Numerous reports have been done looking into the
use and history of the Private Finance Initiative. We have not
attempted to do a definitive study of PFI; instead we have aimed
to provide a piece of work, relevant for likely early changes
in policy, in timely fashion. We hope that this Report will aid
the Treasury in the work they are doing to reform PFI, which they
are expected to report on in the autumn.
Private finance has always been more expensive than
government borrowing, but since the financial crisis the difference
between the costs has widened significantly. The cost of capital
for a typical PFI project is currently over 8%double the
long term government gilt rate of approximately 4%. The difference
in finance costs means that PFI projects are significantly more
expensive to fund over the life of a project. This represents
a significant cost to taxpayers.
We have not seen clear evidence of savings and benefits
in other areas of PFI projects which are sufficient to offset
this significantly higher cost of finance. Evidence we studied
suggests that the out-turn costs of construction and service provision
are broadly similar between PFI and traditional procured projects,
although in some areas PFI seems to perform more poorly. For example
we heard that design innovation was worse in PFI projects and
we have seen reports which found out that building quality was
of a lower standard in PFI buildings. PFI is also inherently inflexible,
especially for NHS projects. This is in large part due to the
financing structure and its costly and complex procurement procedure.
There remain significant incentives to use PFI which
are unrelated to value for money:
- The majority of PFI debt still does not appear
in government debt or deficit figures;
- Government departments can use PFI to leverage
up their budgets without using their allotted capital budgetthe
investment is additional and not budgeted for.
These incentives unrelated to value for money need
to be removed. Stricter rules and guidelines governing the use
of PFI must be introduced. In our view PFI is only likely to be
suitable where the risks associated with future demand and usage
of the asset can be efficiently transferred to the private sector.
We recognise that this may, over time, sharply reduce the aggregate
value of PFI projects but the higher cost of capital that remains
will be easier to justify to the taxpayer. For reasons discussed
in this Report the Government should be looking to use PFI as
sparingly as possible until the VfM (Value for Money) and absolute
cost problems associated with PFI at present have been addressed.
Consideration should be given to using more direct capital investmentthis
will not directly affect the fiscal mandate as it is borrowing
for investment, not for current spending.