Lessons from PFI and other projects - Public Accounts Committee Contents

Conclusions and recommendations

1.  Although PFI has delivered many new public buildings and services, it has been far too easy for the Government to use it as the only form of financing available without clearly proving whether it is value for money. Alternatives to the standard PFI approach could involve: cheaper sources of finance; using selected elements rather than the entire, complex PFI contract; and trials of PFI and non-PFI approaches for similar projects. The Treasury must properly consider all the alternatives to PFI and should rigorously explore radical improvements to the PFI model. The use of PFI has been based on inadequate comparisons with conventional procurement which have not been sufficiently challenged. The justification of proceeding with PFI in the future needs to have regard to a range of important factors. Assessments of new projects should include: a more transparent and complete comparison of alternative funding, the current high cost of using private finance; a rigorous assessment of the transfer of risk to investors; how substantial long-term financial commitments will be accommodated within the public sector's need to make spending cuts; and the potential for improvements in the delivery of conventional projects. The Treasury should issue new guidance setting out a more rigorous method for assessing the value for money of proposed PFI projects that includes these factors by autumn 2011.

2.  Tax revenue is being lost through the use of off-shore arrangements by PFI investors and the effect has not been adequately assessed. The Committee is concerned that the Treasury has no plans to address this matter. Some PFI investors reduce their exposure to UK tax through off-shore arrangements. Yet the Treasury assume tax revenue in their cost-benefit analysis of PFI projects. The Treasury could not tell us if PFI investors had paid tax in the UK on profits and on equity gains, or whether corporation taxes had been collected from PFI companies..The Treasury should measure the tax revenues from PFI deals and should ensure that this is taken into account in future assessments of PFI against conventional procurement.

3.  The public sector has insufficient information on the returns made by PFI investors and no mechanism for sharing in gains when the investors sell their shares. Partial information we have seen suggests initial investors can quickly make high profits from selling on their shares in PFI projects, indicating that the taxpayer may be getting a poor deal in the original PFI contracts. The Treasury should introduce arrangements for sharing gains on the sale of PFI equity shares in new PFI projects. We consider there is also a case for a code of conduct for sharing gains from share sales in existing contracts. A similar code was implemented on refinancing to ensure that high investor returns did not damage the prospects for the Government being able to continue to enter into PFI deals. The Treasury should agree with investors how data on investor returns, including the value at which shares change hands, can be captured and made available to the Treasury.

4.  Transparency on the full costs and benefits of PFI projects to both the public and private sectors has been obscured by departments and investors hiding behind commercial confidentiality. The Treasury cited commercial sensitivities for not allowing freedom of information provisions to apply to the private sector. Once contracts have been let, commercial confidentiality should not restrict the ability of the public, Parliament and decision makers to access information. Freedom of information should be extended to private companies providing public services. The Treasury should define commercial confidentiality and the exceptional circumstances where it applies.

5.  The public sector has failed to make best use of commercial skills. Departments should have developed commercial experience from using PFI but we still see some examples of projects and contracts which are clearly lacking in commercial awareness. The Major Projects Authority and the Treasury should identify and publish lessons from the PFI experience to improve the public sector's commercial skills across all projects. This should include safeguarding commercial skills capability during the current public sector reorganisation to ensure there is adequate contract management of the PFI portfolio.

6.  The Treasury must address the scope for greater efficiencies from PFI projects. Any savings on existing contracts will be dependent on voluntary agreements by the private sector which may involve service cuts. The Treasury should update us by November 2011 on the extent of the savings to be achieved, where and how they have been achieved, and how it is minimising the risk of compromising service quality in individual PFI projects and across the programme. We wish to be advised of any companies that do not agree to make savings and expect the Treasury to consider whether the Government should continue to do business with these companies.

7.  There is a tension between the fragmentation of public service delivery through the localism agenda and making best use of the Government's bulk buying power. It is notable that PFI investment funds are managing many of the 700 PFI contracts as a portfolio, whereas the public sector is not. The Treasury must set out how it will maximise the Government's buying power to improve value for money for users and taxpayers in the context of the declared policy on localism.

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Prepared 1 September 2011