House of Commons - Lessons from PFI and other projects

Lessons from PFI and other projects - Public Accounts Committee Contents

1 The case for PFI

1. Over the past 15 years, PFI has enabled many new public buildings and services to be delivered, some of which might not otherwise have been commissioned. The UK has 700 PFI contracts with 61 further PFI projects in procurement and many other projects where PFI is being considered as an option. The Treasury has championed PFI as a means of renewing infrastructure in an era when capital constraints meant public finance was not freely available.[2] At times PFI has seemed 'the only game in town'.[3] It has been far too easy to use PFI as the only form of financing available without clearly proving whether it has led to demonstrably better, or worse, value for money than other forms of procurement.[4] Since the credit crisis, however, the cost of a typical PFI project has risen by 6% to 7%.[5] Innisfree, one of the PFI investment funds we took evidence from, told us that it was not negotiating new PFI deals in the UK at the moment, as the UK market was getting too expensive.[6]

2. The use of private finance has brought a degree of rigour with more projects being delivered on time and within cost but that does not mean they will always be value for money, particularly given the current high cost of debt finance. There are alternatives. Innisfree told us that in Canada, the Government has bought out debt after the construction phase.[7] Other approaches used in Canada and in France had the public sector contributing loans, rather than using more expensive bank finance at the outset, which brought the overall cost down.[8]

3. Comparison of broadly similar assets procured over the same time period using PFI and conventional procurement methods would help inform future decisions on the best form of procurement.[9]

4. Rigorous assessment of the value for money of PFI projects depends on having accurate and up-to-date data on which to compare against conventional procurement costs. The comparators have also been very sensitive to assumptions for the effect of risks.[10] We have previously questioned the way the public sector comparator test has been carried out, for example to justify the Future Strategic Air Tanker and Manchester Waste incinerator PFI projects.[11] The Treasury said it was completely updating its private finance value for money guidance which would include an assessment of the value and benefits realised after contracts were entered into.[12]

5. Rigorous assessment of the case for using PFI must also include a more accurate reflection of transfer of risk, the focus of which will often alter and change over the life of any contract.[13] The risks associated with the construction period, for example, are much greater than the risks associated with the operational phase. We are sceptical of the Treasury's assessment that effective risk transfer has been achieved in PFI deals.[14] Although the transfer of construction risk has generally protected the taxpayer, it is impossible to be certain how well risk transfer will work over long time periods such as 30 or 40 years.[15] In addition, the large profits made by some companies involved with PFI contracts suggest that the risk transfer in the short term has not been properly priced in the interests of the taxpayer.[16]

6. PFI arrangements have long term implications for the annual budgets of public sector bodies. Media reports have indicated that one South London Healthcare Trust with two PFI contracts has had to reorganise its non-PFI hospitals to help fund its PFI commitments.[17] Funding any large new infrastructure is a major commitment and the Treasury acknowledged that there was less flexibility for reorganisation if a body was locked into a PFI contract.[18] Historically, it had been difficult to negotiate a deal flexible enough to take account of developments likely to take place over the next 25 to 40 years. The Treasury agreed that infrastructure acquired for health care needed to combine the best possible value for money with the flexibility to respond to changes and advances in health care delivery.[19]

7. Treasury guidance requires that, where publicly financed options are compared to PFI options, taxation differences should be considered and adjustments explicitly made if not doing so would materially distort the decision.[20] Tax planning and the use of tax havens as a way of avoiding UK tax are not uncommon.[21] We heard that 72% of Innisfree's shares are held by shareholders based in Guernsey.[22] The Treasury told us it would be inappropriate to speculate, when assessing whether a PFI contract should be let, on the possible future tax arrangements that investors might put in place. The tax assumptions at contract letting are, however, not revisited during the operational phase.[23] The Treasury was unable to confirm the extent to which parties involved with PFI contracts were paying UK tax and whether the companies holding PFI contracts were paying UK corporation tax.[24]