The government has announced that the best practice centre for managing private finance initiative contracts that was unveiled in the Budget is to be based in the Department of Health and Social Care.
In his Budget speech yesterday, chancellor Philip Hammond announced that the government would create the centre for existing deals at the same time as ending the use of PFI, and its successor PF2, for new deals.
Hammond told MPs that he remained in favour of public-private partnerships to fund infrastructure where it delivers value for the taxpayer and genuinely transfers risk to the private sector.
However, he said that there was “compelling evidence that the Private Finance Initiative does neither” and said that “the days of the public sector being a pushover must end”.
Under the PFI model, central and local government use private contractors to build and maintain public infrastructure and then pay an annual fee to use it. After concerns that this led to high payments for public service providers, the updated PF2 model aimed 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.
Hammond said the new “centre of excellence” would actively manage the PFI contracts in taxpayers’ interest, starting in the health sector, where it has been estimated that hospital trusts are paying as much as £2bn in annual usage payments.
The Budget Red Book confirmed that the centre would be based in the Department of Health and Social Care.
Hammond added that the government would “abolish the use of PFI and PF2 for future projects”, and the Red Book confirms the move “in light of experience since 2012 [that] found the model to be inflexible and overly complex”.
However, Hammond highlighted that half of the UK’s £600bn infrastructure pipeline will be built and financed by the private sector, and the government is to undertake an iinfrastructure finance review “to ensure that it continues to meet market needs as the UK leaves the EU”.
The announcement comes after the Treasury rejected a call from the Public Accounts Committee to calculate the returns investors have made from Private Finance Initiative projects, saying that the cost of the exercise would be too high.
In a report examining the use of the PFI, and its successor PF2 introduced in 2012, MPs said it was “unacceptable” that the Treasury has no data on the benefits of PFI, despite more than 25 years of the funding method being used to build schools and hospitals around the country.
After examining 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, MPs recommended that the Treasury should calculate the returns to originating PFI equity investors when they sell on their stake.
The report also highlighted that one government official was collating the data on benefits of PFI schemes.
However, the Treasury rejected the recommendation to calculate the returns made by private investors. In its response to the PAC earlier this month, it highlighted that reforms introduced with PF2 aimed to provide greater transparency about the returns that investors in the schemes will make. Investors in previous PFI schemes are not required to make such disclosures.