PFI investors over-charging for risk, says NAO

Following its examination of the cost of debt in PFI projects, the NAO turned its attention to equity investment. Its report, based on the ‘limited’ publicly available information, warns that public sector bodies are often not equipped to challenge the returns equity investors take.

Bank and bondholders provide around 90% of the funding for PFI projects on the understanding that the rest is supplied by the investors as risk capital and equity. This would be lost if the projects got into difficulty.

While the investors bear the risk of contractors failing to deliver or of project costs being higher than envisaged, in practice there is little risk, the NAO says. This is because government schemes offer a very safe credit risk and investors limit their own risk by passing it on to their contractors.

The NAO analysed three public-private projects and estimated that around 1.5% to 2.2% of annual services payments were difficult to justify in terms of the risks investors said they were bearing.

The auditors also note that some investors accelerate the receipt of their returns by selling shares of their equity in a project. NAO analysis showed this practice gave investors returns of between 15% and 30%.

NAO head Amyas Morse said: ‘PFI projects benefit from secure cash flow from the public sector. Public sector authorities should have clear evidence they are paying a fair price for private sector funding, and risk equity in particular, considering the stable environment that the PFI generally provides.’

Morse said the Treasury should use its PFI review to scrutinise the returns investors are getting from PFI projects.

The NAO also calls for public bodies to conduct further analysis during the bidding process to allow them to assess the reasonableness of investor returns.