UK select committee calls for more PFI transparency

The UK’s House of Lords select committee on European Affairs warned that private finance initiative (PFI) contractual commitments should not “crowd out” other departmental expenditure as public spending is reined in over the coming years to cut the UK’s deficit.

Committee chairman Lord Iain Vallance said PFI should not be used as a means of getting public sector debt “off balance sheet” and greater transparency would help “alleviate suspicions that PFPs [private finance projects] are favoured because they misrepresent and underestimate the level of public sector indebtedness”.

“The risk transfer private finance projects provide has been beneficial in ensuring projects are completed on time and on budget,” Vallance said.

“But experience has shown that PFPs are not always well suited to very large and complex schemes and that value for money tests need to be improved.”

The committee said the failure of the London Underground Metronet project was just such a case and that it had given private finance projects in general “a bad name”. It recommended that alternative procurement methods should be used on projects of this scale.

There was also a warning for private contractors that the performance gap between private finance and traditional procurement was narrowing.

A survey by the National Audit Office (NAO) of projects scheduled to be finished between 2003 and 2008 found 31 percent of those procured under PFI were delivered late and 35 percent were over budget.

In comparison, the NAO survey found 37 percent of traditional projects were late and 46 percent over budget.

Given this greater element of competition, and what the NAO reported was an institutional bias towards PFI by public authorities, the committee recommended that public sector bodies should now have more freedom to choose the procurement method which gives best value for money.

The report also examined the growth in the PFI secondary market with the committee expressing concerns that an investor’s ability to sell its stake in a project before completion could lead to construction of a low quality asset.

“Although due diligence and checks by buyers in the secondary market amongst other parties may meet this concern, we saw no empirical evidence in this area,” the committee said.

It called on the NAO to investigate the effects of secondary markets on the standards of quality in PFI.

The committee also said the merits and disadvantages of a national infrastructure bank should be kept “under review” given the Treasury’s own Infrastructure Finance Unit had only been set up last year and it was too early to tell whether it was bridging the financing gap caused by the credit squeeze, the committee said in its report.

It supported Business Secretary Peter Mandelson’s call last week for pension funds to play a greater role in financing infrastructure projects, with the cross-party group saying the scope for funding from this sector “seems significant”.

OECD evidence cited by the committee said $500 billion worldwide could be invested in infrastructure by pension funds with access to 3 percent of their funds and a formalised infrastructure bank could be useful in helping channel funds towards projects.