Belfast Telegraph

MPs round on PFI scheme

Private finance initiatives cost too much and need reform

By Gavin Cordon

The private finance initiative - intended to lever in private funding for public infrastructure projects such as schools and hospitals - provides poor value for money and needs "substantial" reform, MPs have warned.

The Commons Treasury Committee said the long-term costs of PFI deals were now significantly higher than conventional government borrowing and it urged ministers to use them "as sparingly as possible".

Committee chairman Andrew Tyrie called on the Treasury to remove the "perverse incentives" which encouraged government departments to use PFI rather than more efficient means of financing.

In particular, the committee said PFI liabilities - which are currently treated as "off balance sheet" - should be recorded in the national accounts, even though this would add an estimated £35bn to the deficit.

It said PFI was particularly attractive to departments on restricted budgets as the initial costs were lower, even though the impact was much longer lasting with the build up of big commitments against future budgets before they were even allocated.

The result, it warned, was to encourage "poor investment decisions" by departments "without due consideration for their long-term budgetary obligations".

"The incentive for government departments to use PFI to leverage up their budgets, and to some extent for the Treasury to use PFI to conceal debt, has resulted in neglecting the long-term value-for-money implications," it said.

"We do not believe that PFI can be relied upon to provide good value for money without substantial reform."

PFI was introduced by John Major's Tory government in 1992 as a way of enabling private investors to take on the financing, construction and operation of infrastructure projects.

It was subsequently expanded under Labour and continued by the current coalition Government.

The committee said that while PFI had always been more expensive than traditional government borrowing, the gap had widened "significantly" since the financial crisis.

The cost of capital for a typical PFI project is now put at 8% - double the long-term government gilt rate of around 4%. Paying off a PFI debt of £1bn could cost taxpayers the same as paying off a direct government debt of £1.7bn.

"We believe that a financial model that routinely finds in favour of the PFI route, after the significant increases in finance costs in the wake of the financial crisis, is unlikely to be fundamentally sound," the committee said."