Use of Private Finance 2 (PF2)

18. The public sector has used PFI less and less over time, falling from a peak of over 60 projects in 2007-08 to no new PF2 contracts at all in the last two years.82 IPA told us there are other ways of involving the private sector in infrastructure investment, and over the last five years the government has secured more infrastructure investment using these other methods than through PF2.83

19. Since its launch in 2012, only 6 projects have used PF2: the Priority School Building Programme (PSBP), which will build 46 schools in five batches, and the Midland Metropolitan Hospital.84 The projects have capital costs of £623 million and £297 million respectively.85 The Treasury and IPA were unclear in evidence to us about the scale of the pipeline of PF2 projects, or the money involved. In subsequent written evidence, the Treasury told us that there are only two projects that are expected to be financed by PF2: an upgrade of the A303 Stonehenge tunnel and the approach roads to the Lower Thames Crossing.86 The Treasury expects investment in the two projects will amount to between £6 billion and £7.8 billion.87 When questioned on the future use of PF2, the Treasury said that PF2 will only be used in a "handful" of cases over the next three years, but were unclear on the number and cost of future projects.88 The Treasury told us that it now views PF2 as a "useful tool" in a range of options for financing public infrastructure, but that it will use it in a more focused way. It confirmed that it would not return to the levels of investment seen at the height of PFI, which saw investment peak at £8.6 billion in 2007-08.89 Some departments have said that their reduced use of PFI and PF2 results from concerns about cost efficiency and value for money.90 The Treasury and IPA told us that PF2 is being used less because the public sector is now better at managing project risk, thereby reducing the probability that publicly funded projects with be delayed and run over budget.91

20. The Treasury told us that the outlook for investment in infrastructure is very ambitious.92 In 2016, the IPA identified a need to invest in £300 billion of infrastructure by 2020-21, and expects the private sector to finance half.93 On current projections PF2 looks likely to provide a relatively small role in achieving these aims, and it appears unclear how far PF2, and similarly other private financing, will help the UK meet these financing needs.94

21. We asked the Treasury when PF2 investment would be suitable, if the public sector is now much better at managing risk and can borrow more cheaply. The Treasury told us that the transfer of a project's risk from the public sector to the private sector was one of the main benefits of the PFI model. But it accepted that risks should only be transferred to those who are able to manage them better than in the public sector.95 Some assets are more complex, and therefore risky, to build than others. Around two-thirds of all current PFI contracts involve "accommodation", (for example schools) which is considered to involve relatively low construction risk.96 The Treasury told us that it considers PF2 to be a specialist tool, appropriate in a relatively narrow set of circumstances, and if the risk transfer is not suitable, then PF2 is not the right structure for investment. As such, large, complex projects such as HS2 and Crossrail are now being funded publicly.97 The IPA told us that only projects where the private sector is best placed to identify and manage risks should be considered for PF2, and that projects that are large, with too much complexity and technology risk (such as IT projects) are unsuitable for PF2.98 If PF2 is more targeted than PFI, and the public sector is better at managing projects as well as being able to borrow more cheaply, it becomes more difficult to justify using PF2 because there is a smaller range of projects where the private sector is better placed to manage risk, and the future scope for PF2 to contribute to the UK's infrastructure investment needs looks limited.99