Financing PFI projects in the credit crisis and the Treasury's response - Public Accounts Committee Contents


Written Evidence HM Treasury

QUESTIONS RAISED BY IAN SWALES MP

Q138. "In March this year, a new hospital was announced for the area between Stockton and Hartlepool, costing £460 million. The Trust was told it would be funded directly by the Department of Health.  Does that make any sense to you?"

Q139. "Why would a £460 million hospital suddenly be funded by the Treasury, as opposed to PFI, which I understood was the normal way of doing these things?"

Response

1. These questions refer to North Tees and Hartlepool NHS Foundation Trust's plans to develop a single site hospital at Wynyard Park, to replace both the existing University Hospital of North Tees and the University Hospital of Hartlepool.

2. NHS foundation trusts have access to private sector and public sector financing for capital projects, such as hospital schemes. There is no normal way of financing such schemes. Private Finance Initiatives are only approved if the trust is able to demonstrate there is a clear value for money case compared with a publicly procured alternative.

3. North Tees and Hartlepool NHS Foundation Trust's outline business case for the scheme contained a projected capital cost of £464 million with 93% of this value to be funded through Public Dividend Capital, and the remainder through an equity contribution from the developer.

4. Government approval for this scheme was initially granted in March 2010. It was therefore considered as part of the cross-Government review of spending decisions between 1 January and the general election. When considered alongside similar schemes at a similar stage of development, other schemes were considered to be more urgent, and so Government approval for the North Tees and Hartlepool NHS Foundation Trust's scheme was cancelled.

5. We understand that the trust is currently reappraising the available options for this scheme, including the possible use of the Private Finance Initiative (PFI). The trust has not yet submitted an updated business case to the Government for approval.

RESPONSE TO PAC QUESTION - STEPHEN BARCLAY MP AND RICHARD BACON MP

Question

The question concerns the accountability, and on how it is regulated, of passing PFI contracts to third parties. Would there be checks on the third party as to whether they are suitable to take on the PFI contract and are there any safeguards should circumstances change for the worst? Lastly, what would happen if the third party held on to the money?

Response

The Treasury's "Standardisation of PFI contracts-Version 4" (SoPC4)[1] provides detailed guidance to Authorities when writing a PFI contract.

Section 18 (pp 124-127) of SoPC4 contains guidance on change of ownership clauses in a PFI contract, indicating where it may be appropriate to restrict ownership in a PFI contract to address the specific concerns of an Authority. For example, in the interest of national security in a defence project, or where an authority wishes to prevent tobacco companies holding shares in a school. The provisions within this section allow an Authority to ensure that there are adequate restrictions on the organisations that are able to hold shares in a PFI company.

Section 21 (pp 145-146) provides for Contractor Defaults which lead to termination of the PFI Contract if not remedied. One of the defaults is failure to comply with the change of ownership provisions. If there is a transfer of shares in the Contractor to an unsuitable third party and that unsuitable shareholder fails to transfer its shares to a suitable third party the Authority has the right to terminate the PFI Contract.

BREAKDOWN OF EUROPEAN INVESTMENT BANK LENDING TO UK AND COMPARABLE MEMBER STATES

1. On 26 October 2010, at a hearing on the financing of PFI projects during the credit crises and the Treasury response, the Public Accounts Committee requested a note, (Stephen Barclay Q57) on the relative share of EIB funding the UK receives relative to other European countries with a similar shareholding (but with particular reference to Spain and Italy).

2. Finance contracts signed by the EIB in the countries holding the five largest shares of EIB capital, expressed as a total amount and as a share of total EIB lending in the EU, are set out in table 1.

Table 1.
2010*
2009
Loan amount
(€m)
% of
EU lending
Loan amount
(€m)
% of
EU lending
UK4,68710.0 5,4117.7
France3,7918.1 6,2908.9
Germany5,69012.1 9,80213.9
Italy4,4049.4 9,68713.7
Spain7,96717.0 10,49414.9

Source: European Investment Bank, Annual Reports and EIB website.

* statistics for 2010 include all finance contracts signed up to 10 November 2010, as published on the EIB website

3. The Committee should be aware that France, Germany, Italy and the UK all have the same capital holding of €37.6 billion. Spain has a capital holding of €22.6 billion.

4. The share of lending going to the UK should be considered in the context of:

¾  UK projects traditionally having access to and securing funding from capital markets;

¾  local authorities ability to obtain competitive financing from the Public Works Loan Board and

¾  Limited UK access to the EIB's convergence objective, given the relatively limited number of convergence regions in the UK

November 2010


1   http://www.hm-treasury.gov.uk/d/pfi_sopc4pu101_210307.pdf?bcsi_scan_F8D0BFE83951C3DA=0&bcsi_scan_filename=pfi_sopc4pu101_210307.pdf  Back


 
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Prepared 9 December 2010