Taxpayer misses out on up to £90m in PFI windfalls

Treasury plans to make more than £200m for the taxpayer from windfall gains over the refinancing of private finance initiative (PFI) schemes from roads to hospitals could be nearly halved, the National Audit Office says in a report published today.

The report reveals that companies and investment banks are no longer so keen to refinance PFI schemes since regulations came into force allowing the taxpayer to share equally in windfall gains. As a result, the NAO estimates that a prediction from the Office of Government Commerce in 2002 of £200m in gains will fall short by up to £90m.

The new rules were introduced following a series of refinancing deals that enabled investors to make tens of millions of pounds by in effect remortgaging schemes at lower rates of interest. Examples included a £10m windfall from Fazakerley prison on Merseyside, a £34m gain from the Dartford and Gravesham hospital and a £115m windfall over the Norwich and Norfolk University hospital. Only the last two schemes were shared on a voluntary basis with the taxpayer.

Other schemes where private investors took all the gains included six prisons built under PFI, a Revenue & Customs IT project, and the M1-A1 link road.

Since then the NAO has discovered three road schemes in Devon, Staffordshire and from Carlisle to Newcastle where none of the refinancing gains were shared with the taxpayer.

Under the new rules, windfall gains from refinancing must be shared equally between private investors and the state. Since they came into force only one scheme has gone through a refinancing - modernising the London Underground, which amounted to £42m returned to the taxpayer.

Another big scheme, the £331m second Severn river crossing, was exempted from sharing its refinancing proceeds with the state because it needed the cash to meet an EU ruling that it had to pay VAT on its road tolls.

The NAO found that four out of 10 PFI schemes had a change of investors following share sales. Half of the new owners succeeded in getting the schemes financed.

Edward Leigh, Conservative chairman of the Commons public accounts committee, which has been highly critical of the windfall gains under PFI, said: "My committee will continue to keep an eye on the secondary market to make sure there is no adverse effect on the underlying projects.

"Given the high refinancing returns we have seen being earned by some PFI investors, the public sector needs a better understanding of the full range of the private sector's costs and benefits from PFI and it is incumbent on the Treasury to lead this work," he said.

The Treasury has also warned government bodies negotiating with private companies that they must not agree to less favourable terms in order to get a share of a refinancing deal - particularly if it gives the company a longer period to get more income from a PFI scheme or leaves the public sector with more liabilities if the contract is terminated.

The NAO report reveals that a secondary business market has been established among companies investing in PFI schemes. More and more are trading their shares to new investors.