NAO questions value for money of PFI contracts

Building work on the £335m Royal Liverpool Hospitals PFI project came to a halt this week, following Carillion's collapse.

Over the next 25 years, the government will pay nearly £200bn of public money to contractors under private finance deals, according to a new report by the government’s spending watchdog.

Coming hard on the heels of the collapse of public service provider Carillion, the National Audit Office (NAO) has also found a lack of evidence to show that private finance projects offer better value than public procurement. Instead, following a study of more than 700 existing public-private projects, it revealed that the cost of privately financing public projects can be 40% higher than relying only on government money.

According to the NAO, there are currently 716 operational private finance deals with a capital value of around £60bn. Annual charges for these deals were £10.3bn in 2016-17. The NAO estimates that even if no new deals are undertaken, future charges until the 2040s will amount to £199bn.

Reacting to the report, Labour’s Meg Hillier, chair of the public accounts committee, slammed PFI deals as an effective way of delivering public projects. “After 25 years of PFI, there is still little evidence that it delivers enough benefit to offset the additional costs of borrowing money privately,” she said. Hillier also criticised the current government’s PFI reform and the introduction of PF2. “I am concerned that The Treasury has relaunched PFI under new branding, without doing anything about most of its underlying problems. We need more investment in our schools and hospitals but if we get the contracts wrong, taxpayers pay the price,” she said.

The NAO looked at PFI deals drawn up over 25 years under Conservative and Labour governments, as well as the new PF2, which was introduced in December 2012 as an improved public-private financing regime by the David Cameron government. 

The report concluded that overall cash spending on private finance deals is higher than publicly financed alternatives and an analysis of the costs for building one group of schools revealed “costs are around 40% higher than the costs of a project financed by government borrowing,” said the NAO.

Labour’s  shadow chief secretary to the Treasury, Peter Dowd, said that the NAO justified his party’s pledge to end PFI and replace it with a more cost-effective way of funding public projects. The report, said Dowd, “raises more questions over the use of PFI in a week in which the Carillion scandal has left many fearing for their jobs and standard of their public services”.

Commenting on the NAO’s report, a government spokesman said: “We have reformed how we manage PFI contracts, and through PF2 have created a model which improves transparency and offers better value for money. Taxpayer money is protected through PFI and PF2 as the risks of construction and long-term maintenance of a project are transferred to the private sector.”

Dowd said Labour would “draw a line under the failed PFI approach to public investment and replace it by a transparent and accountable approach, which will reduce the costs and deliver significant savings to the taxpayer.”

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