Private sector benefits most from PFI, say MPs

31 Aug 11
The Private Finance Initiative is ‘a better deal for the private sector than the taxpayer’, an influential committee of MPs has said.

By Richard Johnstone | 1 September 2011

The Private Finance Initiative is ‘a better deal for the private sector than the taxpayer’, an influential committee of MPs has said.


A Public Accounts Committee report into PFI, which has been used by successive governments to pay for the construction of public infrastructure including schools ands hospitals, has concluded that it is ‘far from clear’ that it has provided value for money.

The MPs say that private sector investors are making ‘excessive profits’ from selling on shares in PFI schemes, and calls for the government to institute a code of conduct to share these gains.

The PAC’s report follows a report by the Treasury Select Committee last month which also concluded that the PFI is not good value for money, and should be used ‘sparingly’ by government.

There are 700 PFI contracts in operation, with a further 61 projects in procurement and many others where it is being considered as an option.

Today’s report, Lessons from PFI and other projects, concluded that restrictions on capital budgets have meant that many of the hospitals, schools, prisons, courts and roads built in the last 15 years might not have been completed without private finance. Its use has also brought a degree of rigour with more projects being delivered on time and within cost.

However, the MPs have said this does not mean they will always be value for money, particularly given the current high cost of debt finance borrowed by private companies to finance developments. Interest rates for PFI projects have increased by an average of 6% to 7% since the credit crisis.

They add that in the present climate of government cuts there are ‘legitimate concerns’ about the continuing financial cost of PFI to the public sector, including NHS trusts, who repay the private companies over terms as long as 30 years.

The report has also concluded that some of the government's case for using PFI has not been based on robust analysis, but on ‘ill-founded comparisons and invalid assumptions’.

In particular, the MPs are recommending that the Treasury revisit the tax assumptions it builds into a PFI cost and benefit analysis.

Among other changes, the committee has called on the Treasury to issue ‘more rigorous’ guidance for assessing the value‑for‑money of PFI projects by the autumn. This should provide a more transparent and complete comparison with alternative funding, and an explanation of how substantial long-term financial commitments will be accommodated amid public sector spending cuts.

Committee chair Margaret Hodge said: ‘Government has treated the PFI as the “only game in town”, but the use of this form of financing has been based on inadequate comparisons with conventional procurement which have not been sufficiently challenged. In future, the use of the PFI must be based on a rigorous and transparent comparison with alternative funding methods.’

A Treasury spokesman said the PAC’s conclusion’s would be examined carefully and the Treasury would respond to the issues raised in due course.

He added: ‘The government is committed to ensuring taxpayers get value for money from the PFI and has already made a number of changes to improve the cost effectiveness and transparency of PFI contracts. In April, the government introduced new tougher guidance to departments to strengthen the approvals process, to ensure that the PFI is only used when it offers value for money.’

Trade union Unison said that the report showed that the case against the PFI was growing, and reiterated its call for the government to ditch it as a way of financing public building projects.

Unison general secretary Dave Prentis said: ‘Unison has always said the PFI is a bad deal for the taxpayer, and in the current economic climate the case for it is weaker than ever. Many hospitals are now shedding staff and postponing operations because they are struggling to payoff their PFI debt.’

The CBI last week called on the Government to back the use of private finance in the delivery of new infrastructure.

Responding to the PAC report, deputy director general Neil Bentley said MPs had acknowledged the role that private finance has played in delivering new hospitals, schools, prisons, courts and roads.

He added: ‘The CBI is calling for greater transparency in PFI contracts and for improvements to public sector procurement.

Given the current state of the public finances, private finance must be an option if the we are going to see major new investment in infrastructure at an affordable price. What investors need now is a clear statement from the Government about how the use of private finance will evolve, including ideas such as tax increment funding and pension fund financing.’


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