Understanding the Public Services Industy

Public Services Industry Review
Box 4.3: The History of PFI
The Private Finance Initiative (PFI) was introduced in1992 as a means to facilitate
greater investment. It represented a relaxation of the so called ‘Ryrie Rules’ which
constrained the use of private sector funding to situations where:
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it could be demonstrated to be more cost effective than a comparable publicly
funded project; and
it resulted in a corresponding reduction in public spending.
The guiding principles of the government’s PFI programme as laid down by the
Chancellor at the time were 35 :
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the private sector must genuinely assume risk without a guarantee by the
taxpayer against loss;
value for money must be demonstrated for any expenditure by the public sector;
and
all new public sector capital projects must be tested for private sector potential
before they are approved.
Following the change of government in 1997 the PFI process was reviewed and the
requirement to test all capital projects for PFI potential was dropped. The review led to
the establishment of the PFI taskforce within HMT to develop the appropriate expertise
within government. This was superseded in 2000 by Partnerships UK, itself a Public
Private Partnership jointly owned by industry and government which operates at arms
length from HMT.
Uptake of PFI was slow initially, but took off dramatically after 1995. It peaked in
2000 with over 70 contracts signed that year with a combined capital value of £3.5bn.
Subsequently the number of deals signed each year has fallen slightly, although their
average capital value has continued to increase. HMT currently tracks 628 signed PFI
deals with a combined capital value of £58.6bn 36 . Five areas account for two thirds of
all projects and 85 per cent of the capital value. These are Transport, Health, Defence,
Schools and the Scottish Government.
Current HMT guidance states that PFI should only be used where it delivers value for
money and does not come at the expense of employees’ terms and conditions. In
particular PFI is no longer used for new IT projects or very small projects, following
studies which have shown it does not tend to deliver value for money in these areas 37 .
35 Private Finance: Overview of progress, News release 118/94, HMT (8 Nov 1994).
36 The Private Finance Initiative (PFI) : Signed Projects List, HMT (2008).
37 For example HMT (2003) PFI Meeting the Investment Challenge, HMT (2006) ,PFI Strengthening Long Term Partnerships
and HMT (2008) Infrastructure Procurement: Delivering Long Term Value.
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