'Fuzzy thinking' over PFI contract benefits

posted by Francis Churchill
20 June 2018

MPs have accused the Treasury of “institutionalised fuzzy thinking” over the handling of private finance initiative (PFI) contracts.

In a report, the Public Accounts Committee (PAC) said it was “unacceptable” that after 25 years of using PFI contracts to pay for public infrastructure projects, the Treasury “still has no data on benefits” to show whether the model is value for money.

Meg Hillier, chair of the PAC, said: “It beggars belief that such apparently institutionalised fuzzy thinking over such large sums of public money should have prevailed for so long.”

A PFI contract is an agreement where a private sector company – usually a special purpose vehicle (SPV) – agrees to take on the risk of financing and building a public infrastructure project with the guarantee that the public sector will then lease that asset off them for a fixed term, usually 20-30 years.

The model is popular with governments because the initial investment is raised by the private sector and therefore does not appear as debt on the public accounts. It has been used to finance schools, hospitals and roads.

However, the model has been criticised, most recently by a National Audit Office report in January, for being more expensive than alternative methods of funding infrastructure projects.

Some SPV’s have made large profits on PFI contracts, with one recent estimate putting the profit made on NHS PFI deals at £831m over the last six years. Investors in the PFI deal to widen the M25 were estimated to have made a 30% profit after selling their stake in the contract.

The PAC report said the government’s “obvious” desire to keep using PFI schemes as a tool to keep the cost of infrastructure off the balance sheet was a “risk to value for money for the taxpayer”.

The report said the Treasury has not been collecting data on the benefits of PFI projects, claiming it to be the responsibility of individual departments. When asked to whether the benefits of PFI justified the higher cost of financing, the Treasury told the PAC it was “an impossible question to answer” because it did not have the facts needed, the report said.

The government told the PAC it was seeking to collate existing PFI data but it did not intend to publish its findings

Hillier said: “The Treasury simply cannot support its assertion that PFI represents good value for money. Yet while government is now seeking to collate the PFI data that does exist, it does not intend to publish the results of this work.

“This is unacceptable. Government must level with taxpayers about the value of PFI.”

The report also criticised the Treasury for not doing enough to address the impact more than 700 existing PFI projects were having on local budgets. It called the contracts “inherently inflexible” and said they could have a “considerable impact on budgets at a local level”, citing the case of Parklands School in Liverpool that is costing the council £4m year despite being empty since 2014.

Instead of trying to make changes to existing PFI contracts, government has been focusing its attention on the rollout of a new set of PFI contracts, called PF2, despite uncertainty over how widely used these contracts will be, the report said. Hillier added that the PAC “was not convinced” PF2 fixed all the issues with the previous PFI model.

Only two PF2 infrastructure projects, worth a total of £7.8bn, are currently being proposed despite the Infrastructure and Projects Authority, a government body, identifying the need to invest £300bn by 2020-21.

A Treasury spokesperson said: “We have significantly increased public investment in vital projects like roads, schools and hospitals while continuing to use private finance where it offers value for money.

“We made changes to PFI in 2012 to improve it and always compare the cost of using public or private finance to ensure value to the taxpayer for these projects. Since 2010 only 80 such contracts have been signed, compared to 620 signed between 1997 and 2010.”

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