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PFI always was a Pretty Farcical Idea

Private finance initiative projects require more efficiency than the private sector can deliver

The Treasury select committee did not use the old gag about the private finance initiative being a Pretty Farcical Idea, but that’s a rough summary of its view of the policy launched by Norman Lamont in 1992, embraced with enthusiasm by Gordon Brown in 1997 and still being deployed by George Osborne.

The big argument in favour of PFI used to run like this: private sector capital might be more expensive than public capital but super-efficient private sector managers would carry many of the risks away from taxpayers. Roads, hospitals, bridges, ships and so on would be build with fewer cost over-runs and we would all be better off in the end.

It was hopeful nonsense, of course, as various studies over the years have shown. Yes, it is perfectly possible to point to success stories and projects where risk has genuinely been transferred to the private sector. But they are not the majority of cases. The Treasury committee report chimes with many others in its general conclusion that “the out-turn costs of construction and service provision are broadly similar between PFI and traditional procured projects, although in some areas PFI seems to perform more poorly”.

The real strength in the report lies in its devastating analysis of the cost to taxpayers of meeting the private sector’s higher financing costs. In one example (see pages 16-18 of the report for the discounted cashflow calculations) it examines the cost projections for the Royal Liverpool and Broadgreen University Hospitals NHS Trust’s PFI project, currently in the procurement stage with the business plan approved by successive governments in 2009 and last year. The conclusion: the government could have saved £175m by borrowing directly from the capital markets rather than through a PFI vehicle. That’s serious money.

What’s more, as the government’s cost of borrowing continues to plunge, the financing gulf widens. The cost of capital for a typical PFI project is currently over 8%, estimates the report; by contrast, the government can borrow for 30 years at less than 4%. The private sector’s superiority in efficiency would have to be enormous to bridge that financing gap.

And yet the incentives for governments and officials to ignore strict value-for-money principles remain – most of the PFI debt still doesn’t appear in the official debt or deficit figures and departments can leverage their budgets by putting spending on the never-never.

The committee makes several commonsense recommendations: get rid of these artificial incentives; introduce strict guidelines on the use of PFI; and consider using direct investment instead. The government, promising a review of PFI in the autumn, should listen. Its long-term cost of borrowing is at its lowest level for more than a century – it should take advantage. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds