The Treasury Select Committee (TSC) has recently directed its fire at PFI deals – and not before time. PFI became widely adopted in the early 1990s and has expanded remorselessly ever since. In essence, it is a procurement initiative for large capital projects that seeks to combine the Government’s low cost of borrowing with the private sector’s ability to deliver far more efficiently.
In recent years, it has been widely adopted in financing NHS, transport and education projects. However, as the TSC has pointed out, PFI has several ‘stings in its tail’.
First, PFI has been regularly used to side-step government expenditure targets. Secondly, many PFI projects, particularly those where the private sector input is high, are accounted for off-balance sheet. Hence, the TSC has estimated that a further £35 billion – no mean sum – has effectively been added to the UK’s burgeoning national debt. Thirdly, because of the hire purchase element of many PFI deals, the pay-back period is often very extended and highly expensive.
Advocates of PFI – many of whom work on public procurement projects – argue that PFI has significant advantages including cheaper financing. Whilst 10-year gilt yields are close to record lows currently, it is very debatable whether the cost of capital for PFI deals is markedly cheaper.
In any event, the Government should not use PFI financing to circumvent public expenditure budgetary controls. Nor should it use PFI unless the case is quite compelling – a scenario that seems to have applied to few projects since 2000.
More generally, over the next decade, the Government should clean up its own balance sheet so that investors can be reassured that Enron-style financial accounting techniques are not being adopted.
Aside from some £35 billion of PFI liabilities, this would also extend to accounting for the massive c£1 trillion public sector pension liability. But unwinding outstanding PFI liabilities would be a good start.