1 This briefing presents information on: the rationale, costs and benefits of the Private Finance Initiative (PFI) (Part One); the use and impact of PFI, and ability to make savings from operational contracts (Part Two); and the introduction of PF2 (Part Three). We present information on the programme as a whole and do not seek to form a view on the model or individual projects. This briefing was prepared prior to the announcement on 15 January 2018 that the construction company Carillion was in liquidation.
2 More than 90% of the government's capital investment is publicly financed. Since the 1990s the public sector has also used private finance to build assets. The PFI and its successor, PF2, are forms of Public Private Partnerships (PPPs). In a PFI or PF2 deal, a private finance company - a Special Purpose Vehicle (SPV) - is set up and borrows to construct a new asset such as a school, hospital or road. The taxpayer then makes payments over the contract term (typically 25 to 30 years), which cover debt repayment, financing costs, maintenance and any other services provided.
3 The government reduced its use of PFI after the 2008 financial crisis, as the cost of private finance increased. Parliament also became increasingly critical of the model. In 2011, HM Treasury consulted on reform. It made some changes and relaunched the model as PF2 a year later. So far, two departments, the Department of Health and Social Care and the Department for Education, have used PF2.
4 There are currently over 700 operational PFI and PF2 deals, with a capital value of around £60 billion. Annual charges for these deals amounted to £10.3 billion in 2016-17. Even if no new deals are entered into, future charges which continue until the 2040s amount to £199 billion.1
5 Although we do not form a view on the value for money (VfM) of PFI and PF2 there are some key points which have emerged from our work which we would like to highlight:
The fundamentals of the financing structure and contract remain the same.
• Increased transparency
Data on forecast and actual PF2 equity returns will be published for all PF2 deals. However this does not apply to other non-PF2 PPP deals, and data on the cost of debt is not published.
• Budgetary and balance sheet incentives remain
As part of the PFI reform HM Treasury considered removing incentives, unrelated to VfM, which have driven the use of private finance but it chose not to. If capital and cash budgets are insufficient, private finance may be the only investment option for public bodies.
• Lack of data on benefits
There is still a lack of data available on the benefits of private finance procurement.
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1 This is based on HM Treasury's PFI and PF2 database which covers all the operational PFI and PF2 projects, in addition to all the projects in procurement, as at 31 March 2016. The 2017 dataset was due to be published by HM Treasury in December 2017, but this was not available at the time of publication.