Treasury committee demands overhaul of 'poor value' PFI

An influential committee of MPs launched a stinging attack on the private finance initiative (PFI) yesterday and claimed it offered taxpayers "poor value for money".

The Treasury select committee also called for debts built up through the initiative to be brought on to Britain's balance sheet – a move that would increase the national debt.

Its analysis said that because of the credit crisis, most PFI schemes – including many new schools and hospitals – were hugely inefficient, with the cost of repaying a £1bn debt under PFI equivalent to paying off a £1.7bn direct Government debt.

The average cost of capital for even low-risk PFI projects is more than 8 per cent – double that of government gilts. There was no "convincing evidence that savings and efficiencies during the lifetime of PFI projects offset the significantly higher cost of finance", the MPs' report added.

Bringing PFI debt on to the country's balance sheet would add billions to the national debt and potentially put at risk the UK's AAA credit rating.

But Andrew Tyrie, the Tory chairman of the committee, said: "PFI means getting something now and paying later. Any Whitehall department could be excused for becoming addicted to that.

"We can't carry on as we are, expecting the next generation of taxpayers to pick up the tab. PFI should only be used where we can show clear benefits for the taxpayer."

Mr Tyrie called on the Treasury to "remove any perverse incentives unrelated to value for money by ensuring that PFI is not used to circumvent departmental budget limits".

PFI projects have not only been attacked for their ultimate cost to the public purse but for saddling schools and hospitals with billions of pounds of debt and huge interest bills.

Dr Mark Porter, of the British Medical Association, said: "People rightly focus on the huge costs of PFI. But the main problem in the NHS is the inflexibility of repayment contracts.

"So many hospitals have modern facilities and buildings but are stuck with a very rigid fixed cost structure.

"That can be sustainable when times are good, but the NHS is going through huge financial cuts. Trusts find they don't have real freedom to make financial decisions based on the best interests of patients."

The MPs urged stricter criteria for assessing PFI projects and for private finance providers to take more risk.

An aide to the Chancellor, George Osborne, said: "We've been saying for a long time that the PFI system we inherited wasdiscredited and nothing more than a ploy to keep expensive projects off the balance sheet."

Funding crisiscould forceward closures

Barts and the Royal London hospitals are rightly renowned for their clinical excellence. The financing for the buildings where the miracles happen, less so.

In some quarters, the private finance initiative (PFI) entered into by Barts & the London NHS Trust is seen as the poster child for what is wrong with the PFI system. The £1.1bn project is intended to bring the hospitals into the 21st century. The London, in particular, is showing its age, with a world renowned trauma facility located in its decaying and moth-eaten buildings.

But the new, 21st century facilities, will hit the trust's budget with huge interest charges. According to the Trust's Full Business Case, the annual payment for the new hospitals, and associated services such as facilities management, under the PFI deal is £101m. At 2006/2007 prices. The interest is payable for 42 years.

But it gets worse: the trust has been forced into rethinking the plans because of the financial difficulties in the NHS. These have led to the tabling of a controversial plan for mothballing two floors at The Royal London (192 beds out of 905) and one at Barts' (58 beds out of its 343-bed complement).

The trust yesterday said that its contractual committment to regular reviews on quality and costs would ensure it is getting the best deal possible from the PFI.

"People of east London will shortly have access to fantastic new hospitals serving a population which has some of the most challenging health needs of any in the UK," it added.