Conclusions and recommendations |
past reports on the use of the PFI model have often criticised
the value for money case, the inflexibility of the contracts and
the costly procurement process. In December 2010, we reported
on the increased costs of using private debt finance since the
global financial crisis which have made it difficult to sustain
a value for money case for using PFI. In that report we also expressed
concern on whether investors were systematically realising gains
on share sales.
2. The excessively high returns being made
by private investors in PFI projects are further evidence that
the previous emphasis on using PFI is inappropriate for the future.
For many years most public sector infrastructure projects have
been undertaken using the standard PFI model as the funding involved
does not count as part of national debt or a public authority's
capital budget. This has incentivised authorities to treat a typical
30 year PFI deal (including bundled services) as the only feasible
procurement route for a new project and very few conventionally
procured projects are now undertaken which could provide comparators.
To correct the previous emphasis in using PFI, the Treasury should
ensure that all new business cases:
- demonstrate whether private
finance is being used because it is better than a conventional
procurement and not because it is the only financing alternative;
- in cases using private finance,
demonstrate that the particular method proposed is optimal; and
- take account of tax issues
in the comparison between PFI and other procurement options, based
on actual tax experience in past projects.
Treasury should also undertake regular reviews to ensure that
the standard of business cases is satisfactory and that assumptions,
for example on the benefits of risk transfer, are robust and empirically
4. There is restricted access to data and
insufficient transparency over the amounts the public sector pays
for equity and the returns that investors make.
The lack of full transparency on financial performance and returns
to investors has hampered proper evaluation. Public confidence
in privately financed projects has been eroded by a perception
that PFI deals are expensive with high returns to investors. Building
public trust is essential to any future procurement model that
relies on private finance. Contracts should set out the levels
of on-going disclosure required from investors to enable full
evaluation of all costs and benefits of privately financed schemes.
The Treasury and Cabinet Office must also reconsider how private
companies providing public services, whether or not in the form
of PFI, can be bound by the provisions of the Freedom of Information
all services included in PFI contracts need to be priced at the
outset, and some could be the subject of a separate contract.
PFI contracts for constructing assets have typically included
a range of services, at a contracted price, for periods of around
30 years. Fixing the service provision in this way has limited
public authorities' recent attempts to make operational savings.
The Treasury should consider separately the procurement process
for building the asset from that for providing a service to ensure
that operation and maintenance services are based on actual requirements.
6. The PFI procurement process takes too long,
costs too much and restricts the market. The
time and cost involved do not serve investors or taxpayers well.
The scale of procurement costs constitutes a barrier to market
entry for financial investors such as pension funds and smaller
contractors. Successful bidders recover their procurement costs
in the contract price which means the taxpayer foots the bill.
Those negotiating contracts for the public sector too often lack
the appropriate commercial and financial skills. The growing emphasis
on localism makes this skills problem worse as all too often inexperienced
local bodies undertake complex negotiations with experienced private
sector counterparts. The Treasury, in consultation with investors,
should identify and address the sources of cost and delay in the
procurement process. The Treasury should consider whether best
value would be secured by greater centralization of the procurement
of PFI projects.
7. Competition in the procurement of privately
financed projects is limited and has not been a guarantee of value
for money. The financial
resources needed to bid for PFI contracts have restricted the
number of companies bidding for contracts thereby limiting any
competition. As the pricing of equity in PFI contracts appears
higher than the risks would justify, there is no assurance that
competitive bidding on its own will lead to effective market pricing.
The Treasury needs to analyse the working of the private finance
market, including the returns for investors, to demonstrate how
any new approach will address these current inefficiencies and
hence poor value.
8. There is evidence from the amounts being
realised by investors selling shares in PFI projects of excess
profits being built into the initial pricing of contracts.
The low risks associated with government contracts are not fully
reflected in the pricing of PFI contracts. Project cash flow to
meet bank requirements also appears to over-compensate investors.
The Treasury should instruct departments to require investors
to demonstrate that their pricing of equity is appropriate. The
Treasury should introduce standard contractual arrangements to
recover excess cash left after contractors have met bank requirements;
and share in other investor returns above defined levels.
3 Committee of Public Accounts: 9th Report 2010-2011