PFI short-changes taxpayers, says NAO

The Government's Private Finance Initiative came under fresh attack yesterday after Whitehall's spending watchdog disclosed that taxpayers had missed out on millions of pounds in savings made by PFI contractors.

There was further bad news for the controversial initiative after a leading contractor said it had decided to steer clear of traditional PFI schemes and London's Transport Commissioner Bob Kiley threatened a fresh legal challenge in Europe over the public private partnership for London Underground.

The National Audit Office said it had discovered that 61 per cent of PFI contracts let to date had no clause in them entitling taxpayers to share in the gains if the contractor refinanced the project on more favourable terms as the risks diminished.

In some cases, the NAO said there was evidence that refinancings had taken place without the relevant government department even being aware of what was going on.

To overcome this problem, fresh guidance was issued in July by the Government to enable refinancing gains to be shared 50:50 by taxpayers and project backers. It has also launched a code of practice designed to help departments claw back 30 per cent of future refinancing gains on early PFI deals. But Sir John Bourn warned that for the taxpayer to benefit, government departments would have to manage the new and highly complex arrangements effectively.

It highlighted a number of deals, such as one involving Premier Prisons, where the structure of the PFI was so complex and intricate that it would be hard for the Home Office and Prison Service to know if a refinancing had been carried out.

Meanwhile Capita, which is involved in PFI projects such as the operation of the Criminal Record Bureau, said it had no interest in taking on traditional schemes where contractors build and then run public services such as hospitals and schools. Rod Eldridge, Capita's chairman, said the high cost of bidding and the heavy upfront costs had deterred the company.

The legal action being threatened by Mr Kiley relates to London Transport's decision to advance £35.8m to the Tube Lines consortium to cover its costs of bidding.