The private finance initiative was introduced by the Conservative government in 1992, and to the surprise of many was adopted and then developed by Labour in the years following its 1997 election victory.

Under the scheme, companies from the private sector finance and manage major capital works in return for payment from the government. The aim is that the infrastructure of the country is improved without increasing the public sector borrowing requirement – an attractive proposition for any chancellor.

The initiative is intended to offer better value for money for taxpayers by bringing in competition between contractors and making use of the increased efficiency and innovation of the private sector.  To date the evidence suggests that PFI has been most successful in the building and managing of prisons and roads, but it has been used to fund a wide range of projects including schools and hospitals.

Between 1997 and 2003 over 450 public facilities were completed under the scheme, with 88 per cent of all projects delivered on or ahead of time, and the public sector has not had to bear the cost of any overruns. PFI projects currently account for 10 per cent of all government spending on public services, and this is likely to increase as plans are made to extend the scheme to areas such as regeneration and social housing.

Despite being able to point to its successes, the government still comes under fire for its use of PFI funding and the financial implications of its administration. A recent report from the Centre for Policy Studies (CPS) looking at the 12-year history of PFI outlined the main issues needing to be addressed if PFI is to be embraced outside of government as an option for future public sector financing.

One key criticism the study raised is the government’s decision to classify PFI projects as “off balance sheet”. The accounts aren’t included as public spending, and this allows government to deliver new facilities without affecting its borrowing requirements. The accusation is that some PFI projects have gone ahead because they fit in with government spending targets, not because they offer the best value for money.

From the left of the political spectrum, public sector unions warn that the payment commitments for PFI are effectively establishing a “mortgage” on the public sector.

According to Unison, PFI deals cost more to finance because private sector companies cannot access the same low borrowing rates as the public sector. The union also objects to lower employment standards for staff who are moved to the private sector, and has also expressed opposition to “unacceptable” profits being made from public services.

Both the union and the think tank have expressed criticism of the public sector comparator (PSC) – a mechanism which compares the cost of a project being undertaken as a PFI project against the estimated cost of the same project being undertaken by the public sector.

While critics of PFI think the PSC is used to rig decisions in favour of PFI deals, the CPS has also said it should be abolished and replaced by sector-specific benchmarking.

In a bid to address the concerns of some of its critics, a Labour Party policy forum meeting in 2004 backed changes to PFI rules including reform of the system of local authority PFI credits, to ensure there is equality of funding between PFI and conventional projects. There will also be a consultation with key stakeholders to monitor progress with PFI deals, including future financial implications. But while they may concede some ground ahead of an expected general election, Treasury ministers have repeatedly refused to accept calls to scrap PFI schemes all together.

While the highly technical rules of PFI deals may be tinkered with, the waters remain muddy. Critics may continue to make their case for the abandonment of the scheme, but all the signs are that it is here to stay.