The private finance initiative “cannot be relied upon to provide value for money” and requires “substantial” reform, MPs have said.
The Commons Treasury committee said the long-term costs of PFI deals were now significantly higher than conventional government borrowing and it urged ministers to use them “as sparingly as possible” until new rules are in place.
Committee chairman Andrew Tyrie called on the Treasury to remove the “perverse incentives” which encouraged government departments to use PFI rather than more efficient means of financing.
In particular, the committee said PFI liabilities - which are currently treated as “off balance sheet” - should be recorded in the national accounts, even though this would add an estimated £35bn to the deficit.
It said PFI was particularly attractive to departments on restricted budgets as the initial costs were lower, even though the impact was much longer lasting with the build up of big commitments against future budgets before they were even allocated.
The result, it warned, was to encourage “poor investment decisions” by departments “without due consideration for their long-term budgetary obligations”.
“The incentive for government departments to use PFI to leverage up their budgets, and to some extent for the Treasury to use PFI to conceal debt, has resulted in neglecting the long-term value-for-money implications,” it said.
“We do not believe that PFI can be relied upon to provide good value for money without substantial reform.”
The committee said that while PFI had always been more expensive than traditional government borrowing, the gap had widened “significantly” since the financial crisis.
The cost of capital for a typical PFI project is now put at 8 per cent - double the long-term government gilt rate of around 4 per cent. Paying off a PFI debt of £1bn could cost taxpayers the same as paying off a direct government debt of £1.7bn.
“We believe that a financial model that routinely finds in favour of the PFI route, after the significant increases in finance costs in the wake of the financial crisis, is unlikely to be fundamentally sound,” the committee said.
“Continuing to use an inefficient funding system such as PFI is likely in many cases to increase the overall burden on taxpayers for the provision of public sector capital projects.”
The committee also warned that the supposed transfer of risk to the private sector investors under PFI could be “illusory” as the Government ultimately remained responsible for the provision of the public services involved.
While the long-term nature of PFI contracts was supposed to incentivise the providers to maintain buildings to a high standard, the committee said it had seen no evidence that it produced better results.
An aide to chancellor George Osborne said the coalition was committed to reforming the PFI system.
“We have been saying for a long time that the PFI system we inherited was completely discredited and nothing more than a ploy to keep expensive projects off the balance sheet,” the aide said.