Labour pledge to bring PFI contracts in-house alarms business leaders

Britain’s business groups have reacted with alarm to a pledge by the shadow chancellor, John McDonnell, to bring billions of pounds’ worth of PFI projects and their staff back under government control.

McDonnell received repeated standing ovations from Labour activists in Brighton as he rattled through the party’s manifesto pledges on the economy – including large-scale nationalisations and tax rises for business – and announced he would “bring existing PFI contracts back in-house.”

But the CBI said Labour’s policies could send investors “running for the hills” just as businesses were fretting about the impact of Brexit.

“The shadow chancellor’s vision of massive state intervention is the wrong plan at the wrong time. It raises a warning flag over the British economy at a critical time for our country’s future,” said the CBI’s director general, Carolyn Fairbairn.

Later, at a sometimes testy evening fringe event at the conference, McDonnell and Fairbairn clashed in person over Labour’s plans, with the CBI head saying she feared that a “major state intervention agenda” with policies such as nationalisation, rising corporation tax and a maximum wage could exacerbate uncertainty arising from Brexit.

She said: “That is the question: how you square the commitment around investment, which we share, with this apparent dampening and chilling effect on entrepreneurship, on business and investors? And the world is watching.”

Other business groups also expressed unease over McDonnell’s plan. Adam Marshall, director general of the British Chambers of Commerce, said: “With the UK’s departure from the EU on the horizon, businesses will be concerned by the shadow chancellor’s proposals for widespread and deep intervention across the economy. Proposals to nationalise key industries would put business investment in the deep freeze at precisely the time that it is needed most.”

Labour analysis suggests PFI contracts – a way of financing large-scale infrastructure projects, including schools and hospitals, widely used under Conservative and Labour governments over the past two decades – have generated £831m in profits for private sector firms over the past six years alone.

Private finance initiative deals were introduced in 1992 under the Tory government of John Major, before becoming widespread under Tony Blair’s Labour administration after the 1997 election. Typically used for public buildings and infrastructure, PFI schemes introduce private investors into the design, build, finance and operation of new facilities which are then rented back by the state over several years.

Under the deals, projects are undertaken by private contractors, who then own the structure for decades following completion.

Why did it become widespread?

PFI allowed ministers to build public buildings such as schools and hospitals with minimal upfront costs to the Treasury. Given tight budgeting constraints as the UK ran successive deficits throughout the mid 2000s, the deals became a way to commission popular projects without immediately hitting the public purse.

More than 700 projects have been signed off​reached financial close​, securing private sector investment of around £59.4bn, according to the most recent figures available from the Treasury.

Why is it controversial?

Although helping to massage the public finances in the short-term, over the longer term PFI deals can come with a higher cost to the government as the private sector investment is repaid with interest. In 2013-14 around £10bn was spent on servicing private finance contracts, with about £4bn of this related to debt and interest, according to the National Audit Office. The agency is due to publish a fresh study on PFI spending this autumn.

Where is the money going?

Private companies that have built NHS hospitals using PFI deals have made pre-tax profits of £831m over the past six years, according to the Centre for Health and the Public Interest. The companies are also poised to make almost £1bn more over the next five years.

Firms such as Balfour Beatty, Carillion, Interserve and Kier Group are among some of the biggest involved in PFI schemes, while they also sell PFI portfolios to fund management companies.

McDonnell told the conference: “The scandal of the PFI, launched by John Major, has resulted in huge long-term costs for taxpayers whilst handing out enormous profits to some companies.”

An accompanying press release about the PFI policy appeared to be less radical than McDonnell’s speech, suggesting Labour would take the contracts back in house “if necessary”.

“Labour will review all PFI contracts and, if necessary, take over outstanding contracts and bring them back in-house, while ensuring NHS trusts, local councils and others do not lose out and there is no detriment to services or staff,” it said.

A spokesman said a future Labour government would compensate shareholders in PFI companies by swapping their shares for government bonds. “Parliament will assess the appropriate level of compensation at the point at which contracts are brought back in-house,” he said.

John Appleby, chief economist at the Nuffield Trust, a health charity, told the BBC’s World At One that the total cost of buying out all the PFI contracts in the NHS alone could be well over £50bn.

“In the NHS in England, it is paying around £2bn a year in [PFI] repayments, and they will peak in about 2028, 2030. And I suppose if you add those up from now to the end of those contracts – the contracts end at different periods – we could be looking at something like £56bn by 2048,” he said.

McDonnell also said he would prevent firms that owned shares in PFI projects from listing in tax havens. “The government would intervene immediately to ensure that companies in tax havens can’t invest in PFI projects and their profits can’t be hidden to HMRC,” he said.

In his wide-ranging conference speech, which was greeted warmly in the hall, the shadow chancellor said the next Labour government, led by Jeremy Corbyn, would have to “rescue our country from the long years of austerity” and “lay the foundations of the new world that awaits us”.

He paid tribute to the Harold Wilson government, and to the boost to public sector investment delivered by Tony Blair and Gordon Brown.

McDonnell received further cheers when he promised to renationalise public utilities including water and rail, and to cap the interest on debt repayments.

“Under Labour pressure, the government was forced to cap interest payments on payday loans. But more than 3 million credit card holders are trapped by their debt. They’ve paid more in interest charges and fees than they originally borrowed,” he said.

“I am calling upon the government to act now and apply the same rules on payday loans to credit card debt. It means that no one will ever pay more in interest than their original loan. If the Tories refuse to act, I can announce today that the next Labour government will amend the law.”

He joked that the rule change could be dubbed the “McDonnell amendment” – a phrase usually used to refer to a change of Labour leadership rules favoured by leftwing activists and regarded by centrist MPs as a way of securing the top job for the shadow chancellor in future

Powered by article was written by Heather Stewart Political editor, for The Guardian on Monday 25th September 2017 19.27 Europe/London © Guardian News and Media Limited 2010