So what is the point of the PPP anyway?

A new assessment of plans for the Tube has raised doubts over the whole Public Private Partnership initiative

The Public Private Partnership initiative seemed to promise so much. A huge increase in infrastructure spending was only the half of it. By bringing private sector efficiencies and skills to bear on what used to be regarded as the exclusive preserve of the Government, the work might also be completed at a fraction of the cost, exponents argued.

The Public Private Partnership initiative seemed to promise so much. A huge increase in infrastructure spending was only the half of it. By bringing private sector efficiencies and skills to bear on what used to be regarded as the exclusive preserve of the Government, the work might also be completed at a fraction of the cost, exponents argued.

That at least was the script, but the Government's deeply unpopular plans to bring the PPP to bear on London's Underground has shaken these assumptions to the core

A report on the Government's proposals from Deloitte & Touche, which was commissioned by Ken Livingstone's anti-PPP regime at the Greater London Authority and was finally published on Friday, has exposed serious flaws. It concluded that the PPP, the £14bn project to modernise the capital's creaking subway system by giving the work to private firms, did not provide value for money. Its verdict on the biggest and most important PPP project to date could hardly have been more damning.

It was the Conservatives who first brought in the PFI during the recession of the early 1990s. Constrained by the then stretched state of public finances, they decided to convert public works, which would have been financed as capital expenditure from national debt, into current expenditure. This was done by persuading private sector companies to provide the capital financing necessary for projects and the government would then pay them back over a number of years, say 20 or 30, from current taxation.

The idea was also to transfer risk to the private sector, so that it would have to bear cost over-runs. Another plus was that infrastructure projects would get the benefit of the supposed greater innovation and creativity of the private sector.

New Labour has proved an enthusiastic supporter of the PPP. But with the public finances now in robust health once more, is there really any need to persist with this sometimes excessively complex form of financing? Says Gavin Kelly, research director at the Institute of Public Policy Research (IPPR): "The fiscal argument made sense in 1992 but it is spurious now. If Labour had scrapped the PFI in 1997, the Treasury could have financed all the PFI projects we've had and still easily met the Chancellor's golden rule on borrowing."

The 1999 Budget, estimated that debt as a proportion of GDP in 2001-2002 would be 36.8 per cent. If all the PFI projects since Labour was elected had been Treasury-financed, this estimate need only have gone up to 37.9 per cent, according to the IPPR. The Chancellor's rule implies keeping borrowing below 40 per cent of GDP. In fact today, it stands at just 31 per cent, giving the Government huge room for manoeuvre. Remember, also, that the Government can always borrow more cheaply than the private sector, a clear financial advantage over the PFI.

The Tube PPP, first announced in 1997 but still not signed, has become a byword for all that is wrong with the PPP. But despite intense public antipathy, the Government shows no sign of retreating on either the scheme for the Tube or the PPP more generally.

A key criticism in the Deloitte & Touche report is that while value was being assessed for the Tube project over 30 years, the bidders could renegotiate the contracts after seven-and-a-half years. It found that the public sector comparator – the hypothetical model used to estimate the cost of a project entirely in public hands – had been inflated by £2.5bn to make the case for the private sector look better.

The Tube may be a special case, because of its size and complexity, but the truth is that no-one really knows whether the PPP more generally delivers value for money.

It has not been going for long enough and, more importantly, it is characterised by a culture of secrecy that makes independent assessment of value difficult. Terms of contracts are hidden under the veil of "commercial confidentiality".

The Government is supporting a multi-billion pound scheme, that will shape the future of our national infrastructure, but it has provided precious little evidence that it works.

Mike O'Brien, director of PPP work at The Healthcare Group, a consultancy, says that his financial analysis of benefits of 11 early hospital PFI's did not support the scheme. "At best, they were marginally beneficial. But people were new to the PFI then. The situation is improving."

The National Audit Office (NAO), the parliamentary spending watchdog, has written 21 reports on PFI projects and found a very mixed record. For instance, that prisons and roads have been more successful than schools and hospitals.

Despite mounting concern, there appears for the moment to be no stopping the PPP. Local authorities, schools and hospitals know that the Treasury is not prepared to finance large capital projects. Although all such projects have to pass the public sector comparator test, it is in the interests of local authorities to make sure the figures favour the PFI. Otherwise, no new hospital or school.

Matthew Taylor MP, the Liberal Democrat Treasury spokesman, says: "The Government is mindlessly pro-PPP. Local authorities are starved of funds so they have no choice but to go for it."

The Liberal Democrats, and an IPPR report published earlier this year, have called for a more level playing field to be created, so we can properly judge the merits of PPPs.

For instance, the capital borrowing constraints on local authorities could be lifted, so they could borrow the money to finance some projects now done through the PFI. As it happens, there is a local government White Paper due later this year which could be used to introduce such reforms.

The IPPR's Gavin Kelly says: "It would be a mistake to give up on PPP completely, particularly as the public sector is getting better at doing it. But we need more innovation in the range of financing for public services."