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
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
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.