UK - A parliamentary report published earlier this week has called for a "radical rethink" of UK private finance initiative (PFI) projects, calling on the Treasury to replace them with a model that curbs potential returns to investors unless they are willing to take on more risk.

The Commons Public Accounts Committee's report described the current 30-year PFI model as unsustainable, claiming PFI equity investors enjoyed "eye-wateringly high rewards" for taking on minimal risk.

Committee chairwoman Margaret Hodge said: "We have even seen evidence of excess profits being priced into projects from the start. For too long, public sector authorities have treated 30-year PFI contracts as the only game in town. This has to end."

In expert testimony to the subcommittee, Barclays Infrastructure Funds' managing director Nigel Middleton pointed out that returns had fallen over the past decade as competition increased and uncertainty decreased.

In response to a mooted investor return, he said pension funds would perceive a cap on returns as a strong disincentive to invest in the UK infrastructure market.

But the committee identified pension funds as a potential source of capital that would allow public sector procurers to reduce banks' influence on the cost of capital.

The report's most stinging attacks were reserved not for investors but for the Treasury, which is currently working on reforms to the PFI model.

Accusing it of failing to justify the pricing of equity, the committee urged the Treasury to produce a "qualitatively different policy" that would limit returns and increase transparency over both the equity premium and investor returns.

It also accused the Treasury of failing to ensure that assumptions on risk transfer underpinning the business case for PFI projects were robust and empirically based.

"The excessively high returns being made by private investors in PFI projects are further evidence the previous emphasis on using PFI is inappropriate for the future," it concluded.

The UK is Europe's most mature PFI market, with 700 projects completed over the past 20 years.

A further 30 PFI projects are currently being negotiated.

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