National Audit Office report lays bare the background to private finance deals.
23rd January 2018.
“There are currently over 700 operational private finance initiative (PFI) and private finance 2 (PF2) deals in Britain, with a capital value of around £60 billion. Annual charges for these deals amounted to £10.3 billion in 2016/17. Even if no new deals are entered into, future charges, which continue until the 2040s, amount to £199 billion.”
This extract is taken from a report produced by the National Audit Office shortly before the announcement on 15 January that Carillion had gone into liquidation.
Whether the timing of the publication of ‘PSI and PS2’ * is down to chance or NAO’s prescience, it provides a solid foundation of fact on which to build an understanding of the potential implications of Carillion’s collapse.
PFI and its successor, PF2, are forms of public private partnerships in which a Special Purpose Vehicle (SPV) is set up and borrows to construct a new public asset such as a school, hospital or road. The taxpayer then makes payments over the contract term (typically 25 to 30 years), which cover debt repayment, financing costs, maintenance and any other services provided.
The government reduced its use of PFI after the 2008 financial crisis, as the cost of private finance increased. Parliament also became ever more scathingly critical of the model. HM Treasury’s response was a re-brand, leading to the launch of PF2 in 2012.
PF2, however, retains most of the characteristics of PFI. Appendix 2 – ‘Response under PF2 to concerns raised by Parliament’ – closes the report by listing the concerns subsequently raised about PF2 alongside the changes made – or not made – in response to them.
Lack of data to compare PFI with non-PFI projects
HM Treasury made no attempt to compare PFI with alternatives during the PFI reform process.
Lack of data on equity returns
HM Treasury has committed to publishing expected and actual equity returns for all new PF2 deals.
Flexibility – should consider unbundling service contract
Deals are now less likely to include soft services (eg cleaning); however, this is not directly related to the introduction of PF2, and long-term maintenance contracts continue.
Encourage refinancing / make refinancing easier
Financing for deals is still agreed for whole term. The public sector cannot force refinancing, and most gains will flow to equity owners.
Encourage more sources of finance such as pension funds
One of the stated intentions of the PF2, this has not materialised partly because there are very few deals.
Make savings from legacy projects
The nature of PFI contracts means that savings are very difficult to make.
Flawed value-for-money assessment
The value-for-money assessment tool was withdrawn but new guidance has still not been published.
*‘PSI and PS2’ – ISBN:9781786041760
The Credit Protection Association is passionate about prompting punctual payment through debt recovery and protecting its members from bad payers. THe Carillion story has revealed the danger of these long and complicated PFI deals. Not just for the large businesses taking on these deals but also to the smaller companies further down the supply chain. Already reeling from Carillion’s collapse, our members will be concerned how many other potential risks are out there among this sea of PFI deals.
The Credit Protection Association is a credit management company established in 1914. If you supply goods or services on credit then we can help you!
Keep up to date with the latest news by following us on social media:-
Watch the video to find out how CPA can help you!
Read our blog – Debt collection agency
Read our Cash Flow Advice
Read about our overdue account recovery service
Read our blog – What is credit management?
Read our blog -What is a credit management company?
Read our blog -Credit Management that works!
Read our blog – How to select a debt collection agency
click to see read about our successes
Please call us on 0330 053 9263 to discuss how CPA can help your cashflow. Alternatively, either email us or use our contact form.