The National Audit Office, NAO, has issued a report on the rationale, costs and benefits of PFI, including the use of and impact of PFI, the ability to make savings from operational contracts and the introduction of PF2.
Across the public sector there are currently over 700 operational PFI and PF2 deals, with a capital value of around £60 billion and annual charges for these deals amounted to £10.3 billion in 2016-17. Even if no new deals are entered into, future charges which continue until the 2040s amount to £199 billion.
The health sector has used PFI for more capital investment than any other public sector. Health bodies made total unitary charge payments of £2 billion in 2016/17 (1.7% of the total cash budget for the Department of Health and Social Care). However, some Trusts have no PFI deals, whereas others have unitary charges which vary between 5.6% and 20.1% of turnover. Most of these deals were under PFI, with only one hospital completed under PF2 (Midland Metropolitan Hospital).
The NAO report aims to present information on the PFI programme and does not offer an opinion on the model or individual projects. However, the NAO does highlight a lack of transparency, pointing out that although data on forecast and actual equity returns is published for all PF2 deals, this is not the case for non-PF2 deals and data on the cost of debt is not published. There is also a lack of data around the benefits of private finance procurement. However, budgetary and balance sheet incentives remain as HM Treasury chose not to remove incentives, unrelated to Value for Money, in its PFI reforms. If capital and cash budgets are insufficient, private finance may be the only investment option for public bodies.
The NAO also stresses that public bodies need to collect their own data to prevent price increases for services, such as cleaning, occurring without challenge.
Although the PFI reform set out to create a model that was less expensive, providing access to a wider range of financing source, such as pension funds, in reality the fundamentals of PFI remain unchanged in the PF2 model.
PF2, like PFI, remains as an off-balance sheet finance option for the public sector and the NAO reports that HM Treasury is taking steps to ensure it remains that way following recent new guidance published by Eurostat (the statistical office of the European Union), in response to a new European System of Accounts that makes it more difficult for Public Private Partnership debt, like PFI and PF2, to be classified as off-balance sheet. Depending on negotiations, Brexit may give the Office of National Statistics more control over the classification of PFI and PF2 contracts.
The NAO report has been welcomed by the industry. In a tweet, Chris Hopson, Chief Executive of NHS Providers says: “The NAO is right to highlight the increase in direct cash injections in order for Trusts to deliver day-to-day services.”
Think Tank Reform also tweeted, noting that such schemes make up less than 10% of all public capital expenditure and; “PFI makes it easy for public sector to borrow and does not increase government debt figures, but its use incurs 25-30 year costs that the public sector may not fully understand given five year political cycles.”
NB: The briefing was prepared before Carillion was put into liquidation.
Download a full copy of the report here.
