Private Finance Initiatives Contents

1The Impact of the PFI Legacy

1.On the basis of a report by the Comptroller and Auditor General, we took evidence from HM Treasury (the Treasury) and the Infrastructure and Projects Authority (IPA) on the Private Finance Initiative (PFI) and Private Finance 2 (PF2).1

2.The government has been using the Private Finance Initiative (PFI) and its successor PF2 for over 25 years to build public infrastructure assets (particularly schools, hospitals and roads) and deliver services to the public. In PFI deals the public sector enters into a contract with a private company specifically created to deliver the asset. The private company raises finance from equity investors and borrowing. Once the asset is constructed and available for use, the taxpayer makes annual payments to the private company over the length of the contract, typically 25 to 30 years. These annual payments cover capital and interest repayments, shareholder dividends, asset maintenance, and in some cases other services like cleaning.

3.There are currently over 700 PFI and PF2 contracts in operation, representing around £60 billion of assets. Public bodies paid £10.3 billion to private companies under these contracts in 2016–17.2 Even if the government does not enter into any new PFI-type deals it will pay private companies a further £199 billion between April 2017 until the 2040s for existing deals, in addition to some £110 billion already paid.3 We examined the PFI model in 2011 as part of our inquiry into “Lessons from PFI and other projects”. We concluded that taxpayers could get a much better deal from PFI deals, which looked better value for the private sector than for the taxpayer, and that in the prevailing public expenditure climate there were legitimate concerns being expressed about the continuing financial cost of PFI for public organisations such as NHS Trusts.4

Quantifying the benefits of using PFI

4.It costs more for public bodies to raise finance through PFI than through conventional procurement.5 The cost of private sector borrowing can be as much as 2% to 3.75% more expensive than the cost of government borrowing.6 To represent value for money for the taxpayer, the benefits of using the PFI model must be greater than the higher financing costs.7 The Treasury told us that the PFI model provides a range of benefits for the public sector, including greater certainty over construction costs, improved operational efficiency,8 and well-maintained, higher quality assets which are usually returned to public bodies at the end of the contract period.9 These benefits are also achievable through methods other than PFI–for example, fixed contracts have been used to reduce cost overruns in publicly-financed projects.10 The Treasury told us that the delivery of more than 700 projects was the main benefit of the model, and that using PFI had resulted in more schools, hospitals and public infrastructure. It told us that another benefit was that these projects were being maintained using Special Purpose Vehicles (SPVs), which it asserted meant they were being maintained to a higher standard compared to the backlog of maintenance work often found in publicly funded projects.11

5.Despite these assertions, after more than 25 years since the first PFI contracts, the Treasury has not attempted to quantify the benefits of using PFI.12 This is despite the Treasury telling the previous Committee in 2011 that it would introduce benefits realisation assessment into its value for money guidance, for PFI projects that are underway.13 The Treasury recognised that PFI projects have a “mixed record” of success but told us that ministers had decided not to request the work required to look back at the historic legacy.14 The Treasury told us that it considered collecting data on the benefits to be the responsibility of individual departments, and told us that its own focus is forward-looking to ensure that future PF2 projects work effectively rather than looking back over the historic stock of PFI deals.15 The IPA told us that data on the benefits of PFI doesn’t exist, and to collect retrospective data against credible counterfactuals across the entire stock of projects would be a huge amount of work and a significant expense.16 We were concerned that this lack of historical data has left a large gap in the Treasury and IPA’s understanding of the benefits of PFI.17 IPA accepted that this was frustrating and that in an ideal situation, it would have an asset register for each Department and each devolved authority, tracking the costs, benefits and status of PFI contracts, as might happen in the private sector.18 When we asked whether the benefits of PFI have justified the higher financing costs, the Treasury told us that this was “an impossible question to answer”, because it did not have the facts needed.19 We were concerned that without any data quantifying benefits, the Treasury and IPA cannot assess whether PFI has been value for money,20 and the taxpayer cannot have confidence in PFI projects.21

6.The IPA told us that it had recruited a single member of staff, “pretty much on a full-time basis”, to identify what data on the benefits of PFI exists across all 700 projects in the PFI portfolio.22 This exercise will only collate rather than create data. The Treasury and IPA told us that this is on-going analysis to inform future investment decisions, which will not result in a report.23 IPA told us that the other area it will focus on will be schools and hospitals nearing the end of their PFI contracts and comparing them against publicly–financed assets to see if the whole life benefits of PFI are materialising, for example how well maintained they are.24 It is entirely possible to collect data on benefits and undertake these exercises: the Department for Education is already collecting data, as part of the Priority School Building Programme, comparing the value for money of privately financed schools on PF2 contracts against public financed ones.25 The Treasury told us that the Department for Education’s review was not initiated by either the IPA or HMT, and expects it will be completed in the summer of 2018.26

