit under different market conditions, had instead resulted in the creation of an alternate 'not for profit' non-profit distributing (NPD) funding model "which nonetheless recognised the important role that private investment can plan in infrastructure projects".

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