The Coalition government published its review of the Private Finance Initiative in December 2101 and set out a 'new approach', Private Finance 2 (PF2), together with a draft of the Standardisation of PF2 Contracts (HM Treasury, 2012a and 2012b).
An ESSU research report in January 2011, followed by evidence to the House of Commons Public Accounts Committee and the Treasury Committee, first provided concrete evidence of profiteering in the sale of PFI equity stakes. The government has failed to address the question of profiteering. However, the sale of equity in over 700 current PFI projects will continue and there is no proposal to enforce the sharing of profits in existing PPP projects with the public sector.
Instead, the government has proposed the public sector should take a minority equity stake in the SPC in future PF2 projects as a means of 'profit sharing'. But taking an equity stake in future projects is a different matter altogether. It does not prevent profiteering in future projects and does nothing to address profiteering in current PFI projects. Minority shareholders in PFI projects have been just that, and played second fiddle in secondary market trading. Furthermore, public sector equity ownership introduces new problems and conflicts in the role of the state.
Equity investment in PF2 contracts will increase to 20%-25% in PF2 contracts, compared to 10%-15% in current PFI contracts, with the public sector becoming a minority equity investor on the same terms as the private sector. The objective is "…to ensure better alignment of objectives, greater transparency and improved value for money" (HM Treasury, 2012a).
Public sector equity investment will be arranged and managed by a new "…commercially-focused unit located in the Treasury separate from the procuring authority". It will be managed by "…individuals with the appropriate professional skills to oversee the investment and make commercial decisions" (ibid).
In other words, if a local authority, NHS or other public body invests in equity in a PF2 project, they will not have direct representation on the board of the SPC, but will be represented by a Treasury official! This raises fundamental questions about democratic accountability and ethics and is likely to result in financial and national interests dominating at the expense of wider policy concerns and local demands.
There is nothing to stop the government from selling its equity stake - in 2011 it sold its 10% equity in 48 local authority Building Schools for the Future projects in a £60m deal with the offshore infrastructure fund International Public Partnerships (see ESSU database). Cash strapped local authorities and other public sector bodies are equally likely to sell equity stakes.
The Review recognises there have been 'excessive profits' in the sale of PPP equity, but PF2 is expected to "…curb the ability of the primary investors to generate excessive profits and consequently the potential for windfall gains on secondary market sales" (ibid). The measures include a mechanism to share unutilised funds in the lifecycle reserve; the removal of soft services where contractors have typically included a risk premium in the pricing; the introduction of public sector equity "…to share efficiency savings across an increased equity investment and, therefore, the return on the equity investment will be lower; and equity funding competitions to encourage long-term investment into projects" (ibid).
The effectiveness of the measures is uncertain and rely heavily on the 'expectation' that better partnership working will be successful.