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Two recent studies expose the truth about British private finance initiative (PFI) schemes, showing they cost more and aren’t being evaluated based on all the evidence.

Research published in the journal Public Money and Management shows the British government is on extremely shaky ground when it claims that private finance initiatives (the British equivalent of P3s) are cost effective and save money.

The researchers scrutinized the claim that nearly all PFI projects (88 per cent) are delivered on time and within budget whereas most public projects (70 per cent) are delivered late and 73 per cent cost more than expected. They found that the evidence for these claims was either non-existent or false.

The research team, led by Professor Allyson Pollock from the Centre for International Public Health at the University of Edinburgh, set out to analyze the five studies cited by the Treasury as proof of PFI efficiency.

Two of the reports were based on interviews with managers of PFI projects. The report authors concluded it wasn’t possible to judge from such evidence how the method of procurement affected the results.

A third study by a private company contains no comparative data to support claims of PFI effectiveness over non-PFI schemes.

Researchers were denied access to a fourth study because the government said it was covered by commercial confidentiality even though it had originally said the study would be published.

The only report out of the five to contain any comparative data was commissioned by the Treasury from a PFI consultancy and engineering firm called Mott MacDonald. However, this compared cost and time overruns in 39 public schemes with only three out of the then 451 operational PFI schemes.

The small sample was further biased due to the exclusion of failed, problem PFI schemes and the use of different baselines when comparing cost changes in non-PFI schemes with just three PFI schemes. As a result, cost increases known to occur in PFI were not taken into account while the cost of traditional public schemes was artificially inflated.

Pollock says, “It would appear that comparisons are rigged in favour of PFI and that Treasury policy is not evidence-based.”

The full study is here.

A second study found PFI hospitals could be costing Britain’s National Health Service an extra £480 million a year, while private equity providers reap a 58 per cent return on investment.

The Manchester Business School report, The cost of using private finance to build, finance and operate the first 12 NHS hospitals in England, examines the first PFI hospitals, which became operational in 2000/01.

The authors found that the average borrowing cost was almost twice as high as the cost of public sector borrowing.

This means that by 2005, the additional cost of private finance was about £60m a year on 12 capital projects worth £1.2bn,” say researchers Jean Shaoul, Anne Stafford and Pam Stapleton. “If this experience is generalized across the entire PFI programme… then the extra cost of private finance for the signed PFI capital programme in hospitals… is about £480m every year.”

The higher cost of capital was accounted for largely through the higher interest rate private borrowers are subject to (between seven and eight per cent in the cases examined), but also by the rates of return paid to private equity investors.

After five years with no return on their investment (while the hospitals were still being built), equity providers claimed a 58 per cent post-tax return in 2005; a rate that Shaoul told Public Finance was ‘set to continue for the remainder of the 30-year contracts’.

That return is four times higher than the ceiling 14 to 15 per cent rate of return seen in other PFI deals, which the Treasury described as ‘too high’ in 2005.

The report also raises concerns about the on-going affordability of PFI schemes as hospital trusts move to a less stable funding regime.

The research has been peer-reviewed for academic publication later this year.

With files from Public Finance Magazine, University of Edinburgh Centre for Public Health