NAO slams lack of analysis of private finance initiative deals

The National Audit Office (NAO) has published a scathing report on the rationale, costs and benefits of the government’s private finance initiative (PFI) which says there is still a lack of data available on the benefits of this approach to procurement, and warns it is difficult to establish whether it offers value for money

The report, prepared before the collapse of Carillion which held a number of such contracts, looks at the PFI programme and its successor, PF2, which are forms of public private partnerships (PPPs). In a PFI or PF2 deal, a private finance company – a special purpose vehicle (SPV) – is set up and borrows to construct a new asset such as a school, hospital or road. The taxpayer then makes payments over the contract term (typically 25 to 30 years), which cover debt repayment, financing costs, maintenance and any other services provided.

There are currently over 700 operational PFI and PF2 deals, with a capital value of around £60bn. Annual charges for these deals amounted to £10.3bn in 2016-17. The NAO states that even if no new deals are entered into, future charges which continue until the 2040s amount to £199bn.

The audit watchdog’s report questions whether PFI cuts construction costs on projects, pointing out that some of the benefits could also be achieved by using fixed price contracts, without a long-term private finance contract. It says the Department for Education is currently collecting data and developing methodology and has, so far, found that the financing route has little or no effect on the construction costs of schools.

The NAO’s work on PFI hospitals found no evidence of operational efficiency: the costs of services in the samples analysed were similar, based on data more than 10 years old. More recent data from the NHS London procurement partnership shows that the cost of services, like cleaning, in London hospitals is higher under PFI contracts.

The NAO also points out that the private finance model can result in additional costs, including insurance, the cost of external advisors, fees to lenders and SPV management and administration fees, as well as the higher cost of finance. 

Its analysis of these data for one group of schools shows that PF2 costs are around 40% higher than the costs of a project financed by government borrowing, while the Treasury committee estimated in 2011 the cost of a privately financed hospital to be 70% higher.

The report states that, given this background, the economic case for the model rests on achieving cost savings in the construction or operation of the project; or through the delivery of a qualitatively superior project, but the Treasury currently lacks a methodology for assessing whether this is the case.

Meg Hillier, chair of the public accounts committee, said: ‘After 25 years of PFI, there is still little evidence that it delivers enough benefit to offset the additional costs of borrowing money privately. Many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change.

‘We need more investment in our schools and hospitals but if we get the contracts wrong, taxpayers pay the price.’

NAO report on PF1 and PF2 is here.

Report by Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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