In 1981 Treasury set up a committee under Sir William Ryrie to report on the use of private finance to fund investments by the public sector. Its principal conclusions – subsequently known as the “Ryrie Rules” – were that private funding should be governed by two basic principles:

1. Privately funded solutions must be tested against the public funded alternative and shown to be more cost-effective; and
2. Unless Ministers decided otherwise, privately funded projects should not be additional to public sector provision – that is, capital works expenditure would be reduced by the amount of private funding obtained.

These rules were in effect until 1989, although not surprisingly they were criticised for being too restrictive and for not allowing the private sector to expand the pool of available infrastructure projects.

In 1989 John Major abandoned the latter principle, opening the door to the Private Finance Initiative.

Under the Conservative Government there were three major categories of PFI project:

Financially free-standing projects: these are effectively self-sustaining commercial ventures. Examples include toll bridges and visitor centres.
Services sold to the public sector: The cost is met largely by charges to the public sector. Examples include prisons and some train lines.
Joint ventures: the cost is met partly from public funds and partly from other sources, with overall control of the project resting with the private sector. Examples include the Channel Tunnel and various urban regeneration schemes.

Many of the early projects involved transport but after the PFI was launched Ministers in many other areas started to apply it to their own programmes. Examples of PFI projects built or started under the Conservative Government include:

• The Skye Bridge.
• The Heathrow Express
• The Channel Tunnel
• The Lewisham extension to the Docklands Light Rail (see below)
• Hospital waste incineration.
• Extensions to a number of public hospitals.
• Two privately built and operated prisons at Bridgend and Fazakerley.

PFI differs from privatisation in that the public sector retains a substantial role in PFI projects, and from contracting out because the private sector provides the capital asset as well as services. In both instances the public sector is a procurer of services as well as a regulator.

In November 1994 Chancellor Kenneth Clarke announced that in future Treasury would not approve any capital projects unless private finance options had been explored. So in the space of 13 years Government policy had changed from Ministers having to test private sector projects against public sector alternatives to Ministers having to prove the public sector alternative was the best option – truly a seismic shift!

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