There has been a great deal of talk recently about the unaffordability of PFI projects and this is given added focus by the imminent General Election.
In October 2014, Daniel Poulter, Parliamentary Under Secretary of State for Health, confirmed in the House of Commons that the Government intended to support NHS Trusts in following the example of Hexham Hospital in reducing their PFI burden by supporting voluntary termination of their contracts where a value for money case could be made. However, this was swiftly followed by HM Treasury guidance on the early termination of PFI projects, that introduced a level of subjectivity over decision-making that makes it easy to block terminations.
It is clear that due to a mixture of concern to maintain off-balance-sheet treatment and the need to find budgetary resources to pay the compensation that arises on termination, real central support is not there for individual Trusts or other Authorities to follow Hexham's example.
So what choices will the new Government have when it comes to reducing the burden that PFI projects place on the public sector? Despite what protesters (such as The People Vs PFI) would like to happen, cancellation of PFI projects is just not an option. The public sector has entered into arms-length contracts for these projects, which the courts would have to uphold. Any incoming government could, and should, ensure that departments examine their PFIs for the potential to use the contracts themselves to effect better value for money. Initiatives to date in this regard have been piecemeal. However, what more could be done?
If an incoming government is not prepared to fund authorities that have the ability to terminate their PFI, then we would advocate the introduction of a new Treasury controlled social investment fund that allows the public to invest directly in PFI projects for a fixed level of return of, say 3%. This, in line with other government led investment schemes, such as the Enterprise Investment Scheme (EIS), should attract tax relief at the basic rate. This would make the return comparable with listed funds on the stock exchange investing in PFI assets.
The fund would be used to support the buyout of PFI projects where termination rights exist, either because voluntary termination rights are already within the contracts concerned, or because the public sector have a right to terminate the contract due to a default by the private sector.
In addition, it could also be used to refinance projects, replacing senior debt, where rates are typically more than double that of the government’s own borrowing.
In terms of refinancing PFI projects, at the present time were the cost of capital to be reduced to 3%, the private sector would be the beneficiary of between 50% and 90% of this gain. Given the taxation support and the aim of this policy, this would clearly be inequitable for the public sector. As such it is proposed that, through primary legislation, all PFI and PPP projects would be required to undergo mandatory refinancing where Treasury and the Authority concerned supported the refinancing. This is similar to rights which already exist on PFI projects signed since the introduction of SoPC4, the standard form of PFI contract introduced in 2007.
Treasury, whilst having a cost of 3% for the capital within the social investment fund, would loan the proceeds to the individual private sector PFI companies at the same level of return that the private sector debt providers currently charge. That way there would be no "refinancing gain" for the private sector to share in. Instead the arbitrage could be gifted back to the Authority concerned. This would halve the cost of debt, which typically forms over 60% of PFI payments.
The replacement of private sector debt would have the added advantage of reducing the cost of change for the public sector. At the present time lenders charge high levels of fees and advisor costs when the public sector wishes to amend or change the project or the levels of service it wishes to enjoy. This often prohibits cost reductions and value for money changes, reinforcing the perception that PFI as a procurement route provides long-term inflexible contracting arrangements.
We hope that whoever forms the next Government after May 7th will join us in making a real difference to the unnecessary burden of PFI contracts.
In October 2014, Daniel Poulter, Parliamentary Under Secretary of State for Health, confirmed in the House of Commons that the Government intended to support NHS Trusts in following the example of Hexham Hospital in reducing their PFI burden by supporting voluntary termination of their contracts where a value for money case could be made. However, this was swiftly followed by HM Treasury guidance on the early termination of PFI projects, that introduced a level of subjectivity over decision-making that makes it easy to block terminations.
It is clear that due to a mixture of concern to maintain off-balance-sheet treatment and the need to find budgetary resources to pay the compensation that arises on termination, real central support is not there for individual Trusts or other Authorities to follow Hexham's example.
So what choices will the new Government have when it comes to reducing the burden that PFI projects place on the public sector? Despite what protesters (such as The People Vs PFI) would like to happen, cancellation of PFI projects is just not an option. The public sector has entered into arms-length contracts for these projects, which the courts would have to uphold. Any incoming government could, and should, ensure that departments examine their PFIs for the potential to use the contracts themselves to effect better value for money. Initiatives to date in this regard have been piecemeal. However, what more could be done?
If an incoming government is not prepared to fund authorities that have the ability to terminate their PFI, then we would advocate the introduction of a new Treasury controlled social investment fund that allows the public to invest directly in PFI projects for a fixed level of return of, say 3%. This, in line with other government led investment schemes, such as the Enterprise Investment Scheme (EIS), should attract tax relief at the basic rate. This would make the return comparable with listed funds on the stock exchange investing in PFI assets.
The fund would be used to support the buyout of PFI projects where termination rights exist, either because voluntary termination rights are already within the contracts concerned, or because the public sector have a right to terminate the contract due to a default by the private sector.
In addition, it could also be used to refinance projects, replacing senior debt, where rates are typically more than double that of the government’s own borrowing.
In terms of refinancing PFI projects, at the present time were the cost of capital to be reduced to 3%, the private sector would be the beneficiary of between 50% and 90% of this gain. Given the taxation support and the aim of this policy, this would clearly be inequitable for the public sector. As such it is proposed that, through primary legislation, all PFI and PPP projects would be required to undergo mandatory refinancing where Treasury and the Authority concerned supported the refinancing. This is similar to rights which already exist on PFI projects signed since the introduction of SoPC4, the standard form of PFI contract introduced in 2007.
Treasury, whilst having a cost of 3% for the capital within the social investment fund, would loan the proceeds to the individual private sector PFI companies at the same level of return that the private sector debt providers currently charge. That way there would be no "refinancing gain" for the private sector to share in. Instead the arbitrage could be gifted back to the Authority concerned. This would halve the cost of debt, which typically forms over 60% of PFI payments.
The replacement of private sector debt would have the added advantage of reducing the cost of change for the public sector. At the present time lenders charge high levels of fees and advisor costs when the public sector wishes to amend or change the project or the levels of service it wishes to enjoy. This often prohibits cost reductions and value for money changes, reinforcing the perception that PFI as a procurement route provides long-term inflexible contracting arrangements.
We hope that whoever forms the next Government after May 7th will join us in making a real difference to the unnecessary burden of PFI contracts.
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