The private finance initiative (PFI) - intended to lever in private funding for public infrastructure projects such as schools and hospitals - provides poor value for money and needs "substantial" reform, MPs have warned.
The Commons Treasury Committee said the long-term costs of PFI deals were now significantly higher than conventional Government borrowing and it urged ministers to use them "as sparingly as possible" until new rules are in place.
Committee chairman Andrew Tyrie called on the Treasury to remove the "perverse incentives" which encouraged Government departments to use PFI rather than more efficient means of financing.
In particular, the committee said PFI liabilities - which are currently treated as "off balance sheet" - should be recorded in the national accounts, even though this would add an estimated £35 billion to the deficit.
It said PFI was particularly attractive to departments on restricted budgets as the initial costs were lower, even though the impact was much longer lasting with the build-up of big commitments against future budgets before they were even allocated.
"The incentive for Government departments to use PFI to leverage up their budgets, and to some extent for the Treasury to use PFI to conceal debt, has resulted in neglecting the long-term value-for-money implications," it said. "We do not believe that PFI can be relied upon to provide good value for money without substantial reform."
PFI was introduced by John Major's Conservative government in 1992 as a way of enabling private investors to take on the financing, construction and operation of infrastructure projects. It was subsequently expanded under Labour and continued by the current coalition Government.
"PFI means getting something now and paying later. Any Whitehall department could be excused for becoming addicted to that," said Mr 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."
An aide to Chancellor George Osborne said the coalition was committed to reforming the PFI system.
"We have been saying for a long time that the PFI system we inherited was completely discredited and nothing more than a ploy to keep expensive projects off the balance sheet," the aide said. "That's why we are reforming it so it is genuinely transparent and only used when it provides value for money for the taxpayer. This transparency means PFI can no longer be hidden off-balance sheet like it was under Labour."
