Initiative used to bankroll New Labour’s public sector spending boom in 1990s

Infrastructure investors have called for a “reset” of the Private Finance Initiative (PFI) model to avoid spending public money on resolving complex legal disputes.

The Association of Infrastructure Investors in Public Private Partnerships (AIIP) recommended an improved initiative to allow public sector managers and private firms to settle disagreements without the need for costly third-party adjudication.

The group recognised in a new report that funds used for legal claims, compensation and termination payments should be invested in providing critical public assets such as hospitals and schools instead.

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Carillion was building the Royal Liverpool hospital under a PFI contract at the time it went bust in January 2018

PFI contracts came to prominence under New Labour in the 1990s to bankroll a host of public projects that otherwise would have required massive state borrowing.

But the collapse of Carillion in 2018, which at the time was building a PFI hospital in Birmingham and another in Liverpool, led to increased scrutiny of the initiative. PFI has since largely been dropped as a procurement method for public projects.

The AIIP’s report said PFI’s complexity was a major challenge, giving rise to “mistrust” between parties involved in public-private partnerships.

Without reform, the group warned the planned hand back to the public sector of 150 schemes in the next five years could run into hitches.

Under the initiative, first set up by John Major’s Conservative government in the early 1990s but embraced by Tony Blair’s Labour government, PFI was a way for the public sector to finance schemes through private money and meant government did not have to borrow costly capital for the projects itself.

The public sector then repaid the PFI consortium, usually consisting of a funder, builder and FM firm, over a set period of time.

Known as a concession, the term of the contract runs for 25 or 30 years, much of it covering the upkeep of the building before the asset, such as a hospital, is then transferred back to public ownership at the end of the concession period.

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