14. In 2012, the Treasury replaced the PFI model with PF2 as part of efforts to address some of the previous Committee's criticisms of PFI, including inflexibility and lack of transparency. PF2 is not fundamentally different to the PFI model. Treasury told us that it considered PF2 to be a valuable means of delivering public assets and services, but only when it is used for the right projects with the right type of risks. It told us that it was being more selective in its use of PF2 to ensure that projects represented value for money.66 So far only six PF2 projects have been commissioned, with another two projects in the pipeline.67
15. The public sector can borrow more cheaply than the private sector.68 According to Treasury rules, any decision to invest using PFI or PF2 needs to be supported by an assessment demonstrating that PFI provides better value for money than conventional public sector procurement.69 Prior to 2012, this assessment comprised of a qualitative and quantitative component, however, following a number of criticisms (such as adjustments favouring PFI that lacked an empirical basis) the Treasury withdrew the quantitative model and guidance.70 The Treasury told us that for PF2 deals it would work with the IPA and relevant departments to assess whether a deal meets the criteria set out in the government's Green Book, including assessing the reliability of demand forecasts, and the affordability of the proposed deal.71
16. Aside from value for money assessments, there remain budgeting and accounting incentives that encourage the use of PFI in preference to other procurement approaches, and are unaddressed under the new PF2 model. In 2012 the previous Committee found that PFI projects rarely scored against scarce departmental budgets, giving departments an incentive to use PFI to provide public assets and services, particularly in times of public expenditure constraints.72 The UK produces National Accounts, recording and describing economic activity in the UK, which include important statistics such as Gross Domestic Product (GDP) and the UK's headline debt statistics such as Public Sector Net Debt (PSND). The National Accounts are produced using internationally agreed rules. Under these rules, most PFI debt is not recorded on the government balance sheet and is excluded from calculations of the level of debt within the public sector (often described as "off balance sheet"), which is advantageous to the Treasury.73 Departmental budgets are set using the same principles as the National Accounts. When departments use PFI, the payments are spread over the life of the contract, with no large upfront payment as there would be if government borrowing was used. This is beneficial for departments that have limited capital budgets but, for example, need to build a school or a hospital, and departments have said that they were only able to build certain assets through PFI as there was no other finance available.74 The National Accounts are different to the Whole of Government Accounts (WGA), which consolidate all financial statements across the public sector and are produced using a different set of accounting rules that recognise most PFI projects as on the government balance sheet.75
17. The Treasury told us that PFI and PF2 is only used if it demonstrates value for money compared to conventional public sector procurement, and that the UK's level of debt and the balance sheet treatment had no bearing on a decision to use PFI and PF2.76 Despite this, Treasury is making changes to PF2 to ensure it remains off balance sheet in the National Accounts. For example, private companies can reduce costs and make gains by refinancing debt if the cost of borrowing has fallen since the PFI deal was originally signed. Previous Committees emphasised the need for the taxpayer to share in these type of gains, saying that a refinancing can greatly increase the returns to the private sector and change the balance of risks and rewards.77 In response, the Treasury established "gain- share arrangements" allowing public bodies to take 50% of any savings made by private companies in refinancing the PFI or PF2 debt.78 Under the National Accounts rules, the higher the percentage the public sector is entitled to, the more likely PF2 will be recorded on the balance sheet and count towards UK debt. In 2016, Eurostat, the statistical office of the European Union, made changes to the rules governing the National Accounts, meaning that the PF2 model would be recorded on balance sheet and count towards UK public debt.79 To avoid this, the Treasury is significantly reducing the percentage that the public sector will receive if savings are made, from 50% to just 33%.80 Ministerial submissions have stated that the Treasury has recognised that this change will have a negative impact on value for money.81
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66 Q 123
67 Qq 39, 127
68 Q 121
69 Q 30; C&AG's Report, para 1.27
70 Q 23; C&AG's Report, para 1.32
71 Qq 95, 123
72 Committee of Public Accounts, Equity Investment in privately financed projects, 81st report of Session 2010-12, HC 1846, 2 May 2012
73 Qq 56, 131-132
76 Qq 57, 58
77 Committee of Public Accounts, The Refinancing of the Fazakerley PFI Prison Contract, 13th Report of Session 2000-01, HC 955, 4 July 2001, para 5; Committee of Public Accounts, Lessons from PFI and other projects, 44th Report of Session 2010-12, HC 1201, 1 September 2011, para 3