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Resources 20
Private and public investment


Roads (UK)

The roads protesters who tunnelled under the A30 Honiton by-pass received much television publicity recently. Their main demand was to expose the true costs of the Private Finance Intiative (PFI) scheme being used to build the road.

The A30 scheme is one of eight roads projects which are being financed under PFI - or Design, Build, Finance and Operate (DBFO) as it is also known. These projects involve paying "shadow tolls" - a payment from the public purse to the contractor for every car which uses the road, over a 30 year period. The government claims that these DBFO schemes are value for money, but have refused to reveal their figures.

Transport 2000, the national transport campaign organisation, has now published its own calculations, based on answers to parliamentary questions. These figures show that the cost of a road under PFI/DBFO is on average over 3 times as much as using conventional public financing. The figures do not take account of any possible efficiency savings on maintenance costs - because maintenance costs are on average less than 2% of construction costs - so any such saving would be so small as to make no impact.

The secret cost of private roads

Road scheme

DBFO total cost (£m)

Public finance total cost (£m)

  

A1(M) Alconbury-Peterborough

1,333.1

366.8

  

M1-A1 link

2,228.7

613.2

  

A 4194/417 Swindon-Gloucester

510.3

140.4

  

A69 Carlisle-Newcastle

97.9

26.9

  

A30-A35 Exeter-Bere

788.4

216.9

  

A19 Dishforth-Tyne tunnel

306.2

84.2

  

M40 J1-15

386.4

106.3

  

A50 Stoke-Derby

214.5

59.0

  

Source: Transport 2000


Sewage works PFI: money down the drain

A report by Chemical Bank, into the feasibility of using PFI for a new sewage works at Dalmuir, Scotland, showed that it could not possibly be better value than a conventional publicly financed scheme. The report highlights some of the key problems with any PFI scheme:

  • public authorities can invariably borrow money more cheaply

  • there is rarely any quantified evidence for the supposed "efficiency savings" of the private sector

Under PFI, risks are supposed to be transferred to the private sector. The private sector will always charge more for the risks it takes on, and so the cost of capital will always be higher than if the government borrows the money itself. The assumption is that this extra cost will be offset by the greater efficiency of the private sector.

In the feasibility study the bank worked out the capital cost, interest costs and operating costs over 25 years, of a publicly financed sewage plant. This was then compared with the cost of doing it through a PFI consortium accepting normal risk and a consortium accepting a higher risk. The results are shown in the table below:

 

Dalmuir sewage plant: estimated costs

£m

Publicly funded and operated

311

Funded through low-risk PFI

449

Funded through high-risk PFI

481

Source: Chemical Bank

The table shows clearly that the PFI way of doing it is far more expensive - between £138m and £170m more expensive, an increase of 45% to 55%. The table assumes that the operating costs are the same under all three options - but what about the efficiency savings expected from the private sector?

Unfortunately, the total operating costs are only £110m - less than the extra expense of private finance. As Chemical Bank bluntly put it: "No amount of improvements in operating efficiencies can offset the increased capital costs of the BOO (Build, Own and Operate) schemes."

(extract from Privatisation News 44, February 1997)