Highways England will pay £8bn under a PFI for a £1bn capital investment in the M25 © PA Archive/PA Images
Highways England will pay £8bn under a PFI for a £1bn capital investment in the M25 © PA Archive/PA Images

PFI deals 'more expensive than alternatives'

Will Green is news editor of Supply Management
18 January 2018

Projects financed by Private Finance Initiatives (PFI) are more expensive than those funded directly by government, the National Audit Office (NAO) has said.

In a report the NAO said the cost of finance, insurance, employing advisors, fees to lenders and costs associated with establishing and managing the special purpose vehicles (SPVs) required for PFIs meant “cash spending on PFI… projects is higher than publicly financed alternatives”.

The report said there were currently 716 PFI projects in the UK, with a capital value of £59.4bn, and annual charges amounted to £10.3bn in 2016-17. “Even if no new deals are entered into, future charges which continue until the 2040s amount to £199bn,” said the NAO.

PFIs, in which finance is raised from debt and equity investors with taxpayers making payments to the SPV over the contract term, can be attractive because there is an incentive on SPVs to bring in projects within budget and to lower running costs. But the NAO said these benefits could be achieved without the use of long-term PFI contracts, which often last more than 25 years.

PFIs also have the advantage of not appearing in government debt and public spending figures and they allow public bodies to invest when they do not have sufficient capital budgets, said the NAO. However, it added that there was “still a lack of data available on the benefits of private finance procurement”.

The report said an analysis of PFI hospitals “found no evidence of operational efficiency” while Liverpool City Council would be spending an estimated £47m between 2017-18 and 2027-28 for Parklands High School, which now stands empty. The school cost an estimated £24m to build.

Highways England is expected to pay £8bn between 2017-18 and 2039-40 to the winner of a 2009 PFI contract to widen sections of the M25 and maintain its entire length. The project had a total capital investment value of around £1bn.

The NAO said concerns about value for money on PFI deals contributed to reforms in 2012, known as PF2, but “the fundamental characteristics of PFI remain unchanged in the PF2 model”.

The report said the use of PFIs had slowed, from an average of 55 deals a year in the five years to 2007-8 to just one in 2016-17.

“We present information on the programme as a whole and do not seek to form a view on the model or individual projects,” said the NAO.

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