COMMONS

Committee publishes report on Private finance initiative

01 September 2011

On Thursday 1 September 2011, the Commons Public Accounts Committee publishes a report examining lessons from the private finance initiative (PFI) and other projects.

Speaking on the publication of the report, the Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, said:

"The UK has 700 PFI contracts, with a further 61 projects in procurement and many others where PFI is being considered as an option.
But while PFI has delivered many new public buildings and services that might not otherwise have been built, it is far from clear that it has provided value for money. At present, PFI looks like a better deal for the private sector than for the taxpayer.
Government has treated PFI as the 'only game in town', but the use of this form of financing has been based on inadequate comparisons with conventional procurement which have not been sufficiently challenged. In future, the use of PFI must be based on a rigorous and transparent comparison with alternative funding methods.
We have seen information which strongly suggests that investors are making excessive profits from selling on shares in PFI projects. However, the Government currently lacks sufficient information on the returns made by investors, who have been able to hide behind commercial confidentiality.
The Government should extend freedom of information to private companies providing public services and should introduce arrangements for sharing equity gains.
The Treasury assumes tax revenues when assessing the value for money of a PFI project, yet does not monitor whether taxes are paid. In our evidence we found that tax revenue is being lost through the use of off-shore arrangements by PFI investors. The Treasury should measure the tax revenues from PFI deals and should ensure that this is taken into account in future assessments of PFI against conventional procurement.
Despite the billions of pounds of taxpayers' money at stake, the Treasury has so far not done enough to address the scope for greater efficiencies from existing PFI contracts.
So I welcome the recent announcement by the Treasury that it plans to find at least £1.5 billion of savings across the operational PFI projects in England. But we will want to see clear evidence that real savings have been made, and that they have not been made simply through service cuts and at the expense of service quality."

Margaret Hodge was speaking as the committee published its 44th Report of this Session which, on the basis of evidence from HM Treasury, the Major Projects Authority and certain prominent investors, examined lessons from PFI and the implications for future projects.

Background

The UK has 700 PFI contracts delivering a wide array of public assets and services with 61 further contracts under active consideration by the present Government. Restrictions on capital budgets have meant that many of the assets delivered by PFI, including hospitals, schools, prisons, courts and roads might not otherwise have been built.

Findings

In the present public expenditure climate there are legitimate concerns being expressed about the continuing financial cost of PFI for public organisations such as NHS Trusts. The committee believes that some of the Government's case for using PFI has not been based on robust analysis, but on ill-founded comparisons and invalid assumptions. On individual projects, the costs and benefits identified in business cases need to be revisited after contracts are signed and periodically thereafter, to inform future procurement decisions.

In particular, the committee's view is that the Government should revisit the tax assumptions it builds into the cost and benefit case for PFI. Government assumes tax revenue for Government from PFI investments, but one of the largest PFI investment funds told us that 72% of the shareholders of its management company are registered offshore.

The committee believes that taxpayers could get a much better deal from PFI as demonstrated by the buoyant and profitable market in PFI deals. The taxpayer's position is made worse by poor transparency of investor and contract information alongside patchy public sector commercial skills.

The committee suspects that initial investors are able to make excessive profits from selling PFI shares, yet lacks the information to know for sure. Freedom of information provisions do not currently apply to private providers of public services though investors told the committee that they are willing to make more detailed information available. The committee believes there is a strong case for sharing these gains with the Government. The committee looks to the Treasury and departments to make full use of existing contractual rights of access and further investor information to increase transparency and find ways for taxpayers to get a share of these gains.
 
At present, PFI deals look better value for the private sector than for the taxpayer. Private sector funds have built up portfolios of PFI projects from the large market that government has created. The private sector manage these projects as a portfolio, benefiting from potential economies of scale without any obligation to share such volume gains.

Government, in contrast, has a fragmented approach and is not making use of its bulk buying power. The committee accepts that contracts have got tighter over time and that the Treasury is seeking further efficiency savings, and would urge a bold and speedy approach. Achieving any savings on existing contracts will depend on voluntary agreements with investors and suppliers. The committee looks forward to the results of a pilot project seeking to identify opportunities for public sector wide savings from existing contracts. The onus is on the Treasury and departments to negotiate tangible savings without putting the quality of public services at risk. 

Further Information

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