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Private finance initiatives a costly ‘drug’ to taxpayer, MPs tell chancellor

Treasury select committee urges George Osborne to wean off PFIs as report shows them 1.7 times costlier than public purse

George Osborne must wean the Treasury off the “drug” of the private finance initiative (PFI), which offers poor value for money for Britain’s taxpayers, according to a cross-party committee of MPs.

In a damning report, the Treasury select committee says that with the yield on government bonds at near-record lows, using a PFI deal for a new infrastructure project could end up costing up to 1.7 times as much as paying for it directly out of the public purse.

Andrew Tyrie, the committee’s Conservative chairman, urged the chancellor to call an immediate review, and bring the costs of all previous projects on to the Treasury’s balance sheet.

The independent office for budget responsibility recently estimated that the total liability from the capital costs of PFI projects alone was about £40bn, which would increase Britain’s debt-to-GDP ratio by almost 3%.

The PFI was first announced by Norman Lamont in 1992, but the complex deals proliferated at Gordon Brown’s Treasury. Private sector providers agree to build and run schools, hospitals and other infrastructure projects, typically over 30 years, in exchange for a stream of payments from the public purse.

But Tyrie said that instead of transferring risk to the private sector and cutting costs for the taxpayer, PFI had fooled the public – and Whitehall officials – into thinking they could get shiny new public services “on the never-never”.

“PFI means getting something now and paying later. Any Whitehall department could be excused for becoming addicted to that,” he said.

“It’s like a drug. We can’t carry on as we are, expecting the next generation of taxpayers to pick up the tab. We must first acknowledge we’ve got a problem. This will be tough in the short term but it should benefit the economy and public finances in the longer term.”

The report finds that because they could be hidden off departments’ balance sheets, PFI projects looked artificially attractive.

Allyson Pollock, professor of public health research and policy at Queen Mary, University of London, who has been a vocal critic of public-private partnerships over more than a decade, said: “The National Audit Office and the Treasury together have spent a long time promoting and advertising this policy, at home and abroad, including to some of the poorest countries in the world. It’s time for a complete rethink.”

She added that with PFI payments generally uprated in line with the RPI measure of inflation, which is currently running at 5%, the cost of many PFI-funded projects is rising rapidly at the same time as public sector budgets are being cut.

The select committee analysed one specific project, the Royal Liverpool hospital, currently in its procurement phase, and found that the higher cost of financing it privately could add £175m to the price over the life of the hospital. The yield on government bonds, or gilts, which determines the interest rate the Treasury pays on its debts, has slipped sharply since the credit crunch, making the argument against PFI appear all the more stark.

“The cost of capital for a typical PFI project is currently over 8% – double the long-term [30-year] government gilt rate of around 4%. The difference in finance costs means that PFI projects are significantly more expensive to fund over the life of a project. This represents a significant cost to taxpayers,” the report finds.

Jesse Norman, a backbench Conservative member of the committee, called for an immediate one-year moratorium on the Royal Liverpool project. Pollock agreed, saying: “When you’re in a hole, stop digging.”

Business groups defended the PFI, however. Neil Bentley, deputy director-general of the CBI, said: “It’s worth remembering that without PFI we would not have seen hundreds of much-needed hospitals, schools and homes delivered on time and within budget.”

An aide to the chancellor said: “We have been saying for a long time that the PFI system we inherited was completely discredited and nothing more than a ploy to keep expensive projects off the balance sheet. That’s why we are reforming it so it is genuinely transparent and only used when it provides value for money for the taxpayer.” He added that PFI liabilities are now published as part of new Whole of Government Accounts, so they can no longer be hidden – but they are still not counted as public sector debt.

London Underground investment

Creaking along on ancient infrastructure, the London Underground was crying out for modernisation by the end of the 20th century. The then chancellor, Gordon Brown, decided to fix it with a 21st century solution: a public-private partnership. Labour traditionalists were furious that the maintenance and development of a prime public asset should be handed over to the private sector.

The £30bn project, due to run for 30 years, divided the upgrading and maintenance of the tube between two consortia: Metronet and Tube Lines. In exchange for carrying out complex work on a network that transported 3 million people a day, the businesses that made up the two consortia would receive a monthly payment that would increase or decrease depending on whether they hit targets for measures such as train cleanliness and reliability of services.

The collapse of the arrangement surprised even its most vociferous critics. Metronet went into administration in 2007 after racking up a projected overspend of up to £2bn, its costs not helped by the fact that it contracted work out to its five shareholders: construction firm Balfour Beatty, Thames Water, energy company EDF, engineering specialist WS Atkins and Canada’s Bombardier.

Metronet was bought by the capital’s transport authority, which by then was locked in an increasingly dysfunctional relationship with Tube Lines. The company did not have Metronet’s overspend problems but it could not deliver an upgrade of the Jubilee Line on time and in 2010 London’s mayor, Boris Johnson, bought it from its shareholders, Heathrow owner Ferrovial and US project manager Bechtel, for £310m. Dan Milmo © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds