The Treasury must find alternatives to the private finance initiative for delivering big infrastructure projects, parliament’s public spending watchdog has warned.

In a report that further illustrates the way the tide is turning against the use of PFI, the National Audit Office said the cost of debt finance for the deals had risen by 20-33 per cent since the credit crunch and that there were no clear data to allow conclusions about whether PFI had offered better or worse value for money than other forms of procurement.

But it was clear that even before the financial crisis, “the value-for-money case was sometimes marginal”.

The report comes as t he Treasury is struggling to extract significant concessions from the PFI industry that would cut the cost of projects already built or share more of the private sector’s returns with the taxpayer.

Under PFI deals, contractors finance, build and run projects. To date, almost 700 deals have been signed involving commitments to pay out some £200bn over the next 25 years.

But the deals have proved inflexible and costly when changes are needed. The private sector has built portfolios of projects that have given it economies of scale the taxpayer has not shared. And current encouragement of local decision making acts against the government using its market power to obtain better service deals from contractors.

Furthermore, despite criticism by the Conservatives while in opposition of the “off-balance-sheet” nature of PFI, national accounting rules mean many projects are still treated that way, providing a continuing incentive to use PFI rather than more conventional public spending.

“The case for using private finance in public procurement needs to be challenged more,” the NAO said, adding that in the current climate it might not be as suitable for as many projects as it had been in the past.

The audit body urged the Treasury “to identify alternative methods for delivering infrastructure and related facilities services”, building on the lessons from PFI and using its buying power to conduct tougher negotiations with the private sector.

The government’s new Major Projects Authority must provide more robust oversight than had been the case in the past and be able to stop projects that did not hold the prospect of value for money, it said.

The NAO cited the widening of the M25 as a project that should not have gone ahead; the aircraft refuelling project as one where the availability of private finance distorted decision making; and the collapsed Paddington health campus project as one that should have been halted well before £15m was spent developing it.

The fact the public sector could apply lessons learnt from the PFI and benefit from robust external challenge was shown by the Olympic Delivery Authority’s approach, the NAO said.

In its report, the NAO underlined the Treasury’s failure over two decades to produce “a truly robust and systematic evaluation” of whether PFI delivered better or worse value for money than other forms of procurement.

It also highlighted the lack of transparency over investors’ returns, including those made when projects were sold on. This was an issue the audit office said it expected to return to.

The public sector needed to be “a more demanding and intelligent customer”, according to Amyas Morse, head of the NAO. Many of the best-practice techniques developed for PFI could be applied to other forms of procurement, he said. But the government needed to harness its buying power “through concerted tactics and tougher negotiation”.

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