Equity Investment in privately financed projects - Public Accounts Committee Contents

1  The current PFI model

2.  In using private investment to finance government projects the government has been unduly reliant on one model, the Private Finance Initiative (PFI) which was introduced twenty years ago. Since then 700 projects have been delivered using PFI but during this period there have been very few conventionally procured projects on which to base value for money comparisons and only limited use of other forms of private finance. [4] The Treasury is currently reviewing the PFI model.

3.  The Treasury's view is that broadly speaking PFI has been a good deal for the taxpayer.[5] But our previous reports have repeatedly raised concerns about the value for money of PFI projects which commit the taxpayer to expensive deals with long inflexible contracts.[6] It also appears that the returns to investors in PFI projects are too high for the risks they bear in developing government backed projects.[7] Inefficiency in pricing equity investment was less apparent previously because of a lack of information on how deals were priced.

4.  The Treasury maintains that it has no bias in favour of PFI. It has removed one incentive in favour of using PFI (PFI credits) and has stopped the use of PFI for housing and waste projects. However, other incentives continue in favour of PFI, most notably the European regulations. Under European statistical rules most PFI projects are excluded from departments' capital budgets and the national debt, despite changes to financial accounting rules which now require most PFI projects to be accounted for on balance sheet for accounting purposes.[8] Only 20% of the long term PFI liabilities are recorded as debt in the national accounts.[9]

5.  In seeking to take forward PFI projects, most public authorities have used a standard Treasury PFI model under which investors arrange for services such as maintenance and facilities management services to be provided for around 30 years. We are concerned about the value for money of such "bundled" services, which prices and sets in stone some services years before they are needed.[10] The payments the taxpayer is committed to under these arrangements are around £200 billion[11]. It makes no sense for authorities to lock themselves into a particular service for 30 years when the public sector's use of its assets is likely to change more quickly.[12]

6.  Contracting for a relatively fixed price for many years ahead can also create financial pressures for public authorities at times when financial cuts are needed. Under the PFI model, each year's payments is determined in advance, except for the effects of inflation which have to be adjusted for annually. NHS Trusts in particular are finding it very difficult to meet their PFI liabilities out of their resources.[13] An example of budgeting difficulties is the Queen Alexandra PFI hospital, Portsmouth where the NHS Trust, in seeking to manage annual hospital running costs of £40 million, has cut 700 jobs and closed 100 beds.[14]

7.  Once long term contracts have been signed it is very difficult to make changes. The Government announced in July 2011 its intention to save £1.5 billion from operational PFI contracts in England. The intention of this initiative is that the quality of services should be protected with savings being achieved from more effective management of contracts, making more efficient use of space and by reviewing service requirements. However investors are clear that service cuts are the only way to reduce the public sector's payments in existing contracts. [15]

8.  Under the standard PFI model the deals have involved long procurements and high bidding costs. This has acted as a barrier to competition as only a small number of companies can afford to be regular bidders. The high bidding costs have also added to the cost of projects. The Treasury accepts lower procurement times are possible.[16] In France investors have found that more efficient and reliable procurement has enabled them to price deals with a cost of capital which is around 0.5% to 1% lower than in Britain.[17]

9.  The Treasury acknowledges that a key issue in creating delay and adding to the cost of procurement is that many PFI contracts are developed and negotiated locally. This inevitably leaves local officials, who generally do not have the necessary commercial experience, exposed to commercially astute private sector counterparts which must impact on the value for money being achieved. Whilst it is reasonable that local officials should be able to influence the development of projects which will deliver local public services the current balance between central and local involvement does not adequately protect value for money to the taxpayer.[18]

4   Q10 Back

5   Q82, Qq87-88 Back

6   Lessons from PFI and other projects, Forty-fourth Report of Session 2010-12 Back

7   Qq2-5, Q43 Back

8   Qq108-110, Q136  Back

9   Q137 Back

10   Q30 Back

11   Q3 Back

12   Q20 Back

13   Q23 Back

14   QQ16-16 Back

15   Q41, Q73, Q167, Ev 23 Back

16   Q83, Qq113-114 Back

17   Q47 Back

18   Qq98-104 Back

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Prepared 2 May 2012