Will new towns be another PFI disaster?

SUMMARY

Political economist Richard Murphy critiques Labour's proposal to use Private Finance Initiative (PFI) funding for new towns, arguing it would impose excessive long-term costs on communities. He advocates for direct public investment, highlighting the historical failures and fiscal illusions of PFI schemes.

MAIN POINTS

• Rachel Reeves is considering reintroducing PFI to fund Labour's New Town program, raising concerns about long-term financial burdens. [0:00]
• PFI contracts involve private contractors building and maintaining public assets, often resulting in complicated and costly arrangements. [3:01]
• Historical examples, such as the collapse of Carillion during the Liverpool hospital project, illustrate the risks and inefficiencies of PFI. [6:01]
• PFI has led to extreme overcharging, with public sector entities paying vastly inflated prices for basic maintenance and services. [9:01]
• Modern monetary theory offers an alternative, enabling the government to fund investment directly without resorting to expensive private finance. [12:01]
• Murphy concludes that using PFI for new towns would create generational debt and injustice, urging reform of fiscal rules to allow direct public investment. [15:00]

DETAILED ANALYSIS

Labour’s proposal to fund new towns through the Private Finance Initiative (PFI) has reignited debate over the long-term consequences of private sector financing for public infrastructure. Richard Murphy, a prominent political economist, warns that adopting PFI would be a costly mistake, drawing on the UK’s extensive and problematic history with such contracts. PFI, first popularized under Gordon Brown’s tenure as Chancellor from 1997 to 2007, was designed to keep government borrowing off the official balance sheet by having private contractors finance, build, and maintain public assets.

In practice, this approach resulted in the state paying significantly more than if it had financed projects directly, with contracts often lasting up to 30 years and locking public bodies into inflexible and expensive service agreements.

Murphy details how PFI contracts typically require the government to rent back the assets built by private firms, who also retain responsibility for ongoing maintenance and repairs. This arrangement, intended to shift risk to the private sector, rarely delivers the promised benefits. Instead, contractors often overcharge for maintenance and services, leading to a substantial transfer of public funds to private profits.

Notable examples include exorbitant charges such as £25,000 for garden parasols at a school and £5,500 for a hospital sink replacement. The collapse of Carillion in 2018, which left a Liverpool hospital project unfinished for years, further demonstrates the fragility and inefficiency of relying on private finance for essential infrastructure.

The financial implications are stark. While around £60 billion of public projects were funded through PFI, the total repayment obligations are projected to reach approximately £310 billion—five times the original value of the assets. This discrepancy is largely due to the higher rates of return demanded by private contractors, typically 12-15% per year, compared to the government’s borrowing costs of 4-5%.

The justification for PFI, that it transfers risk away from the state, is described by Murphy and official bodies like the Office for Budget Responsibility as a ‘fiscal illusion,’ since the government ultimately remains responsible for essential services and cannot allow schools or hospitals to fail.

Murphy argues that Labour’s apparent willingness to revive PFI stems from adherence to restrictive fiscal rules that treat all borrowing as equally undesirable, regardless of whether it is for investment or current spending. This leads policymakers to seek off-balance-sheet solutions like PFI, despite their proven inefficiency and cost. As an alternative, Murphy advocates for the adoption of modern monetary theory (MMT), which recognizes the UK government’s unique ability to create its own currency.

Under MMT, the government can directly fund investment projects without needing to borrow from private markets, provided real resources are available. This approach would allow new towns and their infrastructure to be built at much lower cost and without burdening future generations with excessive debt.

In conclusion, Murphy contends that using PFI to fund new towns would not only be financially reckless but would also condemn residents to decades of unnecessary debt and underinvestment. He calls for a fundamental reform of fiscal policy to enable direct public investment, warning that failure to do so risks repeating the mistakes of the past and perpetuating economic injustice.

LINKS

• Poll on the topic of PFI and new towns.
• Richard Murphy's Funding the Future blog and transcript source.
• ChatGPT prompt and instructions for writing to your MP about PFI and new towns.
• Donation page to support Richard Murphy's work.
• Richard Murphy's Bluesky social profile.
• Richard Murphy's main blog page.
• Introduction video to Richard Murphy's channel.
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