I have lost count of the number of times politicians have declared that PFI is “dead”. It has been blamed for everything from collapsing NHS finances to dirty hospital wards and dodgy light fittings.
In reality, PFI was never a policy as such. It was a capital-sourcing mechanism — a way of bringing private investment into public infrastructure projects. Conceptually, it wasn’t radically different from borrowing via the Treasury; it was just a different route to funding.
PFI became notorious for two main reasons:
- Some truly awful early contracts
- The bundling of Facilities Management (FM) into the deals
For the uninitiated:
- Hard FM = building maintenance, plant, safety systems
- Soft FM = cleaning, catering, portering
When replacing old hospitals, FM was bundled into PFI contracts to make the business case stack up. An old hospital might look cheaper on paper, but its ongoing FM costs were often far higher than those of a new building. Including FM made the new-build option appear more “affordable”.
The problem was political optics. Bundling FM into PFI made it look like hospitals were being “privatised”, at least in part. Add a few tabloid-friendly horror stories — the famous £500 lightbulb change in a sterile operating theatre — and PFI became toxic.
Conveniently, no one ever stopped to ask what it should cost to replace an intrinsically safe fitting in a sterile clinical environment within a two-hour safety window.
The reality was more nuanced. The National Audit Office found that:
- 69% of PFI construction projects (2003–2008) were delivered on time
- 65% were delivered at the contracted price
Hardly the financial apocalypse people like to imagine.
The real maths behind PFI
PFI only worked because of a fairly brutal but simple calculation at its heart: the Treasury cost of capital.
Set out in the Green Book, this is the benchmark rate used to discount public-sector investment — roughly aligned with the government’s own borrowing costs.
When I was working on PFI deals years ago, the Treasury cost of capital sat at 6% or higher. That meant a private consortium only had to beat that rate to be “better value” for government. Not exactly a gold rush, but enough to draw in investment.
Then came the credit crunch.
Government borrowing costs collapsed to historically low levels. So did the Treasury cost of capital. Overnight, PFI stopped making financial sense. It wasn’t “scrapped” so much as it became pointless.
The real tragedy is that the Coalition government responded in the exact opposite way it should have. Instead of borrowing cheaply and investing massively in infrastructure, it cut capital spending. They didn’t fix the roof while the sun was shining.
They tore off half the house instead.
Why it matters again now
Fast forward to today. UK government borrowing costs are rising again. Treasury cost of capital is now approaching 4%.
That is getting dangerously close to the territory where PFI-style deals start to make sense again.
At the same time, governments of all colours have been increasingly enthusiastic about public-private partnerships. The entire green transition — energy, transport, housing, heat decarbonisation — is built on blended public/private capital.
No one is going to announce the triumphant return of PFI. The brand is too toxic.
But make no mistake:
it’s crawling back out of the ground as we speak.
https://www.gov.uk/government/publications/balance-sheet-framework
https://www.nao.org.uk/publications/0809/private_finance_projects.aspx