1.11 Equity investors' returns are expected to be high relative to the senior debt lenders because they take on greater risk. There has not, however, been a recent conclusive overall evaluation of whether equity returns are justified by the amount of risk equity investors bear.
1.12 In 2002, PricewaterhouseCoopers published a report, commissioned by the Office of Government Commerce, which concluded that there had been inefficient pricing built into past equity rates of return, which informed Treasury's policy statement the following year.1 In 2006, the Treasury published a policy document setting out expectations that bid level equity returns should reduce as the secondary market matured.2 However, any improvement in pricing has not been sustained. During 2011, the Treasury looked into the status of the PFI equity market, and the balance of risks and returns for equity investors, to support planned policy reform.
1.13 However, evaluation of the role and value of equity in PFI projects has been limited by the lack of public information on:
• how actual returns received by investors, and their forecasts of future returns, have changed once projects have become operational; and
• the actual returns made by primary investors when they sell to secondary investors.
1.14 Using publicly available information, and information we have gathered, we have considered how investors manage risk and contribute to service delivery (Part Two) and the returns to investors (Part Three).
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1 Meeting the Investment Challenge (HM Treasury 2003) setting out the Government's position on capturing the benefits of private finance. The PwC report had been commissioned by the Office of Government Commerce, which then had PFI policy responsibility.
2 Strengthening Long Term Partnerships (HM Treasury 2006) set out policy considerations for lowering primary market equity returns.