NAO challenges value of PFI contracts

Aaron Morby 4 years ago
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The Government’s spending watchdog has given its verdict on PFI warning that there is a lack of evidence to show private finance projects offer better value than public procurement.

Carillion's flagship PF2 Midlands Metropolitan hospital where construction is a year behind and cost soared
Carillion's flagship PF2 Midlands Metropolitan hospital where construction is a year behind and cost soared

The NAO warns that taxpayers will shell out nearly £200bn meeting agreed future charges on the existing PFI projects that are commissioned.

It says there is little evidence that PFI even delivers greater certainty of outturn cost during construction and warns that the cost of finance can be 2-3.75% higher than from state borrowing.

The critical report is a blow for the construction industry which enjoyed surging orders in the early years and has delivered 716 PFI/PF2 projects, with a total value of £60bn.

It was written before the collapse of Carillion, which held numerous PFI contracts and has swung the focus onto the value of operation maintenance and cost of construction on flagship projects for Government.

Repayment for these projects cost the taxpayer £10.3bn last year, the report found. Even if no new deals were agreed, the cost of these projects is forecast to reach £200bn by the 2040s, the report says.

The Department for Education, which delivers less risky projects, has found that the financing route has little or no effect on the construction costs of schools being built.

The NAO suggests that the risk of construction cost overruns could also be transferred using a shorter private finance contract that only covers the construction period but this option has never been pursued in the UK.

On claims that PFI bring operational efficiencies, the NAO said its survey of four Government departments last year revealed three considered operational costs were higher under PFI and the other department considered they were the same.

They tended to consider that maintenance standards were higher under PFI.

The NAO also said the Government had appeared to have cooled on PF2 with only six projects reaching financial close since it was launched in 2012.

These are the Priority School Building Programme, which will build 46 schools in five batches, and the Midland Metropolitan Hospital where Carillion was running over a year late on construction.

Despite the Government promising to deliver an expanded pipeline of PF2 there are currently no projects in procurement although Highways England is considering use of PF2 to finance the £1.3bn A303 Stonehenge tunnel and roads and the £1.5 billion approach roads to the Lower Thames Crossing.

“Decisions that have an impact on taxpayer-funded public services for decades need to be thought through,” said Meg Hillier, Chair of the Committee of Public Accounts. “There are lessons to be learnt and these need to be considered in the context of 20 years not just expediency today.”

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