There Returns to PFI investors

7.The financing structure of a PFI contract typically consists of 90% debt, in the form of bank loans, and 10% equity provided by investors.27 Private investors require a return on their investments to compensate for risks transferred to them under a PFI deal. Investors fall into two categories: primary investors and secondary investors. Primary investors usually invest during the construction stage of a project, and typically sell after construction to secondary investors who want to invest in an operational project, because the risk of project failure is much lower after the asset has been built.28 In some PFI deals equity investors have been able to generate high returns, particularly when equity is sold after construction.29 Shareholders in the M25 PFI deal, for example, made estimated returns over an eight-year period equivalent to 31% a year when selling their stake in the project.30 This is more than double the typical 12–15% returns investors can expect to receive over the life of a PFI project.31 In written evidence, Professor Dexter Whitfeld, Director of the European Services Strategy Unit, told us that returns to investors in excess of 25% are not uncommon in PFI projects. His analysis of 118 transactions that involved the sale of equity revealed an average return to investors of 28.7%.32 Equity returns this large may reflect errors by departments in their pricing of risk transfer to the private sector at the time they entered into the contracts.33 We examined equity returns in 2010 and concluded that excessive gains may indicate overpriced PFI contracts.34

8.The previous Committee suspected in 2011 that initial investors were able to make excessive profits from selling PFI shares, but lacked the information to be sure. It believed that there was a strong case for sharing these gains with the government. The Committee recommended that the Treasury should introduce arrangements for sharing in investors’ gains.35 The Treasury partially accepted this recommendation saying that consideration would be given to the sharing of gains from PFI equity investors.36 However, the Treasury told us that it had decided against introducing sharing arrangements, despite other countries using such arrangements.37 Instead the Treasury sought to address the problem by introducing equity funding competitions.38 These competitions are intended to drive down the price of equity by creating competitive tension between bidders seeking to invest in a portion of the project equity.39 Government has only used an equity funding competition in one PF2 deal to date, and while this successfully resulted in lowering the returns to equity investors, the approach is relatively untested.40 Moreover, the changes only affect future PF2 deals, and do nothing about excessive returns investors can make on the historic stock of over 700 projects. The public sector will also invest as minority equity stake in all future PF2 deals, which should increase transparency to these returns as the public sector will have a seat on the PFI provider’s Board.41

9.We were concerned to hear of high profile cases where the equity element of PFI contracts have been sold to offshore investment funds that pay little or no corporation tax in the UK, which we first drew to the Treasury’s attention in 2011.42 The previous Committee highlighted the potential for tax avoidance through the sale of equity in the secondary market to investors non-domiciled in the UK.43 The Treasury told us that, while the vast majority of PFI companies are UK tax domiciled and pay corporation tax, public procurement rules prevent discrimination against non-UK domiciled companies and investors.44 As a result, the Treasury cannot control where secondary PFI investors are located, and can only take action if there is evidence of inappropriate tax evasion.45 Professor Whitfield told us that offshore infrastructure funds owned around half of the equity in PFI and PF2 projects, with the five largest offshore infrastructure funds making profits of £2.9 billion in the 5 year period between 2001–2017, and paying less than 1% in tax on their PFI profits.46 The Treasury’s rules require departments to undertake a value for money assessment of a PFI or PF2 deal, and the amount of corporation tax a private company is expected to pay is one component of this. The higher the amount that the company is expected to pay, the more likely that the PFI option will be judged value for money. These tax adjustments have historically been criticised for being too high.47 If the calculations do not reflect the reality that offshore investors dominate the secondary market, then the estimated benefits will be overstated.48 We were concerned that this could lead to an incorrect conclusion that the PFI or PF2 deal offers better value than the project being financed by the public sector.49

Consequences of PFI at local levels

10.The Treasury and IPA have focussed on introducing PF2 and making changes to the private finance model as part of this, rather than looking at the much larger historic stock of 700 PFI projects, where the biggest problems persist.50 The Treasury accepted that the success of PFI projects has been a “mixed record”, and told us that one of the main problems with PFI has been the “rigidity and inflexibility” of contracts and their associated long term costs.51 For example, Liverpool City Council is currently paying around £4 million each year in PFI fees for Parklands High School, which has been empty since 2014. The Council is contracted to pay a further £47 million until 2028.52 IPA told us that this is a “very unfortunate situation” but asserted that PFI expenditure only represents a very small percentage of departmental budgets.53 But inflexible PFI costs can create immense pain at a local level. For example, the National Audit Office reported in 2010 that for one Health Trust, PFI payments represented more than 20% of turnover. Pressures on public finances have increased since then, so this figure could be even higher now, given PFI payments increase with inflation.54

11.The Treasury told us that unless contracts can be terminated on a voluntary basis, which does not always provide value for money, or renegotiated, then there is not always a solution to the problem of large payments under inflexible PFI contracts.55 The Treasury told us that this is especially true in older contracts (particularly those signed before 2000), where public bodies have no other choice but to pay for an asset even if it is not being used.56 Public bodies have terminated contracts where they considered it value for money to do so. In 2017, for example, the Greater Manchester Waste Disposal Authority terminated its recycling and waste management PFI contract.57 In 2014 the Northumbria Healthcare NHS Foundation Trust terminated its PFI contract for Hexham hospital, although the IPA has expressed significant doubts about the value for money of buying out that contract.58

