3The Private Finance Initiative: time for honesty
37.The Private Finance Initiative (PFI) is a distinctive form of purchasing assets from the private sector. In a PFI contract, a company called a Special Purpose Vehicle (SPV) is set up by private sector investors. The SPV is responsible for the financing, construction and maintenance of an asset such as a school or hospital. The SPV borrows from banks and others and contracts with construction and facilities management companies (who will often also be investors in the SPV). Once the asset is constructed, the public sector then pays back the SPV over the period of the contract (typically 25 to 30 years). This payment covers the cost of the construction, the cost of the maintenance of the asset and the costs of financing the SPV. The profits made after all these costs are distributed to the shareholders of the SPV. This structure is the same for a PFI deal and for the Treasury’s replacement for PFI-PF2 (see paragraph 43).
38.There are currently around 700 operational PFI and PF2 deals with a capital value of around £60 billion.87 Annual charges for these projects amounted to £10.3 billion in 2016–17 and future charges which continue until the 2040s will amount of £199 billion.88 The number of PFI or PF2 deals has declined since 2010.89 However, Highways England recently announced that they would use PF2 to finance the £1.3 billion A303 Stonehenge tunnel and roads and the £1.5 billion approach roads to the Lower Thames Crossing.90 Also, in June 2018, the Minister for Justice, Rory Stewart MP announced that the new Glen Parva prison “will be funded through PFI”.91
39.The Government claims that there are benefits to using external finance for projects such as “the discipline and rigour” that lenders apply to projects.92 Sir Amyas Morse agreed that PFI was not “undilutedly a bad thing” as “independent financial bodies … will not let you have the money unless you have done a reasonable job of evaluating the cost of the contract”.93 Taking a different view, Paul Davies told us that one of the motivations behind PFI was “to make a lot of those projects off balance sheet.”94
40.The Government has been clear in the past that PFI or PF2 “should be used where—and only where—it offers better value for money than other means of procurement”.95 However in evidence to us, John Manzoni agreed that the off-balance sheet structure was a key motivation behind using PFI or PF2. He told us that “the entire PF structure is to keep the debt off the public balance sheet. That is where we start.”96 The Treasury Select Committee criticised this argument in 2010, arguing that incentives to use PFI which were not related to value for money should be removed.97 This has been a particular issue in the UK; in other countries like Australia, “very few” PFI deals are off balance sheet.98
41.Concerns have been raised about the value for money of PFI for the public sector. Early PFI projects often reported huge profits for investors who made money when they refinanced the project after the asset had been built. Once the asset is built and the project has moved to the maintenance phase, risk diminishes so that banks were willing to offer a lower interest rate for the project debt.99 Following recommendations from PAC, changes were made to ensure that these gains were shared with the public sector.100
42.In 2011, the Treasury Select Committee reported that “the use of PFI has the effect of increasing the cost of finance for public investments” as the cost of private sector borrowing through an SPV is always higher than the cost of the Government borrowing on its own account.101 The Committee found that the main benefit claimed for PFI was the “the transfer of construction risk” but argued that a thirty year contract was “not necessary” to transfer responsibility for a construction project that might only last a couple of years. Sir Amyas Morse agreed that part of the issue with PFI was that the decision to bundle maintenance and building contracts together was a “bit naïve”.102 Margaret Stephens told us that these long contracts reduced flexibility and that “one of the problems with PFI has been inflexibility”.103 The NAO in their recent report said that there is still a “lack of data” on the benefits of PFI and PF2.104 PAC have called for the Treasury to publish data about the benefits of PFI by April 2019 and set out how they will evaluate the value for money of current PF2 projects in the absence of this data.105
43.Both the UK Government and the Scottish Government have developed proposals to reform PFI.
- The UK Government developed PF2 which has some different features from PFI, including more transparency about equity returns on projects and the public sector retaining risks such as utilities costs and change in law.106 The Minister said that the Government thinks “the PF2 approach provides better value for the taxpayer”.107 Earlier this year, the NAO reported that “the fundamentals of the financing structure and contract remain the same” as PFI.108
- The Scottish Government have also developed an alternative to PFI called the “Non-Profit Distributing” (NPD) model. It was announced in 2008. It said that this offers “significant improvements to previous PFI deals” including “greater transparency by having a public interest director serving on the board of the company delivering the project”, “transfer of risk … without the excessive private sector profits”, removing index-linking from payments relating to the construction cost and not including “soft facilities management”.109 (Soft facilities management includes services like cleaning and security and excludes building fabric maintenance.110) The Scottish Government in their evidence to our inquiry say that they have delivered “more than £1 billion in savings” through more efficient infrastructure spending.111
44.The Government originally designed mechanisms to limit the gains made by private sector investors after the refinancing of PFI schemes (Paragraph 40). The Government has recently decided to change its treatment of these gains: instead of sharing them equally with the investor, under PF2 the Government has decided to only take 30% of the gains. The NAO said that this change was made “to ensure that future projects are recorded as off-balance sheet and excluded from headline debt statistics under the new rules, even though these changes may reduce V[alue] f[or] M[oney].”112 PAC have said that the Treasury should “revisit” this approach and should write to them before any new PF2 projects are signed to demonstrate “ how the changes introduced under PF2 are not influenced by balance sheet treatment.”113
45.PFI financing costs more than government financing because the state can borrow at a cheaper rate than the private sector. While we are confident that PFI costs more than conventional procurement, neither we nor the National Audit Office nor the Public Accounts Committee can find any evidence of the benefits the Government claims for it. It is unacceptable that almost 30 years after the first PFI projects were initiated, the Treasury cannot produce an evidence base to support its claims that PFI is worthwhile for any reason apart from the fact that it takes debt off balance sheet.
