A Treasury Select Committee report found that Public Finance Initiative (PFI) projects are an "extremely inefficient" method of financing, and stricter criteria should be introduced to govern their use.
The PFI model was introduced by the Conservative government in 1992 as a way of bringing in private funding to pay for major public infrastructure projects. In a PFI agreement, the private sector pays the upfront cost and is typically repaid by the taxpayer over a 30 year period.
PFI has become the default option for many public bodies looking to provide roads, prisons and schools as the initial procurement costs are comparatively low.
However, the report said that higher borrowing costs as a result of the recent economic downturn meant the long-term expense of PFI was ultimately much higher than more conventional forms of borrowing.
Paying off a PFI debt of £1bn could end up costing taxpayers the same as paying off a direct government debt of £1.7bn, the committee said.
"We believe that a financial model that routinely finds in favour of the PFI route, after the significant increases in finance costs in the wake of the financial crisis, is unlikely to be fundamentally sound," said the report.
"PFI means getting something now and paying later. Any Whitehall department could be excused for becoming addicted to that," said committee chairman Andrew Tyrie.
"We can't carry on as we are, expecting the next generation of taxpayers to pick up the tab. PFI should only be used where we can show clear benefits for the taxpayer," he said.
The report found little evidence that infrastructure funded through PFI was of a higher quality or more innovative in design than those procured by other means, or that contractors had an incentive to maintain finished buildings to a higher standard.
It proposed much stricter criteria for PFI funding including further scrutiny to ensure project risk during the construction phase is transferred to the private sector, and abolishing what it describes as "perverse incentives" to use PFI.
It suggests that the same criteria need to be used for including PFI projects in departmental budgets as for direct capital expenditure. However, it points out that including current PFI liabilities in the National Accounts will increase national debt by £35bn.
Currently PFI liabilities are considered to be 'off balance sheet', which means that they are not counted as part of the official accounts.
