Private finance 2 : tenth report of session 2013-14, Vol. 1: Report, together with formal minutes, and oral evidence

The production of National Accounts according to European System of Accounts (ESA) leaves PFI debt off balance sheet.

The Government's headline debt statistic, Public Sector Net Debt (PSND), which is calculated using the National Accounts balance sheet, therefore excludes PFI debt.

This acts as an incentive to pursue PFI as it does not add to the headline measure of national indebtedness.

One of the PF2 innovations is the introduction of a control total.

This will limit the payments under PFI and PF2 contracts to GBP70 billion over the five years from 2015- 16 onwards, allowing about GBP1 billion of new PF2 projects a year.

However, the budgetary incentive for individual Departments to choose PF2 over traditional procurements would remain until the GBP70 billion upper limit is reached.

There was agreement that increasing the equity proportion under PF2 is likely to increase the cost of capital compared to conventional PFI.

The Government claims, however, that a higher proportion of equity will offset the increased cost of finance.

However, there is a risk that these returns may not be realised in practice. The opportunity cost of the equity investments when assessing the value for money of PF2 projects also needs to be considered.

Decisions are also being taken without a quantitative assessment tool.

Even if a value for money case could be demonstrated for the PF2 approach, institutional investors would need to enter the market in sufficient numbers to create the kind of competition that could lead to the cheaper equity pricing that the Government is seeking