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


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 high.

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 banks.

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 period.

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.



 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2010
Prepared 9 December 2010