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MPs say PFI alternatives should be considered

The government should consider alternatives to the “extremely inefficient” Private Finance Initiative funding model for public building projects, according to a committee of MPs.

The Treasury Select Committee – appointed by the House of Commons to scrutinise HM Treasury – released its report following an inquiry into PFI in July, which heard from a string of witnesses including Anthony Rabin, deputy chief executive of Balfour Beatty.

The resulting report slams PFI for new infrastructure, such as schools and hospitals, as “extremely inefficient” and highlights rocketing borrowing costs since the credit crisis.

PFI sees the private sector design, finance, build and operate a public sector project, usually on a contract of 25-30 years. The committee says the average cost of capital for a low risk PFI project is over 8 per cent, double that of government borrowing. 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.

Andrew Tyrie MP, chairman of the Treasury Select Committee, said PFI should only be used where projects can show clear benefits for the taxpayer.

He said: “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.”

Mr Tyrie said PFI should be brought on balance sheet and the Treasury should “remove any perverse incentives unrelated to value for money by ensuring that PFI is not used to circumvent departmental budget limits”.

The report also warns that poor investment decisions are continuing because PFI allows the public sector to make big capital investments without paying up front.

The report recommends that the Treasury should consult on alternative financing models, such as the Regulated Asset Base (RAB) model, which is largely used in utilities and is an income generating asset, regulated against risk. Another is Local Asset Backed Vehicles (LABV), which is often used in regeneration and is a public private partnership that raises investment on the back of public sector assets.

The report also says that design innovation was worse under PFI projects, while building quality was of a lower standard.

The UK Contractors Group stated in June that key areas of PFI need to be addressed, such as identifying an investment pipeline, reducing the time and cost of procurement and improving project management in the public sector.

But it also warned that transferring risk – which includes insurance and soft services – is unnecessary and “comes with a large price tag”. It also mentioned the RAB model as an alternative option. The UKCG said there are cheaper sources of finance which have not been well utilised such as pension funds, sovereign wealth funds and infrastructure funds.

The select committee says it has not seen any convincing evidence that savings and efficiencies during the lifetime of PFI projects offset the significantly higher cost of finance. And it says the current Value for Money appraisal system is biased to favour PFIs. It says investment could be increased in the long run if government capital investment were used instead of PFI.

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 Office for Budget Responsibility the treatment of PFI to ensure it cannot be used to ‘game’ the fiscal rules
  • the Value for Money assessment process should be subjected to scrutiny by the National Audit Office
  • the Treasury should review the way in which risk transfer is identified.