Hypocritical Tories still relying on PFI

A new report by UNISON, the UK’s largest union, released today (16 May), reveals that, despite heavily criticising the Private Finance Initiative (PFI) in opposition, the Tories are relying on it in power.However, the credit crunch means that the business case for PFI is weaker than ever; a bad deal for the taxpayer has just got a lot worse.In practice, the Tories are not only expanding PFI, but rejecting new, cheaper funding models. On the same day that a huge PFI hospital was signed off in Liverpool, the government rejected plans for a hospital on Teeside, funded under a new procurement model.UNISON, a heavy critic of PFI under Labour and the Tories, is calling on the government to finally ditch PFI, and make projects cheaper by funding them publicly.Dave Prentis, UNISON General Secretary, said:“Despite criticising PFI in opposition, the Tories have pushed it forward in power, signing off new projects worth more than £6 billion.“This is a chronic waste of public money. In the post credit crunch finance markets, the cost of borrowing has shot up, making the case for PFI weaker than ever. Projects searching for finance are now at the mercy of the banking sector, which is exploiting its monopoly position, even though PFI projects have not got any riskier. “Our analysis proves that Government borrowing from capital markets would be far more cost-effective, saving hundreds of millions on one hospital alone. And as cuts hit communities, and hospitals and schools shed jobs and wards, the case for more efficient ways of funding major public building projects gathers pace. “Tory efforts to tackle the obscene profits made by PFI companies are a sham. In practice, the government is rejecting new finance models, exchanging very short-term gain, for longer-term pain.”The reports main points:- Despite criticising PFI in opposition and in government, the coalition has a huge PFI programme in operation with a capital value of £6.9 bn, covering more than 60 projects. The cost of this will increase as the projects reach the procurement stage.- The off balance-sheet status of PFI is still the main driver, especially in the face of massive public spending cuts.- However, the case for PFI is weaker than ever. The cost of PFI has risen astronomically following the financial crisis. PFI is at the mercy of the banking sector which has exploited its near monopoly position to raise the cost of finance, despite there being no change in the risk profile of projects.- The gap between the rate at which government and the private sector can borrow has widened dramatically, shown on page 11 of the report, tracing back this gap since Jan 2008. For example, the overall rate of return projected on the Royal Liverpool and Broadgreen PFI scheme is about 8.5%, compared to a current long term gilt rate of about 4%. Using the current gilt rate to discount the projected returns to investors on this scheme shows the cost of private finance currently an additional £160 million in net present cost (NPC) terms.- The case for public funding has strengthened. The report puts forward other potential models, such as gain sharing from equity sales and from maintenance over-spend as more cost efficient options. Case studies in the report include:- The Royal Liverpool and Broadgreen University hospital on Merseyside is one of the largest PFI projects to be tendered. The total cost of the scheme is £1.24bn and would have been £733m under conventional procurement (p10).- On the same day as the Liverpool hospital was approved, the coalition government rejected a new procurement model on Teesside. The hospital in Hartlepool would have used 91% public finance and 9% equity - the latter to take on construction risk. A much smaller PFI scheme is now being planned.