12.The Treasury told us that it is the combined responsibility of the Treasury, IPA and the procuring department to ensure that demand forecasts are reliable to reduce the likelihood that a new school or hospital is left empty part way through a PFI contract, as in the case of Parklands School.59 The Treasury and IPA do not actively monitor struggling PFI deals to assess whether intervention might be helpful.60 The Treasury explained that it only becomes involved when departments present a proposal to buy out a PFI contract, or to renegotiate it in a way that was novel or contentious.61 The Treasury and IPA do not, for example, look across the entire stock of PFI contracts to see if there are any contracts that would be suitable for voluntary termination.62 For example the Treasury told us it was not specifically looking at the Barts Health NHS Trust’s PFI deal, where the final cost of the project will be £7 billion over the life of the contract, with the hospital trust making payments until 2049. The Trust paid £143.6 million in PFI payments in 2015 while running a deficit of over £90 million in the same period, causing significant budgetary pressures.63

13.Another problem currently affecting many public bodies relates to PFI insurance. PFI contracts require the cost of insurance to be agreed at the start of the contract. Public bodies then are entitled to share in any savings should the cost of insurance fall. However there are examples whereby private companies are deliberately withholding money owed to public bodies following a fall in insurance costs. We questioned the IPA on how they are addressing this problem and they told us it was undertaking a review of the PF2 standard contract guidance looking specifically at the costs of insurance.64 This review fails to address problems being faced in existing PFI contracts, and the full extent of this issue remains unquantified. It remains unclear what the Treasury is doing to help local bodies recoup insurance cost savings PFI providers owe them.65


1 Report by the Comptroller and Auditor General, PFI and PF2, Session 2017–19, HC 718, 18 January 2018

2 C&AG’s Report, para 2.4

3 C&AG’s Report, para 2.4; NAO briefing, The choice of finance for capital investment, March 2015, para 2.9

4 Committee of Public Accounts, Lessons from PFI and other projects, 44th Report of Session 2010–12, HC 1201, 1 September 2011

5 C&AG’s Report, para 1.5

6 Q 59

7 C&AG’s Report, para 1.24

8 C&AG’s Report, para 1.5

9 Q22

10 C&AG’s Report, para 1.8

11 Q22

12 Q45

13 Committee of Public Accounts, Lessons from PFI and other projects, 44th Report of Session 2010–12, HC 1201, 1 September 2011, oral evidence Q 200

14 Q23

15 Q23

16 Qq 45, 50

17 Q49

18 Q51

19 Qq 59, 63

20 C&AG’s Report, para 1.24

21 Q51

22 Q46

24 Q48

25 Q24

26 Qq 24, 84, 88

27 C&AG’s Report, figure 1

28 C&AG’s Report, para 3.12

29 C&AG’s Report, para 3.12

30 C&AG’s Report, para 3.12

31 Professor Dexter Whitfield (PFI0001) para 1.1

32 Professor Dexter Whitfield (PFI0001) para 1.1

33 C&AG’s Report, para 3.12

34 Committee of Public Accounts, Financing PFI projects in the credit crisis and the Treasury’s response, 9th Report of Session 2010–11, HC 553, 9 December 2010

35 Committee of Public Accounts, Financing PFI projects in the credit crisis and the Treasury’s response, 9th Report of Session 2010–11, HC 553, 9 December 2010

37 Qq 71–75

38 Qq 29, 76

39 Qq 29, 76

40 C&AG’s report, para 3.13

41 Q122

42 Q 26

43 Committee of Public Accounts, Equity Investment in privately financed projects, 81st Report of Session 2010–12, HC 1846, 2 May 2012

44 Qq 26–27

45 Q27

46 Professor Dexter Whitfield (PFI0001) para 2.2 and 3.1

47 C&AG’s Report, para 1.31, C&AG’s Report, Review of the VFM assessment process for PFI, October 2013, para 3.30–3.35 and Figure 8

48 C&AG’s Report, para 1.31

49 Public Accounts Committee, Equity Investment in privately financed projects, 81st Report of Session 2010–12, HC 1846, 2 May 2012, para 12

50 Q89

51 Qq 23, 89

52 Qq 92–93, C&AG’s Report, Figure 1.21

53 Qq 89, 90, 92–93

54 C&AG’s Report, para 2.5–2.6

55 Q 93

56 Qq 92, 93

57 Qq 89, 112

58 Q 109, C&AG’s Report, para 2.20

59 Q 95

60 Qq 112–120

61 Qq 111, 117–118

62 Qq 112–113

63 Qq 99, 101–104

64 Q 128, C&AG’s report, para 2.10

65 Q 128




Published: 20 June 2018