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National Audit Office urges government to find alternatives to private finance initiatives to fund major infrastructure projects
The government's spending watchdog has issued its strongest health warning to date over the use of PFI deals to build new schools and hospitals, saying the government should urgently find alternative ways to invest in major infrastructure projects after some costs spiralled out of control.
Private finance initiatives (PFI), whereby banks and construction companies pay for public sector capital projects then lease them back for a period of up to 30 years, have become increasingly expensive since the credit crisis and the government should consider slowing down the number of new deals it enters into, the National Audit Office says.
The Treasury may be tempted to continue new projects, which allow big capital builds without an initial outlay from the public purse, because it keeps spending off the balance-sheet, the report says. But the ongoing costs have not always provided best value for money, instead locking the government into hugely expensive deals for decades.
The Tories in opposition were highly critical of PFI deals and the coalition in the last few months has announced changes in protocol to improve the way deals are struck. But research last week suggested that George Osborne has so far signed off more PFI deals than were signed in any of the previous three years.
"The NAO concludes that, in the current climate, the use of private finance may not be as suitable for as many projects as it has been in the past," the report says.
"There has not been a systematic value for money evaluation of operational PFI projects by departments. There is, therefore, insufficient data to demonstrate whether the use of private finance has led to better or worse value for money than other forms of procurement. The NAO calls on the Treasury and departments to identify alternative methods for delivering infrastructure and related facilities services, building on the lessons learned from PFI, to maximise value for money for government."
The cost of PFI soared during the financial crisis, with a typical building project increasing in price by between six and seven percentage points as credit became more expensive. The worst case recorded was the scheme to widen the M25, the cost of which rose by 24% following the credit crisis.
The NAO says the government must improve the civil service's capability to manage PFI deals and end dependence on consultants in procuring and overseeing the deals, which can be extremely complex.
Richard Bacon, a Conservative member of the public accounts committee, the parliamentary group that vets the work of the NAO, said: "This report should be required reading for senior civil servants whenever a government department even hints that it may wish to use the private finance initiative."
A Treasury spokesperson said: "The government is taking steps to address some of the problems previously identified in PFIs. Going forward, all PFI projects will be considered in line with new guidance issued for major projects; this is based on the value and risk associated with the project, so ensuring all projects receive a suitable level of scrutiny.
"The government is also examining ways of reducing ongoing costs in PFI contracts."
