Private Finance Projects and off-balance sheet debt - Economic Affairs Committee Contents


Abstract

Expectations of public services have risen steadily over many years and Governments have struggled to satisfy them within the constraints of annual public spending limits. Growing public payrolls tend to pre-empt resources for maintenance and renewal of infrastructure. Governments have understandably looked for new ways to fund investment and reduce the risks of implementation. One is Private Finance Projects (PFPs), financed by privately-raised debt and equity and paid for by public authorities over many years.

The Private Finance Initiative (PFI) model was put forward in 1992 by the Conservative Government. PFI projects did not become widespread before the Conservatives left office.

After 1997, the Labour Government adopted and expanded use of Private Finance Projects as Public-Private Partnerships (PPP). The Treasury steered public authorities to PFP/PFI as the way to finance their projects. The number of deals grew fast, fuelled by readily-available finance.

In recent years PFPs have delivered a large programme of infrastructure in short order. They are probably here to stay. Although a final verdict has to await the outcome of very long-term contracts, it seems timely to take stock now that PFPs have become familiar and reached significant scale but face the challenge of scarce private finance and cuts in Government spending.

PFPs are used in a wide range of projects. There are two broad, conflicting views:

  • their supporters say that private capital at risk has brought much-needed rigour and efficiency to building and maintenance of public infrastructure and delivered more than would have been possible without them.
  • their opponents condemn PFPs as expensive and inflexible, a drain on non-PFP public service budgets and a way for Governments to evade public spending rules and fudge national accounts by excluding PFP liabilities. They also deny that real risk transfer takes place.

A dearth of hard data, especially on comparable projects subject to conventional procurement, encourages assertion rather than analysis. This needs to be remedied.

The next few years will show if private finance can retain its role in public procurement when money is tight and Parliament and the public expect better evidence that it is being well spent. Competitive pressures will play their part and more can be done to encourage competition in PFPs. Central Government also has a key role in ensuring and demonstrating that its approach to public procurement is efficient and economical. For PFPs, it needs to be made clearer that private finance offers good value for money despite higher borrowing costs than public finance.

At the same time, means should be explored of bringing together private rigour and public finance so that public procurement might benefit from the best features of each.

Where PFPs are efficient and value for money they should not need the support of any institutional bias in their favour. Their virtues should enable them to win acceptance as a procurement path in the right circumstances on their own merits. Within spending limits, public authorities should be free to choose the procurement method which offers best value for money. Continued improvement in the structure of PFP contracts (particularly with respect to flexibility and innovation) and in public sector contract negotiation and management skills is also needed.

The approach to PFPs has developed organically over the years. Lessons have been learned in how to constrain the opportunities for the providers of private finance to make excessive returns and in what types of project are, or are not, suitable for PFP treatment. But there is more to learn.

On the one hand some projects are too large, complex and uncertain to be suitable candidates. On the other, now that private finance has become established in the maintenance and servicing of public infrastructure, thought should be given to the scope for expanding its use further into the provision of professional and other services currently provided directly by the public sector.

Greater transparency and clarity in the presentation of PFP liabilities in national accounts would help improve understanding of the overall economic and social impact of PFPs and confidence in the accounts themselves.


 
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