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PFI: a get-rich-quick scheme?

Investors in the City took advantage of public sector naivety to make big profits, according to a recent MPs report.

Will Gordon Brown be in hock to the City slickers in a rather different way to Tony Blair? Has his personal baby, the private finance initiative, now funding 750 projects at a cost of £54.5bn to the taxpayer, just given City investors a new get-rich-quick scheme? This is the question posed by a highly critical MPs report published today, compiled with the help of some of the best auditors in Britain from the National Audit Office.

The verdict of the House of Commons public accounts committee is damning. Naive public officials were taken to the cleaners by sophisticated City business people, who raked in millions for investors thanks to their superior knowledge of the world of finance.

It was not supposed to be so. Gordon Brown seized on the fledgling Tory scheme because he was fed up with familiar tales of big public projects, from hospitals to road programmes, running late and over budget, with the Treasury held to ransom. The idea was simple. Private companies, not the state, would borrow cash to build hospitals, roads, schools and prisons and accept the risk that they must be built on time and within budget. In return, the state would pay annual fees to the companies, who would run them for up to 30 years.

Well, they were built on time, but the City slickers submitted a large charge for borrowing the cash for the first tranche of schemes. Then, as soon as they were up and running, they remortgaged their borrowing at much lower rates and walked away with windfall profits of up to (in the infamous case of the Norfolk and Norwich hospital) £115m and increased rates of return from 16% to 60%.

The public officials hadn't even thought of these wheezes and hurriedly tried to renegotiate, in order to get a share of the City windfalls. They have now got some money back, but nowhere near the real share, and in the case of Norfolk and Norwich hospital they ended up signing an extended contract to 2037, with a huge fee if the local authority had to pull out of the scheme.

Now the City slickers have moved on and sold their schemes, creating a secondary market, so they don't have to re-negotiate with the state and share any profits.

It is no wonder that the report by MPs is so damning. New figures released yesterday showed that in one case, Jarvis had a staggering 662% return on a tiny £10m scheme to rationalise the property portfolio of North Wiltshire council. This was a freak result, caused by a complex borrowing arrangement, but even after this was stripped out, it still provides the company with a return of 80%. Others include a 33% return for investors, after refinancing, on the M1-A1 road link, compared to a 17% projected return when the contract was awarded. Then there's the A50/A564 Stoke-Derby link, up from 13% to 27%, and the Ministry of Defence Joint Services Command and Staff College, with a new return, after refinancing, of 52% for the private developers.

The figures speak for themselves. The idea may have been brilliant in theory, but it is clear that the officials implementing it were not up to the job. The small print says it all - basically the negotiations were often left to local public officials, while the brainboxes at the Treasury gave advice without getting their hands dirty. This does not auger well for other Brown projects.

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