UK Parliamentary Committee Report on PFI (PPP) August 2011

All PFI projects have to complete a Value for Money (VfM) assessment of the PFI option compared to an conventional procurement option with funding provided by central government (Public Sector Comparator)

VfM analysis of PFI project to redevelop Royal Liverpool and Broadgreen University Hospital arrived at value for money benefit of 0.03%

“we are surprised at the precision of this comparison given the inherent uncertainty in any long term investment decision”

The same value for transaction costs are used for both the PFI and PSC option. This goes against the evidence that a PFI procurement involves "significant transaction costs " (technical, legal, financial advisors) which are greater than those of a PSC procurement

It was assumed that Internal Rate of Return investors would demand would be 13%. The evidence shows -it varies between 13% to 15%. Several PFI proposals do not provide ‘vfm’ if IRR is taken at `14%.

Whole lifecycle costs were not properly compared between PFI and PSC. They adjusted down up to 15% for PFI option.

a real discount rate of 3.5% has been used for the first 30 years of the project. This is much higher than the real rate on 30 year index linked gilts which is currently less than 1%

An adjustment of 6% has been made to increase the PSC option - to take corporation tax receipts from the PFI option into account.

The discounted value of transferred risk is assessed at 9.78%. This adjustment for 'risk transfer' acts to reduce the PFI cost.

We have seen evidence that PFI has not provided good value from risk transfer. Some of the claimed risk transfer may also be illusory

Assumption that the costing of the conventional procurement route will always be over optimistic (optimum bias). Upward revision of the PSC option of 19% for the CAPEX and of 15% for OPEX. Assuming that there will always be significant cost over-runs within the non-PFI option is one example of PFI bias.

Optimism Bias is applied to conventional procurement but not to PFI, giving an inbuilt advantage to PFI in the comparison.

On-time and on-budget performance can be secured through conventional procurement, so long as the design and build services are procured through a fixed-price, "turn-key" contract.

There is no convincing evidence to suggest that PFI projects are delivered more quickly and at a lower out-turn cost than projects using conventional procurement methods. PFI contract price is set at a much more advanced stage in the process.

It is evident that a project delivered "to time and to budget" (in post-contractual terms) may nonetheless represent poor value for money if the price paid for the risk transfer was too high.

PFI contracts are inherently inflexible. The inflexibility of PFI means that any emergent problems or new demands on an asset cannot be efficiently resolved.

The vast majority of the costs of this PFI project are related to the capital expenditure and its financing.

The price of finance is significantly higher with a PFI.

The financial cost of repaying the capital investment of PFI investors is therefore considerably greater than the equivalent repayment of direct government investment.

“Analysis of the financing costs shows that the costs of financing the building of the new hospital were significantly higher (71%) than if the same finance had been raised by the government”

Recent data suggests that the Weighted Average Cost of Capital of a PFI is double that of government gilts.

Government has always been able to obtain cheaper funding than private providers of project finance but the difference between direct government funding and the cost of this finance has increased significantly since the financial crisis.

PFI will only provide value for money if this differential in the cost of finance, which has significantly increased, is outweighed by savings and efficiencies during the life of a PFI project

Every one percentage point reduction in the interest rate paid on the estimated £40 billion of PFI debt would realise annual savings of £400 million.

We believe that a financial model that routinely finds in favour of the PFI route, after the significant increases in finance costs in the wake of the financial crisis, is unlikely to be fundamentally sound

The National Audit Office should perform an independent analysis of the VfM assessment process and model for PFI. It should audit all of the assumptions within the model, and report on whether or not these are reasonable.

Most PFI debt is invisible to the calculation of Public Sector Net Debt (PSND) and is not included in the debt and deficit statistics.

If all current PFI liabilities were included in the National Accounts then the OBR estimates that national debt would increase by £35 billion (2.5% of GDP).

Therefore there has been, and continues to be, at least a small incentive to use PFI in preference to other procurement options, as it results in lower headline government borrowing and debt figures in comparison to other forms of capital investment.

A PFI deal will have a smaller impact on the current budget of an organisation whereas a conventionally procured capital project will result in a significant one-off hit to the capital budget. In the long term, the PFI arrangement will build up big commitments against future years' current budgets that have not even yet been allocated or agreed. We are concerned that this may have encouraged, and may continue to encourage, poor investment decisions. PFI continues to allow organisations and government the possibility of procuring capital assets without due consideration for their long-term budgetary obligations

A recent Committee of Public Accounts report also noted that, in many cases local authorities and Trusts chose the PFI route because the Departments offered no realistic funding alternative

It is important the debate acknowledges that without PFI there would have been few alternative sources of capital funding for large projects

"historically there has been insufficient support for capital investment and maintenance”

Any other reasons why governments prefer PPP??