11. The private sector participants in a PFI project may earn returns from providing services as contractors to the project or on their investment in the project. The OGC is reviewing value for money and the levels of return the private sector gets on its investments in PFI projects to ascertain whether it is commensurate with the risks in undertaking government contracts.15 There is a risk that if a contractor builds high rates of return into the contract, it will be more expensive than if undertaken in the public sector. If its study shows that contractors' rates of return are excessive, the OGC will wish to look at the steps needed to introduce more competition into the market place. High contractors' returns might also reflect other factors such as the private sector putting a very high premium on certain risks which had been transferred by authorities. If this was the case, the authorities would be advised to bring such risks back into the public sector.16
12. The OGC did not know what level of returns would be highlighted by its current study but believed that shareholders' returns of 8 to 15 per cent in real terms would be reasonable.17 Our Report on the refinancing of the Fazakerley PFI prison showed that the contractor had made significant extra profit as a result of refinancing, increasing the shareholder returns to 39 per cent.18 The OGC said this was an early prison where there had been significant risk for the private sector, since in public sector procurement in areas like prisons there had been significant cost and time overruns. It would expect the private sector to make higher returns on successful early contracts. As the PFI market matured and the risks became better understood by the private sector, their rates of return might be expected to diminish towards the average returns earned in other market sectors. The OGC review was assessing whether returns were in fact declining. Even on early PFI contracts some private sector organisations had lost large amounts of money.19 The Chairman of the Major Contractors Group told us that in his company, Kier Group, returns on PFI contracts were about 2.5 per cent of turnover compared with one per cent on other contracts. However, the risks were significantly greater in PFI projects and there were high bidding costs.20
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17 Qs 178-185
18 Qs 21-23; 13th Report from the Committee of Public Accounts, The Refinancing of the Fazakerley PFI Prison Contract (HC 372, Session 2000-01), para 29