| Synopsis: |
Banks or bondholders provide around 90 per cent of the project funding for a PFI project on the condition that the remaining money is provided by the investors as risk capital or equity, which will be lost first if the project runs into difficulty. However, the investors limit their risk by passing it to their contractors. In addition, the government is a very safe credit risk and many projects such as hospitals and schools are repeat projects. This report identifies three potential inefficiencies in the pricing of equity. These are the time and costs of bidding; minimum rates set by investors, which sometimes do not reflect the actual risks the project will face; and bank requirements. It concludes that, generally, public sector authorities have not been equipped with the skills and information required to challenge investors' proposed returns rigorously. The NAO shows how further analysis during the bidding process would help authorities to assess the reasonableness of the investor returns. Some investors in successful projects have gone on to sell shares in their equity to release capital and fund new projects.Analysis has shown that investors selling shares early have typically earned annual returns of between 15 per cent and 30 per cent. The Treasury should use its current review of PFI to consider alternative investment models that limit the potential for very high investor returns in relation to risk |