The NAO says that equity investors bear only very limited risks and are making profits of up to 30%, getting out quick and making a fast buck. Most of the risk is born by contractors who are on fixed price contracts.
“Our findings suggest that the public sector may often be paying more than is necessary for using equity investment,” the NAO says.
The root cause is that civil servants are not sufficiently competent to stand up to bankers on complex financial issues.
The use of PFI is currently being reviewed by the Treasury after a barrage of detailed critical analysis has shown it to be inherently flawed.
The NAO said: “There are alternative investment models that limit the potential for very high investor returns. The Treasury should use its current review of PFI to consider alternative models of public private partnerships. It should consider both the advantages and disadvantages of a range of possible sharing mechanisms that reinforce market pricing for equity and reduce the risk of inefficient pricing of risk.”
The Treasury responded to the NAO report by saying: “The Treasury agrees that this is the right time to assess the value for money of the PFI delivery model, reflecting on the nearly 20 years of experience of PFI projects, and agrees with the NAO that there should be scope for improving the value for money from using equity investment in future government projects. The Treasury considers that this aim needs to take into account a wider range of issues that together contribute to the overall economics of a transaction, rather than merely looking at equity returns on their own.”
The full report, Equity investment in PFI, is freely available on the NAO website.
Got a story? Email news@theconstructionindex.co.uk
