PFI projects 'poor value for money', say MPs

PFI projects will generate an estimated £2.8bn in capital spending this year

The Private Finance Initiative (PFI) used by successive governments to pay for new schools and hospitals is poor value for money, MPs have said.

The Treasury select committee said PFI was no more efficient than other forms of borrowing and it was "illusory" that it shielded the taxpayer from risk.

Government had become "addicted" to PFI, the committee's Tory chair said.

A government source said it had already acted to make PFI more transparent and rigorous and cut the cost of projects.

Following criticism that the true costs of PFI were being hidden "off balance sheet" and excluded from government debt calculations, the coalition published details of total PFI liabilities for the first time last year alongside the national accounts.

PFI was introduced by John Major's Conservative government in 1992 as a way of bringing in private funding to pay for major public infrastructure projects.

'Addicted'

It was widely used by Labour between 1997 and 2010 but faced growing criticism for the costs involved and the ultimate liabilities for the taxpayer in the event of projects going wrong - such as the collapse of London Underground maintenance firm Metronet in 2008.

In a critical report, the cross-party Treasury select committee said the long-term expense of PFI deals - where the private sector shoulders the upfront cost and is typically repaid by the taxpayer over a 30-year period - were now much higher than more conventional forms of borrowing.

Due to the financing costs involved, it said paying off a £1bn debt incurred through PFI cost the taxpayer equivalent to a direct government debt of £1.7bn.

PFI had become the default option for many public bodies as initial procurement costs were comparatively low, the MPs said, but too often the size of the financial commitments undertaken and their impact on future budgets was not taken into account at the time.

"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 report concluded.

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

The report found little evidence that PFI-funded buildings were of higher quality or more innovative in their design than those procured by other means or that contractors were incentivised to maintain finished buildings to a higher standard.

"PFI means getting something now and paying later," Andrew Tyrie, the Tory MP who chairs the committee, said.

"Any Whitehall department could be excused for becoming addicted to that. We cannot carry on as were are, expecting the next generation of taxpayers to pick up the tab. PFI should only be used where we can show clear benefits for the taxpayer."

''Much-needed'

An aide to the chancellor said the government had already taken action to ensure a "level playing field" between PFI and other public procurement methods and to address some of the "perverse incentives" surrounding PFI identified by the committee.

"We have been saying for a long time that the PFI system we inherited was completely discredited," he said. "That's why we are reforming it so it is genuinely transparent and only used when it provides value for money for the taxpayer.

"So far we have announced plans to save £1.5bn off existing projects, abolished PFI credits so PFI doesn't have an advantage over other forms of public procurement and strengthened the approval process for approving projects."

Labour defended its use of the PFI system when it was in government, saying it had been used to deliver hundreds of new public facilities and the biggest ever hospital building programme.

Kerry McCarthy, Labour's shadow treasury minister, said clear guidelines were in place to ensure it was only used if it was deemed value for money compared with public sector routes.

"The Tory-led government has continued to use the PFI scheme, the Treasury has reportedly signed off on more than 60 projects so far totalling close to £7bn," she said.

"This suggests that they believe it can be a value for money means of generating investment in our public services."

The CBI said the government needed to decide how PFI would develop in the future as investors needed certainty and the economy badly needed private investment.

"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," said its deputy director general Neil Bentley.

"It is worth remembering that without PFI we would not have seen hundreds of much-needed hospitals, schools and homes delivered on time and within budget."