Milking the public sector?

PFI: A government give-away?

By Andrew Bomford

Since the general election, the government has faced increasing hostility over its private finance initiative, as it tries to improve public services such as health and education.

Now it faces a new scandal, where private companies are making huge windfall profits by refinancing their contracts with the government.

But the PM programme has learned about one refinancing deal where the public sector came out on top.

So why do most refinancing deals leave the taxpayer short-changed?

When the first bricks were being laid, at Altcourse Prison in Liverpool, five years ago, its developers - the construction firm Carillion and Group 4 - were expecting to make about £17 million profit.

In fact, within two years of the first prisoners moving in, the consortium had not only recouped its money, but made £10 million profit, 23 years ahead of schedule. How? By refinancing.

MPs criticise PFI

Rather like you or I would take out a new mortgage - they did a new deal with the banks, at a much lower interest rate, pocketing the difference.

MPs on the Public Accounts Committee were scathing. One Labour MP, Alan Williams, says the public lost out.

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But the committee's most serious criticism was saved for the Prison Service, and for government in general, for failing to exploit their strong negotiating position.

After enquiries by PM, interim advice was published saying the public sector should seek a 50-50 split of refinancing windfalls.

Value for money and risk transferred are the two big arguments put forward by the government in favour of PFI. But windfall gains from refinancing bring the whole issue of value for money into question.

Cashback

Allyson Pollock, from University College in London, says most PFI contracts are low risk - triple A rated - because the government will not default on the deal, and the gains from refinancing, she says, reduces that risk even further.

One example of best practice has just been completed this week, and the PM programme can now reveal the details.

The builders AMEC have refinanced the £241 million contract for the new Inland Revenue offices in Newcastle, producing a £60 million windfall.

Negotiations have resulted in 60% of that money - £36 million - going back to the Inland Revenue in the form of reduced rent.