PFI cash cancelled out by cutbacks

June 5, 1998

MONEY brought in to the public sector through the Private Finance Initiative has been more than offset by deep cuts in public investment, according to a report by the Institute of Fiscal Studies.

Compiled by IFS researcher John Hall, the study says: "It appears PFI spending has been a substitute for, rather than a complement to, public investment. This means that using the PFI has helped to hold down public expenditure and the public sector borrowing requirement."

The findings contradict the Treasury's original aims for PFI. Its November 1994 financial statement and budget report said that the "private sector's contribution is additional to public provision. This means that for a given amount of public expenditure, new and better quality capital investment will be secured for the nation."

Mr Hall's analysis of government figures shows that since the November 1994 budget public sector investment plans for 1997-98 have been cut three times - by Pounds 2 billion in November 1995, representing a 9 per cent cut; Pounds 1.8 billion in November 1996 (9 per cent); and Pounds 1 billion in March 1998 (5.5 per cent). The general deterioration in public spending has resulted in public investment in 1997-98 being an estimated Pounds 3.3 billion lower than planned.

"Far from generating additional investment, this evidence might be taken to suggest that PFI spending has not even compensated for cuts to public spending plans," says Mr Hall.

PFI deals totalling more than Pounds 7 billion in capital value have so far been signed; transport infrastructure projects account for more than 70 per cent of the overall figure. Higher education projects total Pounds 200 million, and in the further education sector Pounds 20 million.

But, Mr Hall says, while the fact that deals are going ahead shows that initial hurdles to getting PFI off the ground are being overcome, the value of the contracts signed "is at best only a partial measure of policy success". He warns that if private finance replaces public spending, investment priorities will be driven by what is attractive to the private sector, not what is needed by public services.

On a more positive note, Mr Hall says PFI could help the development of competitive markets which in turn should improve flexibility. Gains realised through the scheme might also increase as public-sector managers gained experience in how to share risk with the private sector.

He concludes: "The key point is that PFI should not be seen as a universal panacea. It has the potential to increase the efficiency with which public services are delivered but it cannot be taken for granted that it will represent good value for taxpayers' money in every type of capital project."

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