Nationalisation, anyone?

The Treasury Select Committee, a UK Parliamentary investigative body, has released a devastating report on the Project Finance Initiative (PFI), stating that PFI “does not provide taxpayers with good value for money” and suggesting the government buy back these projects once construction is finished, to lower borrowing costs.

The latter is perhaps the report’s most radical conclusion, urging the government to effectively nationalise the PFI programme, the UK’s standardised framework for procuring public-private partnerships.

“The most straightforward way of dealing with current PFI contracts is for the government to buy up the debt (and possibly also the equity) once the construction stage is over. This […] would not increase the structural deficit or prejudice the fiscal mandate as this debt would score as government borrowing for investment in the National Accounts,” the report suggests, adding:

“Interest rates on the financing of the deals would fall significantly, releasing savings. Every one percentage point reduction in the interest rate paid on the estimated £40 billion (€46 billion; $60 billion) of PFI debt would realise annual savings of £400 million.”

According to the report, bringing PFI on balance sheet would increase the UK’s debt by £35 billion, or 2.5 percent of gross domestic product.

The Treasury committee concludes that the main reason for the use of PFI is its off-balance sheet perks as it proceeds to deconstruct all of the scheme’s commonly known benefits. “Some of the claimed risk transfer [in PFI] may be illusory [as] the government is ultimately accountable for the delivery of public services,” the committee says, adding that “we have seen evidence that PFI has not provided good value from risk transfer”.

The report is also sceptical on the alleged whole life benefits derived from using PFI, stating that “it is difficult to establish clear cut evidence in the area of whole life costing”. In addition, the committee considers “PFI contracts [to be] inherently inflexible,” requiring “negotiation with the equity and debt holders before any substantial changes are made during the life of a contract”.

The problem is that “debt and equity holders have little to gain from changing profitable contracts so will be unlikely to agree to changes unless they significantly enhance profitability,” the report argues.

Future PFI projects should be evaluated under much stricter value for money criteria, although the committee finds that higher borrowing costs post-Crisis “mean that PFI is now an extremely inefficient method of financing projects”.

As such, other alternatives, including Local Asset Backed Vehicles and the Regulatory Asset Base approach should be considered to attract the private sector to infrastructure financing.