Coalition increases ‘discredited’ PFI schemes

Chancellor George Osborne has given the go-ahead for 61 PFI projects, worth a total of £6.9bn, since coming into power.

PFI, a way of using private finance and companies to build public infrastructure projects like hospitals and roads, exploded under the Labour Government but was roundly criticised by leading members of the then-opposition, including Mr Osborne and Nick Clegg.

Labour said the model allowed the financial risks of constructing large infrastructure projects to be borne by private companies, not the taxpayer, but before the election Clegg, now Deputy Prime Minister, branded them as a “a bit of dodgy accounting – a way in which the Government can pretend they’re not borrowing when they are, and we’ll all be picking up the tab in 30 years”.

We are working on reforms to the discredited PFI model. George Osborne, speaking in 2009

Mr Osborne said in 2009 that the model was “discredited”.

In a speech to the ABI, he said: “We are working on reforms to the discredited PFI model that are transparently accounted for and genuinely shift risk to the private sector.”

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However, the Treasury’s own figures, obtained by Channel 4 News, shows that more PFI projects across England and Northern Ireland are due to reach financial completion this year than when Gordon Brown was Prime Minister. The Coalition will sign off 40 PFI projects over 2011 – worth almost £3.7bn – compared to 38 in 2009 and 32 in 2008.

The numbers of projects are still well below the peak when Tony Blair was Prime Minister. In 2000, he signed off 67 projects worth £4.6bn.

Costs

There have long been questions over whether the PFI model offers good value for money for the taxpayer – and in the current economic situation, these are even more pertinent.

FactCheck: Does PFI offer the taxpayer value for money? 

Mark Hellowell, a PFI specialist at the University of Edinburgh, told Channel 4 News that the large gap between the cost of private sector borrowing and the cost of public sector borrowing meant that PFI now represented particularly poor value for money.

“The truth is the Coalition Government have made a decision that they want to expand PFI at a time when the value for money credentials of the system have never been weaker,” he said.

“The Government is very concerned to keep the headline rates of deficit and debt down, so it’s looking to use an increasingly expensive form of borrowing through an intermediary knowing the investment costs won’t immediately show up on their budgets.”

But the Treasury insists that PFI schemes would only get approval if they proved they were “good value for money”. It told Channel 4 News that the high number of PFI projects this year would have been even higher under plans inherited from Labour. It said that nearly £4bn-worth of projects had been cancelled.

In a statement given to Channel 4 News, the Treasury said: “PFI must only be used to deliver a project where it can be shown to be good value for money.

“Going forward all PFI projects will be considered in line with new guidance issued for major projects. This will set an approvals and assurance plan for each project that is based on the value and risk associated with the project, so ensuring all projects receive a suitable level of scrutiny.

“There is clear evidence of excesses in some of the older PFI contracts. We are determined to save money where we can which is why we are running a savings pilot at Queen’s Hospital, Romford. The PFI contract is being examined to identify ways of reducing ongoing costs in this contract. Lessons learned will be used to drive savings across the full portfolio of PFI contracts.”

“PFI is one option amongst many for delivering infrastructure projects.”

Background: what is PFI?
The Private Finance Initiative (PFI) was dreamt up by Lord Lamont in 1992 as a way of getting the private sector to build and run big public projects – like the Channel Tunnel rail link and the Jubilee Line underground extension – which would then be rented back to the state over several decades.

But within two years, the then-Shadow Chancellor Gordon Brown had enthusiastically embraced the idea, claiming: "We have stolen a march on the Tories".

Under complex deals, the projects would be carried out by private contractors, who'd own the structure for up to 35 years. The public sector body – such as the NHS or the MoD – paid the contractors annual interest, as well as paying off the capital sum and maintenance. PFI charges are also indexed to inflation, so when – as now – inflation increases, so does the cost of many of the deals.

Lord Lamont argues that Labour has abused the PFI, which, he told The Spectator, "was only for ventures like new bridges or toll roads, never for ordinary public spending".