MPs slam 'inefficient' PFI deals

18 Aug 11
An influential committee of MPs has said that funding public infrastructure through the Private Finance Initiative does not provide taxpayers with good value for money, and should be used ‘sparingly’ by government.

By Richard Johnstone | 19 August 2011

An influential committee of MPs has said that funding public infrastructure through the Private Finance Initiative does not provide taxpayers with good value for money, and should be used ‘sparingly’ by government.

Romford PFI hospital

The Treasury select committee report into the controversial financing method, widely used to construct schools and hospitals,has found that Whitehall departments have been ‘addicted’ to getting something now and paying later. A total of £60bn of capital investment has been committed to PFI projects under successive governments.

The committee report, Private Finance Initiative,found that there was no convincing evidence that savings and efficiencies during the lifetime of PFI projects could offset the higher borrowing costs of using private capital over government borrowing.

Since the credit crisis, the cost of capital for a typical PFI project is currently over 8%, double the 4% level of government bonds.

An analysis commissioned by the committee suggests that capital investment could be increased if government borrowing were used instead of PFI financing, as paying off a PFI debt of £1bn might cost taxpayers the same as paying off a direct government debt of £1.7bn.

This mean that the PFI is now an ‘extremely inefficient’ method of financing projects.

The MPs also warned that such poor investment decisions might continue to be made across the public sector because the PFI allows departments and public bodies to make big capital investments without committing large sums up front, and incentives remain for it to be used.

Although international financial reporting standards require that most PFI projects feature in an organisation’s financial accounts, capital investment related to PFI projects rarely feature in individual government departments’ budgets. As long as certain risks are deemed to be passed to the private sector on a PFI project, then the project is recorded as off balance sheet for National Accounts and statistical purposes, including calculating the national debt.

It is recommended that the Treasury resolve this by treating PFI projects in departmental budgets in the same way as direct capital expenditure, and adjusting them accordingly.

The government’s value for money appraisal system should also be scrutinised by the National Audit Office as the MPs say the current system is biased to favour the PFI.

Committee chair Andrew Tyrie said:‘We can’t carry on as we are, expecting the next generation of taxpayers to pick up the tab. The PFI should be used only where we can show clear benefits for the taxpayer. We must first acknowledge we’ve got a problem. This will be tough in the short term but it should benefit the economy and public finances in the longer term.’

The government is currently procuring 61 new PFI projects, with a total estimated investment value of £7bn.

Last month, the government announced that it hoped to save £1.5bn from existing PFI schemes, following a pilot to reduce costs at the Queen’s Hospital in Romford, and two Ministry of Defence sites.

However, the committee concludes that the PFI is likely to be suitable only where the risks associated with future usage of the asset can be efficiently transferred to the private sector. This needs to be established by much more robust criteria, so that risk is ‘transferred to the private sector and is seen to have been transferred’.

The trade union Unison demanded that the government dump the PFI completely.

General secretary Dave Prentis said: ‘The committee has confirmed what we know is true – the PFI is a waste of cash. Government incentives and short-term gain are being put before the long-term pain.’

However, the CBI said that without the PFI, hundreds of hospitals, schools and homes would not have been built.

Deputy Director General Dr Neil Bentley said: 'The Committee’s report is right to say lessons from the past need to be heeded, and the PFI must only be used when it is appropriate and offers the best value for money.

'But with the state of the public finances, it is absolutely essential we attract the billions of pounds of private finance needed to upgrade our national infrastructure and boost jobs and growth.

'To do this, investors need confidence, and the Government must decide sooner rather than later how the PFI will evolve, alongside a range of alternatives, such as Tax Increment Funding and Pension Fund Financing.'


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