Whitehall departments will have to make outstanding payments of almost £200bn over the next 25 years for private finance deals, even if no new deals are signed, the National Audit Office has revealed.
The public spending watchdog’s new report on Public Finance Initiative and its successor programme, published today but drawn up prior to the announcement of contractor Carillion’s liquidation, said there are more than 700 existing deals with charges forecast to total £199bn. Whitehall won’t have fully paid them off until the end of the 2040s.
Four departments – those for health and social care, education, transport and the Ministry Defence – accounted for 59% of the £10.3bn paid through the infrastructure investment model in 2016-17.
From 2017-18 onwards, the NAO estimated that Whitehall’s annual PFI payments will average £7.7bn over 25 years.
PFI is a financing model through which a private company pays for the construction of a public asset such as a school or road and the government repays it in instalments over the duration of the contract. It has been used since the 1990s.
Departments reduced their use of PFI after the 2008 financial crisis due to the higher cost of private finance, and increasing criticism of the model from politicians. A slightly reformed programme, PF2, was launched in 2012, and two departments – health and education – have agreed PF2 deals since then.
Despite the reduced use of PFI, the NAO said that “the legacy of deals have a long-lasting impact”, and there is a lack of evidence on their economic benefits.
As the government can raise finance at a lower cost than the private sector, the Treasury has noted that the economic case for PFI “rests on achieving cost savings in the construction or operation of the project; or through the delivery of a qualitatively superior project”, the report said.
But the Treasury has so far failed to collect data to allow it to quantify the benefits of PFI, according to auditors.
Responding to the new report, Meg Hillier, chair of the Public Accounts Committee, criticised “inflexible PFI contracts that are exorbitantly expensive to change”, and the fact that little evidence exists that PFI delivers enough benefit to offset the additional costs of borrowing money privately.
“I am concerned that Treasury has re-launched PFI under new branding, without doing anything about most of its underlying problems,” she added. “We need more investment in our schools and hospitals but if we get the contracts wrong, taxpayers pay the price.
“Decisions that have an impact on taxpayer-funded public services for decades need to be to thought through. There are lessons to be learnt and these need to be considered in the context of 20 years not just expediency today.”
Last year the NAO surveyed 11 departments with PFI deals, and found that “cost certainty was generally seen as a benefit of PFI”, while several departments said that “their capital budgets would not have been sufficient to cover new investment had they not used PFI”.
But some departments said that they found operational costs to be higher under PFI and reported “operational inflexibility was a drawback”, while seven of the 11 said they had reduced their use of PFIs largely due to “concerns about cost efficiency and value for money”.
“Most departments told us that they would be interested in buying out their PFI deals, but this requires upfront funding and is rare,” the report added.
It also said that the Infrastructure and Projects Authority has identified a need for more than £300bn of investment in social and economic infrastructure in the five years to 2020-21.
In a report published yesterday looking at the use of private finance to deliver infrastructure, the Institute for Government said that recent improvements have led to better private finance deals, such as for the Thames Tideway Tunnel sewerage scheme, but concluded that Whitehall still doesn’t have enough civil servants with commercial skills.