Government must do more to address PFI funding concerns says Treasury Committee

However the Treasury Committee said that it was pleased that the Government had already taken on board many of the conclusions contained in its initial report into the controversial funding method, which was issued last year.

Its comments came as it published the Government's response to the report, which committee chair Andrew Tyrie said did not fully address the argument that excluding liabilities under PFI arrangements from the public sector's total debt acted as an "incentive". Currently PFI liabilities are considered to be 'off balance sheet', which means that they are not counted as part of the Government's official accounts.

He stressed that PFI must only be used where it delivered the "best possible value for money for the taxpayers", such as when the benefit of private sector expertise in the management of a project outweighed higher borrowing costs.

The Committee added that it intended to write to the Government about reports that Transport for London had recently been prevented from increasing its borrowing to fund investment in the Crossrail project directly, rather than through PFI.

The Committee's original report said higher borrowing costs as a result of tougher economic conditions had made PFI an "extremely inefficient" method of financing, and that stricter criteria should be introduced to govern its use.

The Government announced that it intended to reform the system in November last year. Chancellor of the Exchequer George Osborne issued a call for evidence on a replacement funding method that would "draw on private sector innovation but at a lower cost to the taxpayer".

The Committee said that there were other "welcome signs of progress" in the Government's response, including new value-for-money guidance due for publication later this year and a commitment to making information on contracts and investors more transparent.

The National Infrastructure Plan 2011, which was published in November alongside Osborne's Autumn Statement also indicated alternatives to PFI being developed by the Government, the Committee said. These include the use of pension and insurance funds to support additional investment, potential road tolling and a scheme which would allow local authorities to borrow against anticipated future business taxes and the Community Infrastructure Levy (CIL).

However, the Government must "be cautious about taking on further contingent liabilities or providing guarantees that could lay additional costs at the door of future taxpayers", Tyrie said.

The PFI model was introduced in the 1990s as a way of using private funding to pay for major public infrastructure projects such as roads, prisons and schools. In a PFI agreement, the private sector pays the upfront cost and is typically repaid by the taxpayer over a 30-year period.

Richard Laudy, a construction law expert with Pinsent Masons, the law firm behind Out-Law.com, said that the advantages of PFI should not be forgotten despite the funding method's recent bad press.

"PFI comes reasonably close to the whole life cycle model which the Government is promoting in the National Infrastructure Plan and, despite the traditional concerns about construction risk, relatively few PFIs overrun the construction period," he said. "If the right model could be found for achieving equitable returns and the cost of the procurement process reduced, then this might be a viable solution to at least some of the challenges the UK construction sector faces."