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MPs call for reform of ‘inefficient’ PFI

19 Aug 11 The Treasury select committee has blown the gaff on the great illusion that is the Private Finance Initiative.

Andrew Tyrie, well-qualified chairman of Treasury select committee
Andrew Tyrie, well-qualified chairman of Treasury select committee

In a report out today the Treasury select committee says that PFI funding for new infrastructure does not provide value for money and stricter criteria should be introduced to govern its use.

It also calls for PFI payments to brought onto the balance sheet.

Higher borrowing costs since the credit crisis mean that PFI is now an ‘extremely inefficient’ method of financing projects, according to the committee. Poor investment decisions may continue to be encouraged across the public sector, however, because PFI allows government departments and public bodies to make big capital investments without committing large sums up front.

The committee has seen no convincing evidence that savings and efficiencies during the lifetime of PFI projects offset the significantly higher cost of finance. Indeed, the report raises concerns that the current Value for Money appraisal system is biased to favour PFIs. It identifies a number of problems with the way costs and benefits for such projects are currently calculated.

Committee chairman Andrew Tyrie MP said: "PFI means getting something now and paying later. Any Whitehall department could be excused for becoming addicted to that.

"We can’t carry on as we 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. 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.

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"PFI should be brought on balance sheet. The Treasury should remove any perverse incentives unrelated to value for money by ensuring that PFI is not used to circumvent departmental budget limits. It should also ask the OBR to include PFI liabilities in future assessments of the fiscal rules.

"We must also impose much more robust criteria on projects that can be eligible for PFI by ensuring that as much as possible of the risk associated with PFI projects is transferred to the private sector and is seen to have been transferred."

Before becoming an MP, Mr Tyrie was a special advisor to the then Chancellors of the Exchequer, Nigel Lawson and John Major, and senior economist at the European Bank for Reconstruction & Development.

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 more than 8%, double that of government gilts. Analysis commissioned by the committee suggests that paying off a PFI debt of £1bn may cost taxpayers the same as paying off a direct government debt of £1.7bn.

The Committee recommends that:

  • The Treasury should consider scoring most PFIs in departmental budgets in the same way as direct capital expenditure, adjusting departmental budgets accordingly;
  • The Treasury should discuss with the OBR the treatment of PFI to ensure that PFI cannot be used to ‘game’ the fiscal rules;
  • The value for money assessment process should be subjected to scrutiny by the NAO;
  • The Treasury should review the way in which risk transfer is identified.

The full report is available here.

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