The PFI was used to refurbish the London Underground (Creative Commons)

PFI: Watchdog warns UK taxpayers will hand over £200bn in next 25 years

18 January 2018 | By GCR Staff 1 Comment

The UK’s spending watchdog has today called into question the basic rationale of using public–private partnerships to deliver public sector projects, and calculated the cost to the taxpayer of existing schemes as $200bn between now and 2040.

The National Audit Office, which reports to parliament, says it is not presenting an evaluation of the private finance initiative (PFI), and its successor, PF2. However, it maintains that there is little evidence that contracting out infrastructure work reduces costs in the construction phase and the cost of finance has been between 2% and 5% higher than it would have been if government bonds has been used.

It adds that a 2% difference can more than double repayment costs on a 30-year concession.

Other extra charges include individual insurance arrangements. Research by auditors has found that private investors who charge public bodies for insurance on each project have not passed on 15 years worth of lower insurance costs.

“Many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change”– Meg Hillier, House of Commons’ public accounts committee

There is also the cost of using external advisers rather than civil servants, administrative and lending fees as well as shareholder dividends, asset maintenance and, in some cases, services such as cleaning.

These charges can add up to a considerable sum. The report says: “Our analysis of the data for one group of schools shows that PF2 costs are around 40% higher than the costs of a project financed by government borrowing.

“The [House of Commons] Treasury Committee undertook a similar analysis in 2011, which estimated the cost of a privately financed hospital to be 70% higher than the public sector comparator.”

Meg Hillier, the chair of the House of Commons’ public accounts committee, said there was little evidence that the benefits of using the private finance initiative, or its successor, PF2, outweighed these extra costs.

She said: “Many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change. I am concerned that the Treasury has relaunched PFI under new branding, without doing anything about most of its underlying problems.”

The benefits of outsourcing public sector projects have traditionally been seen as increasing the available pool of capital for investment, the transferral of risk to the private sector entity during construction, and better management during the operational phase, as the firm running the asset seeks to maximise its profit by creative efficiencies.

These have been called into question by the failure of Carillion, one of the UK’s main undertakers of PFI and PF2 schemes, and the kind of company that theory says would outperform a public sector equivalent. The report was prepared before Carillion’s collapse.

Before the Carillion debacle, there were signs that the private sector specialists were becoming unhappy with the system. In November last year, Olivier Brousse, the chief executive of PFI investor John Laing, told the Financial Times that it had lost “public goodwill” and needed “reinventing”.

Any move to curb PF2 now, however, would be a case of shutting the stable door after the horse has bolted. The legacy of the policy is more than 700 operational PFI and PF2 projects, with a capital value of around £60bn ($83bn). Annual charges for these deals amounted to £10.3bn in 2016-17, and even if no new deals are signed, the NAO says, charges will continue until the 2040s, and will amount to £199bn.

The report adds that the basic feature of PFI, including higher debt and interest repayments, shareholder dividends, and asset maintenance costs, are all replicated by PF2.

The NAO’s findings represent something of a change of opinion. In a 2003 survey it concluded that “the PFI approach is bringing significant benefits to central government in terms of delivering built assets on time and for the price expected by the public sector”.

And in a 2010 report it said: “Our examination of PFI hospital contracts indicates that most are well-managed and [are] achieving the value for money originally envisaged.

The policy was developed during the chancellorship of Kenneth Clark in the early 1990s, with the initial aim of filling a $50bn hole in the public sector borrowing requirement.

It later became the preferred – and in many cases the only – procurement route for the Labour government that took office in 1997. Very large scale schemes, such as Schools for the Future, a plan to renew every secondary school in England and Wales, were financed using it.

Image: PFI was used to refurbish the London Underground (Creative Commons)

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