Equity Investment In Privately Financed Projects

This report examines the risks and rewards for private equity investors in government private finance projects. The Private Finance Initiative (PFI) model has been used by governments in some 700 projects over the last 20 years but defects, including failures to demonstrate the value for money case satisfactorily, the use of long inflexible contracts and the costly contracting process, and inefficient pricing of equity have made continuing with the current model unsustainable. The Treasury is currently reviewing the PFI model. It needs to improve flexibility in the way that private finance is used, establishing quicker and more efficient procurement procedures and achieving a better balance between investors' risks and their rewards. Private finance should only be used where it secures real value for money for the taxpayer, not because of definitional statistical incentives to get projects off the balance sheet (only some 20% of long term PFI liabilities are recorded as debt in the national accounts). Business cases must be an unbiased and transparent assessment of the best form of procurement for the particular project being undertaken, taking account of expected tax receipts from alternative options and not adjusting assumptions to bias the outcome of the assessment. The Treasury needs to collect data on investors' experiences and use this information to assess and challenge investors' returns. There needs to be greater transparency over the pricing of contracts, and inefficiencies which add to the cost of private deals, such as long procurement times, need to be addressed.