PFI in prisons

This chapter explores how far it is possible to compare the cost of PFI schemes with the public sector, before looking at the project data in the next chapter.

The development of PFI was described in Chapter 2. To summarise: under PFI, the customer contracts with the private sector, in the form of a Special Purpose Vehicle (SPV) jointly owned by the construction company and operating company, to design and build the prison, finance the build and run and maintain the prison once built, for a term of 25 years. At the end of contract the prison reverts to the public sector. Government pays the SPV a single charge for the service, calculated daily and paid monthly, which covers running costs including maintenance, servicing and repayment of debt and equity, and profit. A defining feature of PFI is transfer of risk to the operator that would otherwise be borne by government.

Most contracted run prisons – 12 out of 16 across the UK – are PFI prisons, so the question of whether contracted prisons cost less and, if so, by how much is really about PFI. Unfortunately, PFI methodology makes that question impossible to answer with any precision:

• 1. Because government departments are not allowed to borrow commercially, and because they cannot transfer risk to themselves, the public sector cannot bid for PFI prisons. So one cannot compare PFI and public sector bids.

• 2. Instead, during procurement, government constructed a Public Sector Comparator (PSC) to estimate what the conventionally financed alternative would cost. The difference between the cost of the PFI and the PSC options is then calculated. But note that ‘public’ here means ‘conventional public build’: it does not necessarily mean publicly operated. Some competitions have run the PFI option against an ‘all-public’ solution but in others (and it is not always clear, now, which) the PSC has been public build, but privately operated under a ‘management only’ contract (assumed to be the next cheapest option to PFI). So one cannot be sure what the PSC represents. And the methodology for PSCs has changed over time, so it cannot be assumed that data for different projects can be precisely compared.