Edward Leigh

The Treasury has been told that its approach to borrowing costs in PFI deals should be made more "consistent and defensible".

The call came as the Commons public accounts committee published a report on the 37-year, £170 million private finance initiative scheme to refurbish the Treasury's own Whitehall HQ.

During negotiations for the deal, the private consortium Exchequer Partnership had its preferred bidder status terminated, with negotiations eventually re-opened on condition that funding for the project be raised by a separate competitive process.

The MPs found the novel approach was a success, saving taxpayers a total of £13 million.

But they also warned that the costs of using private finance needed to be clearly identified.

"The private sector cannot borrow as cheaply as can the government," said the committee's report.

The MPs also questioned whether the six per cent discount rate used to compare the public and private sector costs of raising finance was reasonable.

"That six per cent figure implies that public finance would cost more than the actual private sector cost of finance in this project, including allowance for risk. Yet the Treasury suggested to us that, taking account of project risks, there might be no difference between the costs of private finance and public finance.

"The Treasury should ensure that the appraisal of PFI projects adopts a consistent and defensible approach to the cost of finance," the report concluded.

Committee chairman Edward Leigh congratulated the Treasury on the savings achieved through the funding competition, and suggested that the mechanism should be considered for wider use.

"While such funding competitions will not always be appropriate, at the very least, they must always be seriously considered," he said.