Private Finance 2

Private Finance 2

House of Commons Treasury Committee Private Finance 2 Tenth Report of Session 2013–14 Volume I: Report, together with formal minutes, and oral evidence Written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/treascom. Ordered by the House of Commons to be printed 12 March 2014 HC 97 [Incorporating HC 990, Session 2012–13] Published June 2014 by authority of the House of Commons London: The Stationery Office Limited £14.50 The Treasury Committee The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of HM Treasury, HM Revenue and Customs and associated public bodies. All publications of the Committee (including press notices) and further details can be found on the Committee’s web pages at www.parliament.uk/treascom. Membership at time of the report Mr Andrew Tyrie MP (Conservative, Chichester) (Chairman) Mark Garnier MP (Conservative, Wyre Forest) Stewart Hosie MP (Scottish National Party, Dundee East) Andrea Leadsom MP (Conservative, South Northamptonshire) Mr Andy Love MP (Labour, Edmonton) John Mann MP (Labour, Bassetlaw) Mr Pat McFadden MP (Labour, Wolverhampton South West) Mr George Mudie MP (Labour, Leeds East) Mr Brooks Newmark MP (Conservative, Braintree) Jesse Norman MP (Conservative, Hereford and South Herefordshire) Teresa Pearce MP (Labour, Erith and Thamesmead) David Ruffley MP (Conservative, Bury St Edmunds) John Thurso MP (Liberal Democrat, Caithness, Sutherland, and Easter Ross) Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk. Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/treascom. The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in printed volume(s). Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee are Chris Stanton (Clerk), Anne-Marie Griffiths (Second Clerk), Adam Wales and Gavin Thompson (Senior Economists), Hansen Lu, Thomas Francis (on secondment from the FCA), and Gregory Stevens (on secondment from the Bank of England), Callum Saunders (on secondment from the NAO) (Committee Specialists), Steven Price (Senior Committee Assistant), Alithea Williams and Paul Little (Committee Assistants). Contacts All correspondence should be addressed to the Clerk of the Treasury Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5769; the Committee’s email address is [email protected] Private Finance 2 1 Contents Report Page 1 Introduction 2 The Private Finance Initiative 2 Private finance 2 6 Our inquiry 7 2 Accounting and budgetary incentives 8 Incentives to use PFI 8 Abolition of PFI credits 9 PF2 proposals 10 Accounting treatment 10 PF2 control total 12 3 Value for money 15 Public sector minority equity stake 15 Cost of finance 17 Equity cost 19 Public sector returns 20 Risk transfer 23 Comparison of procurement options 23 NAO review of the VFM assessment process 25 Transparency 29 Service agreements 31 4 Securing private investment 34 Willingness to invest 35 Potential influences on investment 36 Deal flow 36 Pension Investment Platform 37 Securing investment through PF2 38 Conclusions and recommendations 41 Formal Minutes 44 Witnesses 45 List of written evidence 45 List of Reports from the Committee during the current Parliament 46 2 Private Finance 2 1 Introduction The Private Finance Initiative 1. In November 1992 the then Chancellor of the Exchequer, Norman Lamont, made an announcement in the Autumn Statement about “ways to increase the scope for private financing of capital projects”.1 This was the beginning of what was to become known as the Private Finance Initiative (PFI), through which groups of private investors manage the design, building, finance and operation of public infrastructure. By the time the Labour government came to power in 1997 a total of 68 PFI projects, worth around £4 billion, had been signed. In May 1997, the new government commissioned Sir Malcolm Bates to conduct a review of the Private Finance Initiative. The aim of the review was to “identify obstacles” in the way of PFI projects and establish how the process could be streamlined.2 One of the recommendations of the review was to abolish the Private Finance Panel (see paragraph 3). By November 1999, a further £5 billion worth of PFI projects had been signed.3 The current coalition government, formed in May 2010, remained committed to the Private Finance Initiative as a way of delivering investment in infrastructure.4 In total, 61 new PFI projects were in the procurement stage as of March 2011, with a total estimated investment value of £7 billion. By March 2013, over 700 PFI projects were operating under contract, with a private sector investment value of around £55 billion.5 2. In a typical PFI project, the private sector party is constituted as a Special Purpose