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Taxpayers to stump up billions for private finance deals into 2040s

Costs for building hospitals and schools far higher than public sector alternatives

Caroline White

Thursday, 18 January 2018

Annual charges for private finance deals on public sector contracts amounted to more than £10 billion in 2016-17, says a briefing* published today by spending watchdog, the National Audit Office (NAO).

Future charges will amount to nearly £200 billion, says the NAO, which had completed the work on the report before the announcement on Monday that construction company Carillion had gone into liquidation.

This report presents information on the rationale, costs and benefits of the Private Finance Initiative (PFI); its use and impact; ability to make savings from operational contracts; and the introduction of PF2.

Most (more than 90 per cent) of the government’s capital investment is publicly financed. But since the 1990s the public sector has also used private finance to build hospitals and schools in Public Private Partnerships (PPPs).

In a PFI or PF2 deal—the successor to PF1—a private finance company or Special Purpose Vehicle (SPV) is set up and borrows to construct a new asset. The taxpayer then makes payments over the contract term, which typically last 25 to 30 years, to cover debt repayment, financing costs, maintenance and any other services provided.

The government reduced its use of PFI after the 2008 financial crisis, as the cost of private finance increased. Parliament also became increasingly critical of the model.

In 2011, HM Treasury consulted on reform. It made some changes and re-launched the model as PF2 a year later. So far, only the Department of Health and Social Care and the Department for Education have used PF2.

There are currently over 700 operational PFI and PF2 deals, with a capital value of around £60 billion, says the NAO.

Annual charges for these deals amounted to £10.3 billion in 2016-17. Even if no new deals are entered into, future charges which continue until the 2040s amounting to £199 billion, it says.

The figures in today’s report, which states that financing projects like schools and hospitals privately costs taxpayers billions of pounds more than public sector alternatives, have sparked anger.

Dr Chaand Nagpaul, BMA council chair, said: “This report confirms the longstanding and widespread concerns about PFIs—that they are a drain on the public purse, reducing available resources for frontline patient care— and with private companies gaining at the expense of taxpayers and patients.

“As we saw with the collapse of Carillion this week, there is often little or no safety net for when these deals go wrong. It can cause huge disruption to patient services, and taxpayers are unfairly expected to foot the bill.

“With the cost of financing hospitals 70 per cent more under PFI than if they were financed through government borrowing, it is clear that the government needs to move away from PFI deals and should be properly funding new NHS capital projects to ensure that public money remains in the NHS to deliver patient care”

* PFI and PF2, a report prepared under Section 6 of the National Audit Act 1983 for presentation to the House of Commons in accordance with Section 9 of the Act, 2018.

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