Letter: PFI too dear?

Sir: You report "Mandelson under fire on bonuses" (report, 17 September) on the decision of the TUC conference to oppose the Private Finance Initiative. This decision follows John Prescott's comments at the TUC regarding PFI earlier in the week.

Specifically, Prescott argued that PFI is essential to allow more money to be allocated for health and education. In fact, and on the basis that the Government generally allocates all the spare cash it has to health and education, the use of PFI reduces the amount available for health and education. This is because PFI is a more expensive way for the public sector to acquire the use of assets, as compared with the public sector borrowing funds and buying the assets direct.

Take the case of a PFI project to provide the public sector with the use of an asset with an estimated economic life of 20 years. Over the 20-year period, the PFI investor has to recover the capital cost of the asset, and earn a return on the net funds invested. While the details of return enjoyed on PFI contracts must - on the grounds of commercial confidentially - remain secret, it is reported that at least one City PFI fund manager is offering returns of up to 15 per cent per annum to investors. By contrast, the public sector can currently borrow via a 20 year gilt at around 5 per cent per annum. Treasury figures suggest that the value of assets procured for the use of the public sector in the years 1997/98 to 2000/01 will total about pounds 12bn.

Assuming an average rate of return for PFI investors of just 10 per cent per annum, then for every pounds 10bn net assets in use under PFI at any one time, the cost to the taxpayer is pounds 500m per annum higher than if the assets had been acquired by the public sector directly. This effectively represents money diverted from hard-pressed education and health budgets in the long run.

The Treasury might like to reflect on this every time a new PFI contract is signed.

MC FITZPATRICK

Head of Economics

Chantrey Wellacott

London WC1