Vehicle (SPV). The financing of the initial capital investment (i.e. the capital required to pay transaction costs, buy land and build the infrastructure) is provided by a combination of share capital and loan stock from the owners of the SPV, together with senior debt6 from banks or bond-holders. The return on both equity and debt capital is sourced from the periodic “unitary charge”, which is paid by the public authority from the point at which the contracted facility is available for use. The unitary charge may be reduced (to a limited degree) in certain circumstances: e.g. if there is a delay in construction, if the contracted facility is not fully operational, or if services fail to meet contracted standards. A condition for acceptance as a PFI project originally was the transfer of project risks from the public to the private sector. 3. PFI was a departure from what were known as the ‘Ryrie Rules’ which had governed and restricted the use of private finance in the 1980s.7 In particular, PFI widened the circumstances where private finance could be used and allowed private finance which would be additional to, rather than a substitute for, public finance.8 In Autumn 1993, the 1 HC Deb (1992–93), 12 November 1992, col 998 [Commons Chamber] 2 Treasury Committee, Fourth Report of Session 1999–00, The Private Finance Initiative, HC 147, Ev 18 3 Treasury Committee, Fourth Report of Session 1999–00, The Private Finance Initiative, HC 147, Ev 17 4 HM Treasury, Public Private Partnership – Technical Update, 2010, p 1 5 HM Treasury, Private Finance Initiative Projects: 2013 Summary Data, December 2013, para 1.5, p 3 6 Debt which has a higher repayment priority compared to other types of unsecured debt in the event of liquidation. If a company goes bankrupt, senior debt holders are repaid before holders of unsecured debt. 7 David Heald and Alasdair McLeod, Constitutional Law, The Laws of Scotland: Stair Memorial Encyclopaedia: Public Expenditure, 2002, para 502 8 HC Deb (1992–93), 12 November 1992, col 998 [Commons Chamber] Private Finance 2 3 then Chancellor Kenneth Clarke announced the creation of a Private Finance Panel (PFP) whose role included identifying “new areas of public sector activity where the private sector could get involved”, encouraging “greater participation in the initiative by both public and private sectors” and seeking “solutions to any problems that might impede progress”. In 1994, he told the CBI conference that “private sector finance would be the main source of growth” in public investment projects and that the Treasury would not approve capital projects unless private finance options had been explored.9 In 1997, the new Labour government announced an end to the requirement to consider private finance for all capital projects and abolished the PFI Panel in favour of a taskforce within the Treasury: In light of the reduced requirement to promote the concepts of PFI throughout the public and private sectors, there is no ongoing requirement for a Panel of senior private sector members. Their work over the 4 years of giving credibility to the Initiative has been valuable and should be publicly acknowledged.10 This taskforce was later replaced by the organisation Partnerships UK which itself became a Public Private Partnership in 2001.11 4. The overall aim of PFI was “to achieve better value for money for the taxpayer by ensuring that infrastructure projects were delivered to time and to cost, and that assets were well maintained”, by “harnessing the private sector’s efficiency, management and commercial expertise”. It was intended to bring “greater discipline to the procurement of public infrastructure” and creating, “through the transfer of appropriate risks to the private sector, a clear focus on the whole of life costs of projects and an innovative approach to service delivery”.12 5. The case for attempting reform of public procurement was strong at the time PFI was launched, given the chequered record of conventional public procurements in the 1970s and 1980s. For example, the construction of the Dungeness B power station took 13 years longer than planned and cost well over twice the original estimate. The Advanced Passenger Train was pushed into service before technical issues had been resolved, resulting in the project being cancelled.13 6. Despite the positive intent, some aspects of PFI did not work effectively in practice.14 As early as the late 1990s, concerns were beginning to be raised by the National Audit Office and others over the economy, effectiveness and efficiency of PFI deals.15 Concerns grew as projects progressed and the use of PFI expanded.

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