Equity Investment in PFI

29th Feb 2012

Last Monday the Public Accounts Committee held its evidence session on equity investment in PFI projects. The hearing followed the recent publication of the National Audit Office’s report into the issue, which called on the Government to explore the utilisation of alternative investment models as part of its current review of the PFI. Committee members highlighted concerns regarding excessive returns on equity investments and focussed their questioning of witnesses on how this situation has arisen.

Key themes from the hearing were:

  • The length of the procurement process and high cost of bidding. In particular, concerns were raised that the large barriers to entry meant the market was increasingly oligopolistic in structure.
  • The growth of the secondary equity market: members are concerned that the sale of equity to the ‘lucrative’ secondary market was seeing investment being taken off-shore, with implications for UK tax revenue, which were not being fully factored into initial Treasury value for money calculations.
  • Whether the capping or sharing of equity returns was a viable way forward to reduce excess returns in the market, or whether this would dampen appetite for private sector investment.
  •  Whether bundling all aspects of a contract together was appropriate / efficient or was contributing to the perceived problems of excess returns and a lack of competition within the industry.
  • Concern that the £1.5bn savings being sought from existing contracts was resulting in cuts to services rather than reducing the ‘gold-plated’ inefficiencies in contracts.

Both Committee Members and witnesses highlighted a desire to attract a wider and more diverse range of institutional investors to the market. There was also consensus that financing models needed to be developed with a view to creating investment instruments that are a more ‘mainstream’ asset than is currently the case. Indications were that such reforms are being actively considered by HM Treasury as part of their review of PFI.

 

Liz Baker - Operations Director