Government departments have cut back on private finance initiative (PFI) deals because they are concerned about their value for money, a National Audit Office (NAO) report has revealed.
The public spending watchdog’s report, PFI and PF2, says that government payments to privately funded infrastructure contractors will continue well into the 2040s, and future payments are forecast to total £199bn, or an average of £7.7bn a year over the next 25 years – even if there are no future deals.
Civil engineering PF2 deals in the pipeline include the £1.3bn A303 Stonehenge tunnel and roads and the £1.5bn approach roads to the Lower Thames Crossing. The report was prepared before Carillion went into compulsory liquidation earlier this week.
There are more than 700 PFI and PF2 deals currently in operation, and their capital value is around £60bn. These include the 25 year, £2.2bn Streets Ahead PFI deal between Amey and Sheffield City Council, where Amey is embroiled in a tree felling row with some local residents.
There is an incentive for public sector clients to show the benefits of PFI deals as a way of demonstrating a project’s value for money and showing that it would be built sooner than if it had to find alternative public funding, the report claims. But the report notes that a Treasury Committee had concluded that the value for money calculation undertaken by government departments was “flawed” and had not been revised. Private finance debt is removed from the government balance sheet resulting in short term incentives for the government to use private funding, the report claimed.
The watchdog also said that cutting the costs of existing PFI contracts was difficult due to the structure of the deals, lack of information access rights, and the lack of an incentive for investors to cooperate. Savings might be achieved through means such as market benchmarking and changes in a project’s scope, but these put the standard of service provided at risk, says the report.
Transport for London (TfL) has terminated three deals using break clauses, saving a reported £476M, but the report says that most deals do not have such these. These deals include TfL taking direct control of Tramlink in 2008, only 12 years into a 99 year PFI deal.
On PF2 deals, the report said the fundamentals of the PFI contracts were unchanged. A change announced by the Treasury at the PF2 launch was not implemented. This was to introduce a requirement for equity to account for 25% of the finance, as opposed to the norm of 11%. The Infrastructure & Projects Authority and the Treasury claimed lower levels of debt were unnecessary as the lending market improved.
Commenting on the report, Committee of Public Accounts chair Meg Hillier MP said: “After 25 years of PFI, there is still little evidence that it delivers enough benefit to offset the additional costs of borrowing money privately. Many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change.
“I am concerned that the Treasury has re-launched PFI under new branding, without doing anything about most of its underlying problems. We need more investment in our schools and hospitals but if we get the contracts wrong, taxpayers pay the price.
“Decisions that have an impact on taxpayer funded public services for decades need to be to thought through. There are lessons to be learned and these need to be considered in the context of 20 years, not just expediency today.”
A government spokesperson said in response to the report: “Many vital infrastructure projects like roads, schools and hospitals are paid for by PFI and PF2, stimulating our economy, creating jobs and delivering better public services.
“We have reformed how we manage PFI contracts, and through PF2 have created a model which improves transparency and offers better value for money.
“Tax payer money is protected through PFI and PF2 as the risks of construction and long-term maintenance of a project are transferred to the private sector. Private finance is more transparent, with information and data published by government annually.”
The PFI and PF2 deals are forms of Public Private Partnerships (PPPs). In both, a privately funded company or Special Purpose Vehicle (SPV) – is set up and borrows to construct operate and maintain a new asset such as a school, hospital or road under a long term contract. Over the term of the contract, typically 25 to 30 years, the taxpayer makes payments to the SPV to cover debt repayment, financing costs, maintenance and any other services provided.
The cost of borrowing is more expensive when privately sourced, than when the governmennt borrows money. Data collected by the Infrastructure & Projects Authority on PFI and PF2 deals entered into since 2013 showed that debt and equity investors were forecast to receive returns of between 2% and 4% above government borrowing.
Additional costs such as insurance, losing interest on cash held in commercial accounts opposed to public ones, costs for external advisors and management and administration fees are all cited in the NAO report as pushing up the cost of the deals.
Since the 1990s the public sector has used private finance to build assets. However, in 2008, the government reduced its use of PFI after the 2008 financial crisis, as the cost of private finance increased. According to the NAO report, MPs became increasingly critical of the model and in 2011, HM Treasury consulted on reform. It made some changes and relaunched the model as PF2 a year later. So far, two departments, the Department of Health and Social Care and the Department for Education, have used PF2.
Today, more than 90% of the government’s capital investment is publicly financed, but there are still over 700 PFI and PF2 deals in operation, with a capital value of around £60bn.