46.The Treasury and the Government should not approve any further PFI projects until they can clearly justify, based on evidence, their claims about the benefits of the scheme. It will seem bizarre to many observers that the Government has chosen to pay more than it could for £60 billion worth of projects, without evidence of any benefits from the extra cost involved in using this financing method. Ministers should be able to choose to use state finance where it is clear that private finance would bring no benefits. The Treasury should scrutinise in particular the recently approved transport projects (the A303 Stonehenge tunnel and roads and the £1.5 billion approach roads to the Lower Thames Crossing) to ensure that there is good evidence that private finance represents the best value for money in these cases.
47.The Government should investigate the experience of the Scottish Government with the Non-Profit Distributing model and report back in its response to this report its view of what the UK Government can learn from the Scottish experience.
48.The Government has previously maintained that it selected private finance only when it judged it to be value for money to do so. However both the comments of the Civil Service Chief Executive, and more importantly, recent changes to the Treasury’s guidance on refinancing make clear beyond a reasonable doubt that the Government’s true reason for using the Private Finance Initiative or PF2 is that the debt does not have to be shown in the National Accounts or within the national debt.
49.Balance sheet treatment is not an appropriate justification for the choice of method of finance or for the terms of government contracts, especially if it means the contracts cost the Government more. We welcome the decision to clawback excessive profits from refinancing; however, it is wholly unacceptable that the Government have reduced this in order to conceal the true nature of public sector liabilities. The Government should note in their response that our recommendation follows similar arguments from both the Treasury Select Committee and the Public Accounts Committee. Without compelling evidence and justification from the Treasury, the Government should re-introduce refinancing provisions allowing 50% gain share for the public sector.
87 The Treasury launched PF2 as a replacement for PFI in December 2012. We consider the differences between the two contractual mechanisms in paragraph 33 of this report. All figures are from Comptroller and Auditor General PFI and PF2, p. 4
88 All figures are from Comptroller and Auditor General PFI and PF2, p. 4
89 PF2 is the Government’s new revised version of PFI. Report by the Comptroller and Auditor General, PFI and PF2, session 2017–19, HC 718, p. 24
90 Report by the Comptroller and Auditor General, PFI and PF2, Session 2017–19, HC 718, p. 46
94 Q576 (Paul Davies)
95 HM Treasury Consolidated Budget Guidance February 2018 p. 117- the same point is made in HM Treasury A new approach to public-private partnerships (December 2012) p. 21, HM Treasury Managing Public Money March 2018 Paragraph A.7.4.3
97 Treasury Committee, Private Finance Initiative, Seventeenth Report of Session 2010–12, pp. 13–14
98 PWC Public Sector Research Centre, The Value of PFI; hanging in the balance (sheet)? (2008), p. 2
99 Report by the Comptroller and Auditor General, The refinancing of the Fazakerley PFI Prison contract, Session 1999–2000 , HC 584
100 Report by the Comptroller and Auditor General, PFI Refinancing Update, Session 2001–2002,HC 1288, p. 2
101 Treasury Committee, Private Finance Initiative, Seventeenth Report of Session 2010–12, HC 1146, p. 55
104 Report by the Comptroller and Auditor General, PFI and PF2, Session 2017–19, HC 718, p. 5
105 Public Accounts Committee, Private Finance Initiative, Forty-Sixth Report of the Session 2017–19, HC 894, p. 5
106 Report by the Comptroller and Auditor General, PFI and PF2, Session 2017–19, HC 718, p. 38
108 Report by the Comptroller and Auditor General, PFI and PF2, Session 2017–19, HC 718, p. 5
110 More detail can be found in International Facilities Management Association What is facilities management (2018)
112 Report by the Comptroller and Auditor General, PFI and PF2, Session 2017–19, HC 718, p. 45
113 Public Accounts Committee, Private Finance Initiative, Forty-Sixth Report of the Session 2017–19, HC 894, p. 7
Published: 9 July 2018