a Lessons from the use of PFI equity have relevance to new commercial arrangements under consideration. The Treasury should take into consideration lessons from the experience of using PFI equity in its development of new commercial models. The lessons should include:
• When designing a delivery method, to consider the most appropriate method for remunerating private investors, while allowing the amount the Government pays for projects to reflect the benefit of having a strong public sector customer.
• To be aware that attractive projects are likely to encourage a secondary market, which will provide early enhanced returns to initial investors.
• To be transparent about investors actual risks and rewards, to enable proper assessment of the value for money being achieved from using investors.
b There is evidence to suggest the public sector may often be paying more than it should for PFI equity investment. The Treasury should address the potential inefficiencies in pricing by:
• providing guidance to departments on how to challenge bidders' proposed equity returns more rigorously during the procurement stage. The Treasury should consider the role that 'should cost' models might play in such challenges;
• working with the Cabinet Office and other government departments with policy responsibility in this area, to consider the potential to drive down procurement times;
• considering whether additional cash flows, which lenders require to protect the repayment of their loans, can be shared with the public sector once the lenders' risks have reduced in mature projects; and
• giving consideration to other areas where the efficiency of risk allocation and pricing could be improved, such as inflation provisions and changes in life-cycle costs.
c There are alternative investment models that limit the potential for very high investor returns. The Treasury should use its current review of PFI to consider alternative models of public private partnerships. It should consider both the advantages and disadvantages of a range of possible sharing mechanisms that reinforce market pricing for equity and reduce the risk of inefficient pricing of risk.
d The Treasury recognises that there are limitations in the currently available information about investor gains and losses in PFI projects. The Treasury should establish with investors a standard form of disclosure so that, on each change of shareholder, authorities become entitled to equity sales data sufficient to judge the rate of return to the seller. Authorities should regularly use their contractual rights to obtain up-to-date financial information from project companies.
e Good knowledge and understanding of the risks retained by investors and their contractors is an important part of effective project management. Authorities should clarify with project companies how risks transferred to the project company will be managed between the investors, contractors and other parties, such as insurers. This will help the authorities to assess the reasonableness of the investors proposed returns and also to monitor the project's risk management.
f PFI investors have established active contract management procedures from which the public sector can learn. The Treasury, working with the Cabinet Office and other government departments with policy responsibility in this area, should consider how the positive disciplines which investors have brought to PFI projects, such as taking immediate steps to enforce contracts and/or resolve problems, could be applied to publicly managed projects.