PFI ‘still being used to keep costs off balance sheet’

11 Jan 12
The government has not done enough to address concerns that the Private Finance Initiative is being used to keep the cost of major infrastructure projects off its balance sheet, the Commons’ Treasury select committee said today.

By Nick Mann | 11 January 2012

The government has not done enough to address concerns that the Private Finance Initiative is being used to keep the cost of major infrastructure projects off its balance sheet, the Commons’ Treasury select committee said today.

Andrew Tyrie

But ministers have begun to review the transparency of the financing system and the methods used to determine whether it provides value for money, it added.

The committee was commenting on the government’s response, published today, to the MPs’ August 2011 report, Private Finance Initiative. That found no convincing evidence that savings and efficiencies made during the lifetime of PFI projects could offset the higher cost of using private capital rather than government borrowing.

Committee chair Andrew Tyrie said that ‘anomalies’ in the national accounting system continued to provide an incentive for departments to opt for this financing option, as PFI liabilities do not currently count towards the national debt. Departments can also keep PFI spending off their own individual budgets.

In its response, the government highlighted changes it had made since April 2011 to ensure that projects provided value for money, regardless of how they were being financed.

It also explained that it was making improvements to ensure a ‘more robust’ process would be used to determine whether the PFI was the best choice for a project. As part of this, the Treasury plans to publish revised value for money guidance later this year.

To increase transparency, PFI liabilities were also included in the first unaudited Whole of Government Accounts, published in July, the government added.

Tyrie welcomed the steps being taken, which he said would help to achieve the best possible value for money for the taxpayer, but said the government’s response had failed to ‘fully address’ the committee’s concerns over the motivation for using the PFI.

‘We must avoid using PFI solely as a means of placing government finance off-balance sheet,’ he said. ‘Value for money is crucial.’

PFI could still have a role in developing infrastructure when the risks associated with a project could be properly transferred to the private sector, he said. The benefits of placing it under private sector management must also outweigh the higher cost of capital.

The committee called on government to explore other private sector funding mechanisms, such as UK pension funds, to finance infrastructure, as mooted by Chancellor George Osborne in November.

But Tyrie warned that these alternatives could also carry risks to the public purse. ‘The government must be cautious about taking on further contingent liabilities or providing guarantees that could lay additional costs at the door of future taxpayers,’ he said.

The Foundation Trust Network said that plans to put the NHS on a more ‘commercial footing’ in the Health and Social Care Bill would depend on there being more than one way of financing infrastructure projects.

Sue Slipman, chief executive of the body representing semi-autonomous NHS trusts, said: ‘Central to the success of this will be their ability to access affordable investment capital, which offers the kind of value for money commensurate with spending by a public body.

‘Whatever route the government chooses to pursue in using private capital to fund public sector projects, it is critical that they enable a plural investment market. We will not achieve value for money if there is only one option on the table.’

Parts of the public sector with an ‘entrepreneurial mindset’, such as foundation trusts, are already exploring the funding options that might be open to them, she added.

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