Private Finance Initiative

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 budget—the 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 investment—this will not directly affect the fiscal mandate as it is borrowing for investment, not for current spending.