Treasury Committee investigates PFI

Apr 07, 2011

An inquiry into the future of the PFI by The Treasury Select Committee is underway. Calls for evidence began on the 8th of March and will continue until April the 28th.

The committee has said the inquiry will “build on the work already done by the National Audit Office [NAO] and the House of Lords Economic Affairs Committee [HoLEAC].”

As we noted last week, the NAO report on PFI housing and hospitals, conducted by the parliamentary public accounts committee, condemned PFI in broad terms. It said: “[W]e again found no clear and explicit justification and evaluation for the use of PFI in terms of its value for money.” It added that there were “no realistic alternatives to PFI”. The NAO report then recommended: “The use of PFI and its alternatives should now be robustly evaluated.

The Treasury Committee will ask six questions of PFI:

  • What are the strengths and weaknesses of different public procurement methods?
  • If PFI debt had been on-balance sheet rather than off-balance sheet would PFI projects have been used as much? How should PFI deals be accounted for?
  • How far can risk really be transferred from the public to the private sector?
  • Are there particular kinds of risk which are particularly appropriate for transfer through PFI deals, or particular projects which are suited for PFI?
  • What state guarantees are explicit or implicit in PFI deals?
  • In what circumstances are PFI deals suitable for delivery of services?

PFI’s history of failure has already answered some of these questions but some terms here may be unfamiliar. “Off-balance sheet” refers to an accounting method that hides the full cost of PFI programmes.

Because a percentage of the risk is transferred to the private sector, the government can express the annual payment to a private consortium as revenue, rather than capital expenditure. Thus, the cost is only revealed year by year, rather than totalled up at the beginning. New Labour exploited this in an attempt to deliver public infrastructure while appearing to balance the books.

Off-balance sheet accounting was the focus of investigation of the House of Lords Economic Affairs Committee who “condemned ministers for keeping two sets of departmental books, saying it had helped to obscure the hidden, long-term costs of private finance projects”.

The Treasury’s investigation comes in the wake of encouraging work by the NAO and HoLEAC and there are reasons to expect the committee may do a decent job.

Within parliament, there is some political will against PFI, illustrated by Tory MP Jesse Norman. Norman sits on the Treasury Committee and is an outspoken critic of PFI. Writing in the Sunday Times in February, he said: “[I]t has been a costly failure, because many of these projects are horrendously overpriced.

Last year, he launched a cross-party campaign called PFI-rebate which is calling for private contractors to refund the public purse by £500m, cash. More than 60 MPs have already joined the campaign.

But a glance at this figure in context reminds us of the scale of the PFI problem.

£500m represents 0.8% of the £64 billion in start-up costs of the approximately 800 PFI projects.  More accurately, when factoring the off-balance costs of PFI contracts, £500m equates to 0.2% of the public debt that will be incurred under PFI, currently put at some £267 billion by the Treasury.

Norman’s campaign is based on curbing the worst excesses of PFI and not, as GR wants to see, writing off PFI’s odious legacy of debt and ensuring the fair delivery of public services. Nonetheless, we welcome the committee’s inquiry (and our chance to submit evidence) and hope it demonstrates that PFI costs us all a lot more than we realise.

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