The death knell for PFI contracts in the UK

This week, the shadow chancellor John McDonnell suggested a future Labour Government would bring PFI contracts in house. Details are sketchy (as always...) but the issue has been extensively covered in the media. Even the FT joined in the chorus with some pieces on the shortfalls of the scheme (here, here and here - all gated). At the very least, this conversation will give pause to potential future investors and make the current ones think twice about their portfolio.

It should not come as a surprise for regular readers that I am staunchly pro-competition and see it (with transparency) as the twin engines that should be setting the course for any public procurement legal regime. Having said that, I never warmed to the whole PFI idea and think, in general, they tend to lead to poor results. These has been my view for the past decade or so.

The reasons for them are two fold. First is asymmetry of information. Once a PFI is in place it is usually followed by the hollowing out of capacity on the public side which soon translates into an absolute inability to monitor the contract properly. Contract monitoring is a perennial problem in procurement, but even more so when it comes down to long standing contracts. In consequence, if and when a contract is re-tendered 10 or even 30 years later the public side will be putting it out without fully knowing what it needs and how it is done. Plus, from a competition perspective the incumbent has an incredible head start over everyone else (same happens with many other contracts though).

Nothing of the above is new, and Jean Tirole built a good part of his career writing about incomplete contracts in the public sector - and there are few contracts less complete than long term public contracts. Aligning interests is hard. Damn hard.

Second, there is also an issue of regulatory/supervision capture. Everyone likes to talk about relationships in public procurement and how we need more of those. I for one, digress and like to see procurement contracts as transactions with a beginning and an end. The cosier the relationship the more likely it is for the supervisor/regulator to not enforce the terms of the contract. No surprise then that we sometimes see former public officials (politicians, aides or civil servants) ending up working for the same firms they were supervising or regulating. It is just human nature.

That is not to say that all PFIs are bad or that all lead to bad results. I have seen them being well used (i.e., with a clear logic and achievable outcomes) for example in the Spanish health sector. But as with so many other procurement 'tools' designed to be used only by those who know how to handle them (competitive dialogue, I am looking at you) the overall score is negative. 

As a conclusion, a point about the World Bank. For the last few years they have been singing the praises of PFI contracts in the developing world. I have been wary about their use even in the UK, where public sector capacity is certainly above average, so I can only shriek in horror thinking how those would be deployed in countries with limited capacity. It doesn't help that when talking with colleagues much more experienced on dealing with those countries, their view is very similar.