By Richard Johnstone | 19 June 2014
Treasury reforms to the use of private finance to build and maintain public infrastructure will not remove the accounting incentives for Whitehall departments to use the scheme even when it does not represent best value for money, MPs have warned.
In an examination of the government’s Private Finance 2 rules for private investment in schools and hospitals, MPs said the introduction of cross-government total for spending on Private Finance Initiative contracts could encourage departments to sign off deals quicker.
PF2 is the government's reform to the controversial PFI scheme, under which private companies build and maintain buildings like schools and hospitals over a period of around 30 years.
Many PFI deals have been criticised for providing poor value for the taxpayer, and Chief Secretary to the Treasury Danny Alexander said the reforms would address the fact PFI ‘seemed to privatise the profit and socialise the risk, with schools, hospitals and government buildings locked into poor value contracts’.
As part of the reforms, which include taking an equity stake of up to 49% in PF2 projects, a cross-government control total will limit payments on both PFI and PF2 schemes to £70bn from 2015/16.
This is intended to control how much can be spent by central government on servicing existing contracts and paying for new projects.
However, MPs said the change does not alter the accounting treatment of PFI debt, which was encouraging the use of private finance for reasons other than value for money.
The production of National Accounts according to European System of Accounts leaves PFI debt off balance sheet, the committee noted, and the government's headline debt statistic therefore also excludes PFI debt.
This acts as an incentive to pursue PFI as it does not add to the headline measure of national indebtedness, the Private Finance 2 report stated. Departmental capital budgets also follow the definitions used by the ESA, so when a department does not have a capital budget large enough to finance an investment project under conventional procurement, PFI can be used to leverage its capital budget to proceed with the investment.
Although the control total was intended to limit the payments under PFI and PF2, MPs concluded an aggregate control total would not remove this incentive for departments.
Until the £70bn upper limit is reached, it would remain, MPs warned.
‘Indeed, the control total will create an incentive for departments to bring forward investment decisions under PF2 as soon as possible in order to include the projects within the £70bn cap.
‘This is likely to reduce the quality of decision making within government on investment projects, with less consideration given as to whether PF2 offers the best value for money. The committee remains concerned that the control total will fail to address the budgetary incentives to use private finance.’
Responding to the report, a Treasury spokesman said: ‘We welcome the committee's report and it’s recognition that “PF2 is a step forward on PFI” and we will respond in due course.
‘PF2 significantly reforms PFI and gives a new approach to the delivery of public infrastructure. Private finance is only used where it can be demonstrated to offer better value for money than a publicly financed alternative.’
