The Private Finance Initiative (PFI) model has been used by governments in some 700 projects over the last 20 years. Under the present Government, contracts for 41 projects have been concluded and over 30 projects are currently being negotiated. This Committee has often reported on defects in the PFI model, including failures to demonstrate the value for money case satisfactorily, the use of long inflexible contracts and the costly contracting process. The increased costs of using private debt finance since the global financial crisis and now further evidence of inefficient pricing of equity have made continuing with the current model unsustainable.
The Treasury has recognised that the time has come for a radical rethink and is currently reviewing the PFI model. It needs to address the intrinsic flaws in the current model by improving flexibility in the way that private finance is used, establishing quicker and more efficient procurement procedures and achieving a better balance between investors' risks and their rewards.
It is essential that the case for using private finance, in whatever form, is properly tested at the outset. Private finance should only be used where it secures real value for money for the taxpayer, not because of definitional statistical incentives to use it to get projects done. Such incentives persist because, despite recent changes to accounting rules which require most PFI projects to be accounted for on departments' balance sheets, under separate European statistical rules PFI is still rarely scored against scarce departmental budgets. So at a time of public expenditure constraints incentives still exist to use PFI models to provide public assets and services. Only some 20% of long term PFI liabilities are recorded as debt in the national accounts.
Business cases must be an unbiased assessment of the best form of procurement for the particular project being undertaken, taking account of expected tax receipts from alternative options and not adjusting assumptions to bias the outcome of the assessment. Where private finance is to be used business cases should be clear on the reasons for doing so and why the particular form of private finance proposed is better than alternatives. This requires much broader thinking about the ways of using private finance than the previous focus on a standard PFI model. For example, it is not clear that committing to 30 year service contracts at the outset is sensible if this locks authorities into inflexible prices which can only be reduced by service cuts or services that are required today but will cease to be a priority in future years.
The Treasury needs to collect data on investors' experiences and use this information to assess and challenge investors' returns which in many cases appear difficult to justify. There needs to be greater transparency over the pricing of contracts to clearly demonstrate that the rewards to those providing finance are in line with the risks they bear. Inefficiencies which add to the cost of private deals, such as long procurement times, need to be addressed.
On the basis of a report by the Comptroller and Auditor General, we took evidence from the Treasury and parties involved in investing in and analysing the PFI market on the risks and rewards for private equity investors in government private finance projects.