Henry Mance and George Parker in The Financial Times
Britain has incurred billions of pounds in extra costs for no clear benefit by using the private finance initiative (PFI) to build much of its infrastructure, the National Audit Office has said.
Recent PFI contracts — for schools, hospitals and other facilities — are between 2 and 4 per cent more expensive than other government borrowing, and involve significant additional fees, the watchdog said in a report published on Thursday.
The GMB union said the NAO’s report showed that PFI was a “catastrophic waste of taxpayers’ money” and projects were “financial time bombs”.
Political criticism of PFI has intensified this week following the liquidation of Carillion, a leading provider. Jeremy Corbyn, the Labour leader, told parliament on Wednesday that Carillion was evidence of a “broken system” and “costly racket”, and called for some companies “to be shown the door”.
Although Theresa May, the prime minister, accused Labour of opposing “the private sector as a whole”, some Conservatives have joined in criticism of PFI.
Former cabinet minister David Willetts, a one-time Treasury official, was a key promoter of the scheme, but this week admitted that some recent projects had gone awry. Carillion’s collapse exposed cases where, in the end, the risk reverted to the government, which had to maintain public services, he said.
Labour has promised to bring many PFI contracts back in-house “if necessary” if it wins the next general election. But terminating PFI deals could involve billions of extra fees because most contracts do not include break clauses.
In one example, Liverpool City Council is due to pay a further £47m in fees for Parklands High School in Liverpool, even though the school cost only £24m to build and was shut after 12 years owing to poor teaching standards.
“Many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change,” said Meg Hillier, chair of the Commons public accounts committee.
Breaking these contracts would involve settling interest rate swaps. The largest 75 PFI schemes would cost £2bn to break, a quarter more than the outstanding debt, even before compensation to shareholders is considered, the NAO said.
PFI can be attractive to government as recorded levels of debt will be lower five years ahead even if it costs significantly more over the full term of a 25-30 year contract,
National Audit Office
Stella Creasy, a Labour MP, said the government should negotiate directly with PFI providers or impose a windfall tax on the special purpose vehicles (SPVs) involved. “It might seem that our hands are tied, but they’re not. What we can do is use our tax system,” she said.
PFI was devised in the UK in 1989 but its use jumped while Tony Blair was prime minister in the late 1990s and early 2000s.
It refers to deals where SPVs are set up to finance construction projects. The SPV borrows money to fund the construction, but that debt is mostly not included on the public sector balance sheet. In the last financial year, Britain paid £10bn in PFI fees; future charges amount to £199bn spread over the next three decades.
“PFI can be attractive to government as recorded levels of debt will be lower over the short to medium term (five years ahead) even if it costs significantly more over the full term of a 25-30 year contract,” said the NAO.
Off-balance-sheet public-private partnerships, such as PFI, now represent 1.7 per cent of Britain’s gross domestic product, the third highest ratio in Europe, behind Portugal and Hungary.
The NAO report detailed how the government’s decision-making was slanted in favour of PFI. While the US and Germany compare the cost of private finance with government borrowing costs, Britain’s value-for-money assessment compares it instead with the government discount rate of 3.5 per cent, which is significantly higher.
Overall, any public body “has an incentive to show that private finance offers better value for money than the [public sector comparator] as unless alternative capital funding is made available the project is unlikely to proceed,” the NAO said.
The NAO found that, after former chancellor George Osborne’s relaunch of PFI in 2012, the “fundamentals of the financing structure and contract remain the same”. Ms Hillier said she was concerned the Treasury had not addressed “most of [PFI’s] underlying problems”.
The Treasury argued that PFI contracts have benefits — including making the private sector bear the risk of cost overruns, and introducing an incentive to reduce long-term running costs.
But the NAO collated evidence suggesting that such benefits have failed to materialise. It cited research by the Treasury select committee, which found PFI projects charge higher prices to cover unforeseen costs, and by the Department for Education, which found a school’s construction cost was not affected by how it was financed.
On the question of efficiency, three government departments surveyed by the NAO said operating costs were higher under PFI, while one department said the costs were the same.
The additional costs of PFI were easier identify. Deals and equity investors in agreements signed since 2013 are forecast to receive returns of between 2 and 4 per cent above government borrowing. But on some deals the level is above 5 per cent. In addition, PFI contracts entailed other costs — including fees for arranging the borrowing, which average around 1 per cent of the principal, and management fees, amounting to 1-2 per cent of the total payment.
The value of new PFI deals peaked in 2007-08 at £8.6bn and has declined since, a trend that the NAO attributed to the greater cost of private finance after the financial crisis.