MPs on the House of Commons Committee of Public Accounts in their report of Private Finance Initiative (PFI) refinancing have called for tougher regulation of NHS PFI projects.
The British Medical Association said the report confirmed its concern that PFI is damaging the NHS by draining NHS funds in to the pocket of private companies.
Announcing the MP’s report on Tuesday, Committee Chairman Edward Leigh MP said: ‘Local public sector officials taking forward PFI projects such as hospitals or schools are often painfully lacking in commercial experience.
‘The ill-conceived Norfolk and Norwich Hospital refinancing in 2003 demonstrated this all too clearly.
‘Staff negotiating the fine print of refinancing clauses in contracts, where the risks to the public sector can be high, must be trained so that they are not outwitted by their commercially-sophisticated private sector counterparts.
‘Proceeds gained by the public sector from PFI debt refinancing under the voluntary code for the sharing of gains are currently well short of expectations.’
He added: ‘There is no requirement for the gains made by investors through selling on their shares in PFI projects to be shared with the government.
‘The Treasury must keep the working of the PFI equity market under close scrutiny to make sure the public interest is not being compromised.’
Leigh was speaking as the Committee published its 25th Report, which on the basis of evidence from the Treasury, examined PFI debt refinancing experience, the operation of the PFI equity market and the availability of financial information about PFI projects.
The report’ summary says: ‘Privately financed government projects are generally financed through a mixture of debt finance (in the form of either bank or bond finance) and equity finance (where investors have shares in the project company which has been awarded the government contract).
‘It is a normal feature of long term projects that there may be refinancing in the form of changes to the debt or equity finance during the life of the project.
‘This is because there is normally greater risk at the construction phase which, once completed, enables better financing terms to be obtained.
‘Also, the maturing PFI market has meant that early PFI projects can now access better financing terms than those available when the contracts were let.
‘In 2002 the government introduced arrangements for the private sector to share PFI debt refinancing gains with the public sector.
‘In 2003, the Office of Government Commerce, which then had responsibility for PFI policy, told the Committee that it expected the public sector to receive £175-£200 million from the voluntary sharing arrangements on early PFI deals, but up to December 2006 the government had secured the right to gains of only £93 million.
‘Some of these early refinancings which had taken place had generated very high rates of return to the private sector investors and additional risks to the public sector in the form of higher termination liabilities and extended contract periods.
‘In the PFI equity market there is a developing secondary market which enables investors to acquire shares in PFI projects which are already in progress and some investors are building up portfolios of PFI investments.
‘There is no requirement for the gains on selling shares in PFI projects to be shared with the government.
‘On the basis of a report by the Comptroller and Auditor General, the Committee took evidence from the Treasury on PFI debt refinancing experience, the operation of the PFI equity market and the availability of financial information about PFI projects.’
In their conclusions and recommendations, the MPs state:
‘7. The Treasury view that the public interest is not affected by sales of PFI equity is only credible if there is an efficient equity market in which investor returns can be left to find their own level as the equity is being provided on the best possible terms.
‘The Treasury needs to demonstrate that the efficiency of the market is not prejudiced by factors such as lack of liquidity, market dominance, political risk or lack of transparency.
‘8. There has been growth in new investors in the PFI market mainly through the establishment of secondary market funds.
‘It is reasonable to expect this expansion in the volume of equity available for PFI projects to produce a lower cost of equity for new deals.
‘The Treasury should be tracking the market to assess whether pricing is improving.
‘9. The PFI equity market has shown signs of consolidation in recent years.
‘If shares become too narrowly held these investors may be able to dominate the market with less competition in the pricing of the equity for new deals.
‘The Treasury should have a strategy for managing these risks if they arise.
‘10. Transparency of information is one of the essentials to market efficiency.
‘The Treasury should complete its database of PFI information, and use it to increase the range and quality of summarised data about PFI deals.
‘For example, the Treasury should publish annual updates on the number and value of PFI investments held by the main PFI investors.
‘11. Public bodies surveyed by the National Audit Office were unable to promptly provide financial information about their PFI projects.
‘They need to be more aware of their contractual rights to obtain financial information about their projects.
‘Such data should include the current returns being achieved by investors, and project companies should be asked to provide annual updates of their financial models setting out the investors’ returns.’
While the MPs report is a welcome confirmation of the health unions’ warnings, pleading with the Treasury to regulate government policy is like blowing in the wind.
The trade unions must take national strike action to drive the privateers out of the NHS, bring down the Blair/Brown government and go forwards to a workers government that will nationalise the banks and the drug companies.
This is the way to defend and restore the NHS to the world renowned service that it was and deserves to be again.
