Conclusions and Recommendations |
1. Contracts let since the credit crisis were
over-reliant on expensive bank finance. The
Treasury failed to develop a sufficiently wide mix of finance
sources, including grant funding, for infrastructure projects.
Some contracts obtained funding from the European Investment Bank
(EIB), which lowers some financing costs, but departments made
less use of this resource than did other European Union countries.
The Treasury failed to use its Infrastructure Finance Unit, which
only made one loan, to promote a downward trend in the cost of
private debt finance. The Treasury should expand the range of
financing sources and assess the potential benefits from making
further Treasury loans whenever commercial lending rates are unusually
2. The Government did not use its negotiating
position with the banks to assist PFI lending.
In 2009, banks increased the cost of financing PFI projects by
between 20 and 33 per cent, adding £1 billion to the contract
price over 30 years for the 35 projects financed. At the same
time, the taxpayer was providing unprecedented support to the
banking system. Yet the Treasury failed to set the banks lending
targets for PFI projects. It should now identify ways in which
better deals can be obtained, at least from the government-supported
3. The Treasury did not require a fully evidenced
evaluation of the impact of the increased financing costs on value
for money at the time the contracts were let.
The Treasury did not have full information on project financing
costs in the credit crisis. Value for money is often marginal
for PFI projects. The Treasury should ensure it has full information
on financing costs from departments, and should also intervene
after any significant changes in costs to assess whether PFI deals
should go ahead.
4. Life insurance and pension funds are an
important alternative source of finance, but have been reluctant
to fund PFI projects for a number of reasons.
The Treasury should identify the regulatory and other impediments
affecting their willingness to invest in PFI projects and take
steps to address them.
5. PFI projects with low operating risks have
locked in high financing costs for up to 30 years.
The high risk period is typically the construction period, but
the high interest charge endures throughout the project life.
The Treasury must consider unbundling service delivery from PFI
contracts or find ways to lower the cost of financing the operating
6. There is the opportunity for the Government
to claw back up to £400 million if projects signed in 2009
are refinanced, but there is no certainty of this happening.
The Treasury should monitor market conditions and ensure that
departments are ready to maximise these gains, as soon as conditions
are favourable. In particular, the Treasury should identify groups
of projects which could be refinanced at the same time. This portfolio
approach would enhance the public sector bargaining position,
reduce transaction costs and increase potential gains.
7. Government also needs to get good value
from equity finance. There is little transparency, however, about
investor returns when selling shares - making the value for money
of using equity less clear. There has
been an active market in selling PFI shares, with a large number
of sales and a consolidation of ownership. This has led to portfolio
gains that the Treasury has failed to monitor adequately. The
Treasury should review whether investors are systematically realising
gains on share sales, as well as refinancing debt.