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. At
times PFI has seemed 'the only game in town'.
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.
Since the credit crisis, however, the cost of a typical PFI project
has risen by 6% to 7%.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Tax planning and the use of tax havens as a way of avoiding UK
tax are not uncommon.
We heard that 72% of Innisfree's shares are held by shareholders
based in Guernsey.
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.
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.
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