PFI VFM for public infrastructure

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PFI - VFM for public infrastructure? Andy Wynne
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Talk out-line

• What is PFI?
• Arguments around PFI
• PFI locally
• Structure of PFI projects
• Testing for VFM?
• ACCA funded research
• Refinancing PFI projects
• Current problems

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What is the Private Finance Initiative?
Long term contracts to provide and service public
sector infrastructure (hospitals, roads, prisons
etc) Financed by a private sector consortium
paid an annual service charge Controversial as
seen as privatisation and debate over VFM tests
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Arguments around PFI

• PFI allows greater public sector investment
• capital value of PFI projects 40bn
• Government could borrow an additional 150bn
• PFI delivers projects on time and to budget
• little evidence making true comparisons
• high premiums may be necessary to achieve?
• PFI considers full life costs and so is more
  efficient
• little evidence of improvements in design
• efficiency needed to compensate for greater
  borrowing costs

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PFI locally

• University Hospitals of Leicester one of the
  largest PFI projects in NHS
• Rebuilding three local health centres LIFT
• Building Schools for the Future 15 secondary
  schools in Leicester

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Structure of PFI projects

• PFI contractors form a consortium, typically
  including
• builder
• service provider
• financier (bank)
• Special service vehicle (echoes of Enron?)

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Testing for value for money?

• HM Treasury Green Book requires three tests
• programme level NHS hospitals
• individual project University Hospitals of
  Leicester
• review of bids received from contractors.
• Reduction of discount rate, but two adjustments
• optimism bias
• taxation effect

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Research funded by ACCA

• Professors Pam Edwards and Jean Shaoul from
  University of Manchester
• first study of the operational phase of PFI
• covered two key areas
• health 85 of major capital projects by PFI
  since 1997
• roads 25 of Governments 10 year road plans
  will be delivered by PFI
• http//www.accaglobal.com/research/publications/su
  mmaries/rr-084?sessionfffffffeffffffff0a01213843e
  327431fb3113ff424110f123c0957f486d877

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Partnership and managing the contract

• Planning of performance monitoring systems is
  poor resulting in increased workload and costs
• Subjective outcomes are difficult to monitoring
• Contingency plans for contractor default not
  prepared

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VFM and risk transfer

• Roads premium of 25 and hospitals of 30 for
  time and budget targets
• Rate of tax only 7 for SPVs compared to
  Treasury assumption of 22
• PFI cost of capital is approximately twice the
  Governments
• Contractors returns are higher than elsewhere in
  the industry
• PFI hospitals are more likely to be in deficit

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Financial reporting and accountability

• Little information is available to the public,
  made worse by complex company structures
• Government has encouraged this commercial
  confidentiality
• Worcester Hospital not on the balance sheet of
  the NHS trust or the SPV

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Refinancing PFI

• PFI debts are re-negotiated after the building
  phase is complete
• lower rate and longer period of loan
• usually significantly increases the rate of
  profit
• these profits now have to be shared with the
  public sector

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Current Problems with PFI

• leakage of funds from the public to private
  sector
• cost of letting contracts and monitoring
• aggravation of NHS trust deficits
• fragmentation of the workforce
• inflexibility of service provision
• erosion of public service ethos