Out-Law News 3 min. read

"Unsurprising" report calls for more transparency about private equity investment in public contracts

Private companies investing in Private Finance Initiative (PFI)-funded public projects must be transparent about the relationship between their share of the risk and their profits, a committee of MPs has warned.

In its report into private equity investment in Government PFI contracts, the Public Accounts Committee (PAC) said that some private investors were making "excessively high returns" of as much as 60%. It called on the Treasury to collect more data on investors' returns. The report echoes similar concerns raised by public spending watchdog the National Audit Office (NAO) in February.

Private finance should, the report said, only be used where it "secures real value for the taxpayer" and not as a way of leaving project expenditure off departmental balance sheets.

However infrastructure law expert Jon Hart of Pinsent Masons, the law firm behind Out-Law.com, said that the Committee's findings would only have been surprising had they contained "a few public announcements as to the valuable contributions that have been made - not to mention risks taken on - by investors and contractors" in the more than 700 PFI deals that have been made since the initiative was first launched.

"Certain procuring authorities would also be within their rights at taking offence at some of the comments being made by the Committee," he said. "Yes, many of the very early deals under PFI saw some excessive refinancing gains. Yes, some projects have been procured for the wrong reasons. However, to suggest that the bulk of projects have seen unscrupulous gains on debt refinancing overlooks the fact that this is a frontier that has been vigorously patrolled by the Treasury for some time now."

PAC chair Margaret Hodge the committee had uncovered evidence in its report of problems with the current system ranging from the costly contractual process, with low risk transfer but high returns for investors, inflexible contracts that prevented managers from changing services that had become outdated and excess profits "being priced into projects from the start".

"When a public authority chooses to fund a project using private finance it must be able to demonstrate that this was the best way to deliver real value for money for the taxpayer, not just a way to keep the project off the balance sheet," she said. "The current model of PFI is unsustainable."

The PFI model was introduced in the 1990s as a way of using private funding to pay for major public infrastructure projects such as roads, prisons and schools. In a PFI agreement, the private sector obtains finance to design, build and operate a facility for the benefit of the public. In return the public sector will grant its private sector partner a long-term contract to run the facility and will pay a monthly fee over the life of the project to repay the loan. The model has been used for over 700 projects over the last 20 years, with 41 PFI contracts concluded under the current Government alone and a further 30 projects currently being negotiated.

The Government announced that it intended to reform the system in November last year, and is due to report shortly on the results of a 'call for evidence' on a replacement funding method that would "draw on private sector innovation but a lower cost to the taxpayer".

Last week the Treasury published a further addendum (6-page / 135KB PDF) to its standardised wording and guidance for public sector PFI contracts (SoPC4). Infrastructure law expert Hart said that this new wording, which will be compulsory for all PFIs that have not reached financial close, will give procuring authorities "still further rights to share refinancing gains" where there are changes in margins on projects.

"North of the border, the Scottish Futures Trust has been developing and actively implementing a 'not for profit distribution' model on project financed transactions which goes far beyond the SoPC4 approach, and possibly beyond the ken of Westminster too," he added. "Unfortunately the PAC report seems to omit any reference to this."

PAC chair Margaret Hodge called for an end to the situation where 30-year PFI contracts were seen as "the only game in town".

"The Treasury has now embarked on a rethink and that must be radical, producing a qualitatively different policy," she said. "The review must find a private finance funding model that allows flexible delivery of public services and ends the era of investors receiving eye-wateringly high rewards while taking ever decreasing risks."

Hart said that for all the "ongoing talk - with an emphasis upon 'talk'" - of reforming the PFI model there were as yet no concrete indications of what these changes might be.

"Despite other headlines, liberating other sources of investment such as pensions has so far been relatively lacklustre – underscoring the point that a pension fund investor is going to be as tough, if not tougher, than investors from banks when it comes to investing in infrastructure," he said. "Meanwhile the infrastructure deficit highlighted in the National Infrastructure Plan remains unaddressed, and separately the UK construction industry reports a worsening outlook. Maybe there is perhaps a connection between all of this - if so, if might be time to start joining the dots."

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