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PFI under attack from left and right

Is this the end for the private finance initiative, the wheeze favoured by Whitehall for funding on the never-never?

When wonkish Tory Andrew Tyrie and veteran leftie troublemaker Margaret Hodge agree about something, it’s worth listening; and both have sent a clear message to the Treasury that it’s time to dump Gordon Brown’s favourite wheeze for getting public services on the never-never: the private finance initiative.

Hodge, who chairs the public accounts committee, warned last week that during Brown’s years at No 11, the PFI became “the only game in town”; and Tyrie said it had become a “drug” that Treasury officials must now wean themselves off.

Between them, the two hefty reports, one from Hodge and the other from the Treasury select committee, chaired by Tyrie, both published in the past fortnight, should have dealt the killer blow to a programme which has been used to fund more than 700 projects.

The Treasury committee’s analysis showed that with the yield on government borrowing – ie the interest rate – now at its lowest level for more than a century, the extra costs of a private firm borrowing the money to pay for a school or a hospital could add 70% to the costs of a PFI project over its 30-year life. The private sector may be super-efficient, but on that basis, it’s hard to see how even the sharpest management skills could deliver big enough savings to make PFI a better deal for the taxpayer.

Tyrie, who was a member of the select committee during Brown’s chancellorship and often gave him a tough time during his appearances on the committee corridor, made it clear that he would like to see Whitehall let go of the fiction that handing a school or a hospital over to the private sector makes it cheaper. He believes bringing all the costs of PFI projects onto the government’s books would be a good start, helping to remove the artificial advantage the schemes gain – in the minds of civil servants, at least – from being hidden off the balance sheet.

The equally damning accounts committee report focused on a different issue: the tax status of many of the investment firms that have bought up PFI projects after construction, when the worst of the risks have failed to materialise.

At this point, the projects are all about management and maintenance for a fixed fee, so the initial contractors can often offload them at a handsome profit to investment firms such as Innisfree and Semperian, which then treat them almost like bonds, delivering an income stream straight from the public purse.

Some projects have changed hands up to nine times since their inception – though as the firms involved fall outside the scope of the Freedom of Information Act, citing the handy catch-all of “commercial confidentiality”, it’s hard to tell how much profit has been made. As questioning from committee members including Labour newbie Stella Creasy revealed, the Treasury assumes that by transferring a project to the private sector, it will receive tax revenues from the profits the company makes.

Yet many of the companies involved admitted that they are based offshore, and pay little or no UK tax on their PFI portfolios. Evidence published alongside the public accounts committee report listed Home Office headquarters and the Norfolk and Norwich Hospital as projects wholly or partly owned by firms based in tax havens.

Whichever way you do the sums, PFI projects are not better value; yet the Treasury is apparently still so attached to the idea that it is promoting it as the best way of funding the Crossrail project, even though it will be more expensive in the long run, and could tip the scales in favour of the A+ rated Siemens, ahead of Bombardier, whose B+ rating means it will face higher interest charges. Not only is that likely to deliver a poor deal for the taxpayer, it puts the verdict of the credit ratings agencies ahead of the prospects for job creation and economic growth. Tyrie and Hodge are a formidable if unlikely partnership: George Osborne should take heed. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds