The House of Commons Treasury Select Committee has belatedly analysed the economics of Gordon Brown’s Private Finance Initiative and concluded that PFI does not give good value for money.
PFI is an “extremely inefficient” method of financing projects, according to the committee. But poor investment decisions may continue to be encouraged across the public sector, because PFI allows government departments and public bodies to make big capital investments without committing large sums up front.
Investment could be increased in the long run, the MPs point out, if government capital investment were used instead of PFI. The average cost of capital for a low-risk PFI project is over 8 per cent, as against the long-term government gilt rate of around 4 per cent. The difference in finance costs means that PFI projects are significantly dearer to fund over the life of a project.
This all amounts to a significant cost to taxpayers. Analysis commissioned by the committee suggests that paying off a PFI debt of £1 billion may cost taxpayers the same as paying off a direct government debt of £1.7 billion.
The Committee heard that design innovation was worse in PFI projects, and saw reports which found that building quality was of a lower standard in PFI buildings. PFI is also inherently inflexible, especially for NHS projects. This is in large part due to the financing structure and its costly and complex procurement procedure.
PFI was invented by Conservative chancellor Norman Lamont, but was hardly used until Labour came to power in 1997. For Gordon Brown it was a way of raising money without – apparently – raising government debt, since the cost was treated as capital rather than as debt. But the consequence of such dishonesty is that hospitals, schools and so on, have actually been saddled with outrageous limitations on what they can do in “their” buildings, which actually belong to the PFI consortia.
And taxpayers are having to pick up an extortionate bill. More than 900 PFI schemes have been completed, with a total capital value of £56 billion, while the amount the taxpayer will have to repay is £229 billion, and rising.
Despite dismissing PFI as “discredited”, current chancellor George Osborne has backed more than 60 PFI projects costing almost £7 billion. ■