1. Our report on the Private Finance Initiative set
out a number of deep concerns about the value for money of PFI
to the taxpayer. A great deal of public money may have been misallocated
or wasted. Similar concerns have been expressed by the Committee
of Public Accounts. The conclusions of both Committees reflect
long standing criticisms from many quarters.
2. There have recently been encouraging signs of
reform. On 15 November 2011 the Chancellor of the Exchequer announced
the Government's intention to reform the PFI, saying that it "shares
some of the commonly identified concerns that PFI contracts can
be too costly, inflexible and opaque".[1]
He stated that the Government needed to ensure that investment
in public services was cost effective and provided taxpayers with
maximum value for money. He announced that the Government would
consult on a replacement for PFI that would draw on private sector
innovation but at a lower cost to the taxpayer.
3. It launched its consultation on 1 December, saying
that:
gives greater financial transparency at all levels
of the project, so that the public sector is confident that it
is getting what it paid for and that the taxpayer is sure it is
getting a fair deal now and over the longer term.
4. We welcome the fact that the Government has recognised
many of the problems with PFI that we identified in our Report,
which said that the PFI model:
- has a higher cost of capital
than that of government bonds, and a flawed value for money appraisal
process;
- involves an over-bureaucratic procurement process,
which we said led to high barriers to entry and a concentrated
supply market;
- has an inherent lack of flexibility; and
- is not the only way for risk transfer to the
private sector to take place.
5. In addition to the present consultation on a replacement
for PFI, there are also some welcome signs of progress in the
Government response. For example:
- the Treasury is reviewing the
value for money guidance and agrees that improvements could be
made. Following the review and discussions with departments and
the National Audit Office, revised guidance will be published
in 2012.[2] We see no reason
why further detail about what is being considered should not be
published now;
- the Treasury is examining its Green Book guidance
to departments on optimism bias adjustments to ensure value for
money outcomes; it also intends to improve the collection of project
outturn data in order to inform future projects;[3]
- the Treasury says that it will consider how to
make information on PFI contracts and investors more transparent.[4]
We will monitor the Treasury's progress on this.
6. The Government response does not, however, fully
address our argument that anomalies in the system of national
accounts continue to provide an incentive to pursue PFI at central
government level. This incentive remains in place because, first,
the current rules exclude PFI liabilities from calculations of
Public Sector Net Debt, and, second, privately financed investment
allows government departments to spend more than their allocated
capital budgets.
7. The Treasury's response is inconsistent about
whether accounting considerations play a role in financing decisions.
We recommended that the form of financing which should be chosen
for projects should be that which offered best value for money,
regardless of accounting considerations. In its response to our
recommendation in paragraph 94, the Treasury said that any consequential
increase in public borrowing might compromise the achievement
of the fiscal targets.[5]
This could be taken to mean that PFI is still used, at least in
part, as a means of off-balance sheet finance, rather than because
it represents the best financing method available.
8. In addition, even a new system which reduced reliance
on the banks, maintained incentives on the private sector to deliver
projects to time and budget, transferred performance risk to the
private sector and succeeded in streamlining procurement might
still leave some of the inherent inefficiencies of the PFI system
in place. The Government will need to make clear in due course
whether its eventual proposals constitute a new form of off-balance
sheet finance. It remains the case that the most cost-effective
method for sourcing capital from institutional investors is to
sell government gilts to them.[6]
Inefficiencies associated with public procurement could be tackled
by transferring project risk to contractors on the basis of fixed
price design and build contracts, as stated in our Report.[7]
9. On 11 December 2011 it was reported that Transport
for London had been prevented by the Government from increasing
its own borrowing as it wished in order to fund investment in
the Crossrail project, and that TfL had been told that the majority
of the investment had to be through the PFI. It was further reported
that TfL had cited the Treasury Committee's Report on the costs
associated with using PFI.[8]
We will be writing to the Treasury about this matter.
National Infrastructure Plan 2011
10. There have been other recent indications of alternatives
to PFI being developed by the Government. The National Infrastructure
Plan 2011 which was published alongside the recent Autumn Statement
includes over 500 projects and programmes, in total worth over
£250 billion. The Infrastructure Plan states that "almost
two thirds of the expected investment between 2011 and 2015 will
be privately funded and the remainder will either be partially
or fully publicly funded".[9]
11. The Government says that it:
is taking a fundamentally new approach to coordinating
public and private investment in UK infrastructure ...
