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MPs again slam PFI and call for profit sharing

A parliamentary committee has requested a 'radical' rethink of the procurement model which it deems 'unsustainable' and says is used mostly for its off-balance sheet benefits. MPs also accuse investors of rigging contracts for excessive profits and call for better profit-sharing mechanisms.

The UK's Public Accounts Committee (PAC), a parliamentary committee chaired by Labour MP Margaret Hodge, has released another report blasting the Project Finance Initiative (PFI), the UK's standardised procurement process for public-private partnerships (PPPs).
According to the PAC, the procurement model, which has been used to deliver some 700 projects and counting over the last two decades, is deeply flawed and should be the object of “a radical rethink”. Among PFI's most egregious crimes – allegedly – are its dubious value for money, its use as a predominantly off-balance sheet tool, and its deficient risk allocation, which allows “investors [to receive] eye-wateringly high rewards while taking ever decreasing risks”.
Hodge goes further and, in announcing the report, accused investors of effectively rigging PFI contracts to secure high profits. “We have even seen evidence of excess profits being priced into projects from the start,” Hodge said, with the report suggesting that “where there is evidence that investors are making high rewards during the contract period which are out of line with the risks they bear, public authorities need mechanisms for sharing in these rewards”.
However, the report does not lean in the direction of capping shareholder returns: “Investors in PFI projects are more likely to accept sharing returns above a predetermined level than to accept a cap on equity profits or a share of gains on share sales. This is because investors may need to benefit from projects which are going well to offset those which may be delivering lower returns than expected.”
Other criticisms levelled at PFI include lengthy and costly procurement processes; limited competition which does not ensure value for money; inflexible contracts; and, in the current economic climate, high debt costs which, when combined with “inefficient pricing of equity have made continuing with the current model unsustainable,” the report concludes.
Despite ongoing criticism of PFI, the UK continued to be one of Europe's most active PPP markets, closing just over €3 billion of PPPs in 2011, according to a March report by the European PPP Expertise Centre. In fact, the UK was Europe's most active market in terms of number of deals closed, although the 27 PPPs concluded in the UK last year was significantly less than the 44 PPPs closed in the country during 2010.