Taxpayers will foot Private Finance Initiative bill

In a typical PFI project, private sector parties manage and finance the design, build and operation of a new facility, such as schools and hospitals.

Higher borrowing costs since the credit crisis mean that PFI is now an extremely inefficient method of financing projects.

Poor investment decisions may continue to be encouraged across the public sector, however, because PFI allows Government departments and public bodies to make big capital investments without committing large sums up front. There is no convincing evidence that savings and efficiencies during the lifetime of PFI projects offset the higher cost of finance.

The current Value for Money appraisal system may be biased to favour PFIs and there are problems with the way costs and benefits for such projects are currently calculated. Investment could be increased in the long run if government capital investments were used instead of PFI. Paying off a PFI debt of £1 billion may cost taxpayers the same as paying off a direct government debt of £1.7 billion.

Recommendations include:

• The Treasury should consider scoring most PFIs in departmental budgets in the same way as direct capital expenditure.
• The Office for Budget Responsibility (OBR) should discuss with the Treasury the treatment of PFI to ensure that PFI cannot be used to ‘game’ the fiscal rules.
• The Value for Money assessment process should be subjected to scrutiny by the National Audit Office (NAO).
• The way in which risk transfer is identified should be reviewed by the Treasury.

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