The UK, like other countries, faces a number
of challenges in attracting this private investment. Ongoing instability
in financial markets could disrupt the supply of long term bank
lending for project finance. Few institutional investors have
developed the capability to assess direct investment opportunities
in individual infrastructure projects. Much of the infrastructure
needed in the next decade presents a higher risk profile for private
investors, notably the energy infrastructure associated with a
transition to a low-carbon economy.
12. The Government says that it will take a number
of steps to bring in new infrastructure investors, explore new
sources of revenue to support investment, allow local authorities
more flexibility to support major infrastructure, and use guarantees
when investors cannot accommodate certain risks. The Government:
- has signed a Memorandum of
Understanding with two groups of UK pension funds to support additional
investment in UK infrastructure. The Government is also working
with the Association of British Insurers to set up an Insurers'
Infrastructure Investment Forum. The Government says that it will
target up to £20 billion of investment from these initiatives;
- will explore innovative ways of financing improvements
to the A14, including tolls, which will also be investigated for
other new capacity proposals;
- will consider allowing city mayors to borrow
against future receipts of Community Infrastructure Levy (CIL)
where this can make a significant contribution to national infrastructure;
- will, subject to affordability, consider using
transparent forms of guarantee to support specific projects where
this provides best value for money for taxpayers and users, recognising
that the private sector cannot always bear every risk in major
new projects.
With PFI projects reliant on a banking sector which
can no longer provide capital at a competitive rate, the exploration
of other mechanisms to engage private finance seems sensible.
However, there are risks associated with the methods proposed
by the Government which involve taking on further contingent liabilities
or providing guarantees, which could crystallise into calls on
public funds. The Committee will monitor the development of these
initiatives carefully to ensure that full transparency is brought
to any such call. The creation by the back door of new forms of
financing which carried some of the defects of PFI would not be
the right way forward.
PFI CREDITS
13. We note that the Plan also says that the Government:
has allocated £2 billion in Waste Infrastructure
Credits (formerly known as PFI Credits) to 32 waste treatment
and management projects, providing publicly funded infrastructure
investments using private finance. This investment is managed
by the Waste Infrastructure Delivery Programme (WIDP) and will
help divert an additional 1.6 million tonnes of waste from landfill
in England by 2020.[10]
The Government response to our report, however, said
that the steps it had taken to improve the cost effectiveness
and transparency of PFI included "abolishing PFI credits
at the Spending Review 2010 to create a level playing field for
all forms of public procurement". Under the Infrastructure
Plan, however, it would appear that PFI credits have not only
survived, but have been rebadged. The Government must make
clear exactly what action it took with respect PFI Credits in
2010, and why they are apparently now being reclassified as Waste
Infrastructure Credits, a term which will disguise their true
nature.
Responses to our Report
14. The Committee published its Seventeenth Report
of Session 2010-12, Private Finance Initiative, on 19 August
2011 as House of Commons Paper No. 1146. The Government response
was received on 19 October 2011 and is published as an Appendix
below, together with responses from the National Audit Office
and the Office for Budget Responsibility. The Committee's conclusions
and recommendations are in bold text and responses are in plain
text.
15. We are grateful to our Specialist Adviser Mark
Hellowell, Lecturer at the University of Edinburgh, for his assistance
with this Report.
1 Written Ministerial Statement, 15 November 2011 Back
2
See response to paragraph 84 Back
3
Ibid. Back
4
See response to paragraph 107 Back
5
"... the Government has set a clear plan for deficit reduction
and does not accept that levels of public sector borrowing should
be increased. While the fiscal mandate focuses on the current
budget, capital expenditure levels also impact on it through debt
interest costs; and they contribute directly towards progress
on the supplementary target to reduce public sector net debt as
a proportion of GDP". Back
6
See Seventeenth Report of the Treasury Committee, Session 2010-12,
HC 1146, paragraph 76 Back
7
Ibid., paragraph 95 Back
8
Minister blocks Boris Johnson's plan to fund £1bn Crossrail
project, 11 December 2011: http://www.guardian.co.uk/uk/2011/dec/11/crossrail-funding-boris-johnson
Back
9
National Infrastructure Plan 2011, p. 6 Back
10
Ibid., para 3.147 Back
