11.2 Financing the psncr

some cases manage new projects, say a new NHS hospital. Once the hospital is com-

pleted, it is leased by the NHS, typically for a period of 30 years. The payments made by

the NHS for the lease provide the private companies with a return on their investment.

At the end of the 30 years, ownership of the hospital reverts to the NHS. From the point

of view of the public nances, the cost is spread over thirty years rather than the full sum

having to be borrowed at the beginning of the project. Clearly, this allows the Chancellor

to increase investment in the provision of public services without apparently adding to

the public debt. The PFI makes it easier for the Chancellor to keep the public debt/GDP

ratio relatively low.

However, there are similarities between government investment nanced by increased

borrowing and the PFI approach. The PFI commits future generations of taxpayers to

meet payments for public expenditure albeit in the form of lease payments rather than as

interest on the public debt. The annual payments for the lease come out of the NHS’s

current budget. The impact on the government budget depends on the extent to which

the NHS budget is adjusted to take these payments into account. If we assume that the

NHS annual budget is not increased, the budget decit will be unchanged and no addi-

tional debt need be sold. There will be no impact on interest rates or the money supply.

This could, of course, make it difcult for the NHS to maintain all of its other services. It

remains that, even if the NHS budget and the government’s budget decit are increased

by the full amount of the annual lease payments, the government will need to borrow

much less in the current year than it would have had to do if the hospital had been built

and managed in the public sector. The impact on future borrowings will depend on the

relationship between the annual interest payments that would have had to be made and

the annual payments for the lease.

Why then the controversy? From a nancial point of view, the potential problem is the

rate of return the private sector companies will require to persuade them to participate

in a PFI contract. Critics of PFI claim that the rate of prot extracted by the private com-

panies is far too high – much higher in the long run than the rate of interest on public debt.

It is argued that the PFI allows government nances to look good now but only by trans-

ferring large costs to the future. There are many other issues relating to the PFI – over the

sharing of the risks involved in the project, the impact on the other services provided by

the NHS and other public authorities, the quality of the work and so on. For the govern-

ment’s explanation of and arguments for the policy, see http://www.hm-treasury.gov.uk/

documents/public_private_partnerships/ppp_index.cfm or http://www.parliament.uk/

commons/lib/research/rp2001/rp01-117.pdf. For criticisms of PFI see the website of

UNISON, the public sector trade union, http://www.unison.org.uk/p/