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.
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.
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.
It also appears that the returns to investors in PFI projects
are too high for the risks they bear in developing government
backed projects. 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.
Only 20% of the long term PFI liabilities are recorded as debt
in the national accounts.
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.
The payments the taxpayer is committed to under these arrangements
are around £200 billion.
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.
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.
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.
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.
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.
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.
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.
4 Q10 Back
Q82, Qq87-88 Back
Lessons from PFI and other projects, Forty-fourth Report
of Session 2010-12 Back
Qq2-5, Q43 Back
Qq108-110, Q136 Back
Q41, Q73, Q167, Ev 23 Back
Q83, Qq113-114 Back