Ministers must reveal costs of public-sector projects, warn peers

Treasury's presentation of figures is misleading, says House of Lords committee

The real cost to taxpayers of private finance initiatives using public money should be published to end the Government's "misleading" presentation of the figures, an influential parliamentary committee said yesterday.

The House of Lords economic affairs committee condemned ministers for keeping two sets of departmental books, saying it had helped to obscure the hidden, long-term costs of private finance projects (PFPs), such as those used to build hospitals and schools.

While critics of PFPs often claim they are a device to place public-sector spending "off the balance sheet", the committee said between £170m and £410m from the public purse had been lost from the collapse of Metronet Rail, the public-private partnership which held a contract to maintain, renew, and upgrade the infrastructure on nine London Underground lines.

The peers concluded in their report: "The state should not guarantee large amounts, and a high proportion, of debt as a means to make highly geared PFPs happen. We recommend that the Government should examine what additional risks now borne by the public sector can sensibly be transferred to the private sector, acknowledge the lesson of experience that the risks of exceptionally complex, large projects are not suitable for transfer to the private sector, and produce comprehensive revised policy guidelines."

Lord Vallance, the Liberal Democrat committee chairman and a former BT chief executive, said: "PFP should not be used as a means of getting public-sector debt 'off balance sheet'... The Government should publish figures for PFP liabilities alongside figures for public sector net debt. This would help alleviate suspicions that PFPs are favoured because they misrepresent and underestimate the level of public-sector indebtedness."

Private finance initiatives (PFIs) were announced in 1992 by Norman Lamont, the then Conservative chancellor, and more than 800 schemes with a capital value of about £64bn have been launched. Their use was greatly accelerated when Gordon Brown took over the Treasury in 1997.

The Treasury says about 70 per cent of new hospital projects and about 60 per cent of new schools have been delivered using PFIs. However, the credit crunch has reduced access to finance and pushed down PFI numbers. Last year, the value of completed PFI deals was reported to have been £4.2bn – the lowest for a decade.

The Lords' committee agreed that "rapid growth of PFPs over the past decade or so is striking and has played a significant role in the expansion and renewal of the nation's infrastructure". Delivery of schemes had also been improved, they said, adding: "There is strong evidence that PFPs have a better record of on time and on budget delivery than traditionally procured projects."

However, they added: "Too many PFPs are delivered late, albeit [that] contractors rather than public authorities are liable to the consequent financial penalties... There is some concern that construction companies which can sell their stakes in PFPs shortly after a project is operational may build a lower quality asset.

"The Treasury's requirement that departments should run two sets of accounts, though an understandable response to the use of one accounting system within departments and another nationally, is far from ideal."