MPs slam PFI scheme as costs force extra cutbacks

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An influential committee of MPs yesterday demanded a “radical” rethink of the Government’s Private Finance Initiative, branding the model for attracting private cash into public sector projects expensive and unsustainable.

Some 700 projects have been delivered under PFI since its introduction 20 years ago, and the taxpayer is committed to spending of about £200bn in contracts covering as much as 30 years.

But the Commons Public Accounts Committee (PAC) warned that, in too many cases, investors have made “eye-wateringly high” profits while taxpayers are trapped in expensive and inflexible contracts.

And it said that the contracts – which require fixed payments every year – are forcing public sector bodies such as NHS trusts to make deeper cuts to services during the current period of austerity.

The Treasury announced in December that it would carry out a “fundamental reassessment” of PFI in order to develop a new delivery model that draws on private sector innovation at a lower cost to the taxpayer.

The committee urged the Treasury to use the ongoing review of PFI to produce a “qualitatively different policy” which reflects the true level of risk taken on by private companies.

Under the current set-up, investors have made annual returns as high as 60 per cent by selling their shares in PFI projects, and there is evidence of “excess profits” being built into the initial pricing of contracts, said the report.

The PAC quoted a study suggesting that annual PFI charges paid by the public sector are 3-5 per cent higher than necessary because of inefficiencies in the way that the cost of providing equity is priced into the deals.

Public bodies using PFI to fund the construction and servicing of projects like hospitals, prisons or schools are required to show that the scheme will deliver better value for money than conventional procurement methods.

But the report said that the scheme had been treated by many as “the only feasible procurement route”, in part because it allowed the cost of projects to be kept off the balance sheet.

Once the long-term contracts have been signed, it is “very difficult” to make changes, noted the MPs.