U.K. Spends $14 Billion Per Year on Carillion-Style Projects

(Bloomberg) -- The U.K. government spends 10.3 billion pounds ($14.3 billion) a year servicing public-private contracts of the the type it awarded to Carillion Plc, which went into liquidation Monday.

In a report prepared before Carillion collapsed, the National Audit Office, which scrutinizes government spending, said Thursday there is insufficient data to determine whether so-called private finance initiative deals offer value for taxpayers.

“After 25 years of PFI, there is still little evidence that it delivers enough benefit to offset the additional costs of borrowing money privately,” Meg Hillier, chair of Parliament’s Committee of Public Accounts, said in a statement emailed alongside the report. “Many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change.”

Under PFI contracts, companies finance, build and operate public projects such as hospitals, schools and roads, with the government returning the money over 25 to 30 years.

‘Deeply Negligent’

PFI deals were introduced by the Conservatives in 1992 and flourished under the subsequent Labour government in the belief they would result in cheaper and higher-quality construction and limit the risk to taxpayers. But critics say they lack flexibility and financing costs are high relative to government bonds. The opposition Labour Party has pledged to bring the contracts back under public control if it wins power.

The Treasury estimates PFIs have financed more than 700 projects with a capital value of 60 billion pounds. Future charges amount to 200 billion pounds, even if no new deals are entered into.

Carillion was a major recipient of such contracts, which ranged from military housing to high-speed rail. While ministers stepped in swiftly to guarantee the projects, Labour has questioned why ministers signed 2 billion pounds of deals with Carillion after its financial struggles had become apparent.

“It looks like the government were either handing Carillion public contracts to keep the company afloat, which clearly has not worked, or were just deeply negligent of the crisis that was coming down the line,” Labour Leader Jeremy Corbyn told lawmakers in Parliament on Wednesday.

Over the past 20 years, capital investment using PFI projects has averaged around 3 billion pounds a year, compared with publicly financed capital investment that currently stands at an annual 50 billion pounds, according to the NAO report.

Cabinet Office Minister David Lidington told lawmakers Monday that “no PFI faces an immediate crisis as a result of the liquidation” of Carillion. He used the collapse as a demonstration that PFI contracts are “not an easy ticket to riches,” noting that “there are very real risks.”

To contact the reporter on this story: Alex Morales in London at amorales2@bloomberg.net.

To contact the editors responsible for this story: Flavia Krause-Jackson at fjackson@bloomberg.net, Andrew Atkinson, Robert Jameson

©2018 Bloomberg L.P.