UK PFI strategy justified in short term, report finds

A report from the National Audit Office, which audits the UK government’s accounts, has concluded that the high cost of PFI projects enabled last year by the new Infrastructure Financing Unit were justified by the need to stimulate the economy. But going forward, the NAO recommends stricter criteria being applied to projects.

The National Audit Office (NAO), which audits UK government departments and then reports to Parliament on whether they are providing value for money, has concluded that the Infrastructure Financing Unit (IFU) helped the government to stimulate the economy by reactivating the lending market for private finance initiative (PFI) projects that had been put in doubt as a result of the credit crisis.

NAO: PFI help justified
but not to be continued

By late 2008, the report notes, bank lending was so restricted that no PFI projects were viable. The IFU, which was launched by the previous Labour government in March 2009, deployed public money in order to help get projects off the ground. It subsequently helped to finalise, for example, the £640 million (€762 million; $989 million) Greater Manchester waste treatment project.

The report says that the Treasury and other government departments were, during 2009, giving priority to closing deals at prevailing market rates, even if this meant the public sector paying more and the banks carrying less risk. Analysis by the NAO suggests that higher financing costs increased the annual charge of PFI projects by 6 to 7 percent and that, over 30 years, between £500 million and £1 billion of higher cost has been built in (partly offset by an increased public sector share of refinancing gains).

The report acknowledges that the extra financing costs provided value for money “in the short term” by achieving the government’s aim of helping to stimulate the economy but adds that the Treasury “should not presume that continuing the use of private finance at current rates will be value for money”.

Amyas Morse, head of the NAO, said in a statement: “By introducing an Infrastructure Finance Unit, the Treasury helped reactivate the market and prevent the stalling of many government projects. During 2009, the cost of finance built into the PFI programme at that time was value for money, but there is no guarantee that it will remain that way. Now that the market is providing finance again, a project by project review should be carried out using stricter criteria, to establish the most appropriate funding methods.”