The Government is to stop funding big Whitehall IT projects through the Private Finance Initiative following a series of high-profile failures including the automation of the Passport Office, the Criminal Records Office and state benefit payments.
The change of policy was disclosed in a report from the Treasury yesterday spelling out plans to "revise the scope of PFI and focus its use on where it works best".
Officials said that in future, IT programmes and small scale projects involving capital investment of less than £20m would be financed using conventional procurement methods. At the same time, a new raft of projects ranging from social housing and urban regeneration to waste and NHS primary healthcare centres would be brought into the PFI programme.
The move follows evidence that big IT projects have failed to deliver the benefits assumed when they were awarded under the PFI programme. The Treasury document, Meeting the Investment Challenge, says that only 22 per cent of IT projects let since the launch of the PFI had delivered 80-100 per cent of defined programme benefits. For non-IT projects the figure was 73 per cent.
Treasury officials said it was too early to say whether the change in strategy would lead to a decline in the value of projects financed through the PFI although they said it was likely that funding would peak in 2005-06.
A total of 563 PFI deals with a capital value of £35bn have been signed to date and total investment is expected to rise to more than £47bn by 2005-06. This year, investment through the PFI is expected to be about £4.6bn. Contrary to popular perception, the Treasury report says that almost 60 per cent of the cost of PFI projects is "on balance sheet" - in other words classified as public sector spending. Since 1997, the PFI has accounted for 10-14 per cent of public sector investment.
The list of IT fiascos is long, however. It ranges from the ill-fated Pathway project to automated benefit payments, which was scrapped after costing taxpayers almost £1bn, to the £230m 10-year deal to automate the Passport Office which was dogged by problems resulting in applicants having to wait up to three times longer for their passports.
Other disasters include the £150m automation of National Insurance and the computerisation of the Criminal Records Office, which led to a huge backlog of teachers waiting to be vetted before the start of the current academic year following last summer's murder of the two Soham schoolgirls.
A separate analysis of PFI projects, carried out by PricewaterhouseCoopers, shows that financing costs fell steadily between 1995 and 2001 as the market developed.