Only one civil servant reviewing 700 PFI projects for value for money, MPs reveal

Written by Richard Johnstone on 20 June 2018 in News
News

Public Accounts Committee warns changes to rules for successor PF2 projects risk repeating past mistakes

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It is “unacceptable” that the Treasury has no data on the benefits of the Private Finance Initiative despite more than 25 years of the funding method being used to build schools and hospitals around the country, MPs have said.

In a report looking at the use of the finance model, where central and local government use private contractors to build and maintain public infrastructure and then pay an annual fee to use it, the Public Accounts Committee found only one government official was collating the data on benefits from over 700 projects.

The Treasury has claimed that the PFI model, and its successor PF2, provided a range of benefits, including greater certainty over construction costs, improved operational efficiency, and higher-quality, better-maintained assets.

However, today’s report said that the Treasury is unable to show that such improvements outweigh the additional financing costs of the model, estimated by the National Audit Office to be around 2-3.75% above the cost of public borrowing.


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“The Treasury told us that it considers collecting data on the benefits of PFI to be the responsibility of individual departments,” MPs stated. “It acknowledged that it has not attempted to quantify the benefits of using PFI, despite telling the previous [Public Accounts] Committee in 2011 that it would introduce benefits realisation assessment into its value for money guidance, for PFI projects that are underway. Without quantifying the benefits it is impossible to know whether PFI offers value for money, yet the Treasury continues to assert that it does.”

The Infrastructure and Projects Authority, the joint Cabinet Office and Treasury agency that works to share best practice on delivery and financing for major schemes, told the committee it had a single civil servant to look across the entire stock of PFI and PF2 projects and see what data exists. However, this official will only be collating existing information across 700 contracts in operation, with around £60bn in assets, rather than create new information.

MPs said it was unclear how the Treasury and IPA will use the results of this work, after the Treasury wrote to the committee to say there would be no published report or a review as a result. The committee called on the Treasury to publish results by April 2019.

The Treasury and IPA were also urged to review a representative sample of PFI projects with a public sector comparator, for example roads and hospitals, to analyse the suggested benefits of PFI by December 2018. This would complement the Department for Education's work to assess the use of private finance to fund the Priority School Building Programme.

PAC chair Meg Hillier said the government had now been unable to answer basic questions about PFI now for a quarter of a century.

“It beggars belief that such apparently institutionalised fuzzy thinking over such large sums of public money should have prevailed for so long,” she said.

“The Treasury simply cannot support its assertion that PFI represents good value for money. Yet while government is now seeking to collate the PFI data that does exist, it does not intend to publish the results of this work. This is unacceptable. Government must level with taxpayers about the value of PFI.”

She added that both the Treasury and the IPA must produce clearer guidance on how it expects public bodies to use the government’s much-heralded but so far little used successor to PFI, called PF2.

PF2 aims to provide greater transparency about the returns that investors on the schemes will make, and allows the government to take a stake in the special purpose vehicle formed to deliver a project and share in any gains from the project, but the committee concluded this doesn’t change the model fundamentally.

“We note that there are only a handful of PF2 projects in the pipeline which suggests that the government has lost faith in its own usage of PFI. If this is the case the government should provide a clear explanation of its position,” the report stated.

MPs also called on the Treasury to more explicit about its position on future deals. Although the department claims the UK’s level of debt and accounting treatment of PFI and PF2 do not form any part of the decision about whether to use PFI, it is changing the design of PF2 to prevent capital costs of future projects from counting towards UK national debt statistics.

Under PF2, the public sector owns a share of the project delivery company which means it also shares any savings made when providers lower their costs of borrowing through refinancing.

The report noted that this reflects the recommendations of previous PAC reports on the large profits made by some providers after refinancing, but highlights that the Treasury is significantly reducing the amount the public sector will receive if savings are made.

The Treasury has cut the maximum gainshare arrangement from 50% to just 33% - a move which the committee claims is to ensure that projects are classified as off balance sheet under national accounting rules, since the higher percentage made it more likely PF2 schemes would count towards UK debt.

This trade-off is being made even though the MPs highlighted that “ministerial submissions have stated that the Treasury has recognised that this change will have a negative impact on value for money”.

This must be revisited to ensure the focus is on value for money and not accounting treatment, Hillier said. “We are not convinced the design of PF2 has fixed the underlying weaknesses of the previous method.

“Government’s own figures suggest the UK needs to spend some £300bn on infrastructure over the next couple of years. It is critical that taxpayers are not further lumbered with excessive costs arising from poor contracting.”

Responding to the report, a Treasury spokesman said the government had significantly increased public investment in vital projects like roads, schools and hospitals while continuing to use private finance where it offers value for money.

“We made changes to PFI in 2012 to improve it and always compare the cost of using public or private finance to ensure value to the taxpayer for these projects. Since 2010 only 80 such contracts have been signed, compared to 620 signed between 1997 and 2010.”

PF2 represents a specialist form of financing that can be appropriate under certain well-defined conditions, the ministry added, and its use is likely to be more limited than PFI.

About the author

Richard Johnstone is CSW's deputy and online editor and tweets as @CSW_DepEd

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