1 The impact of the credit crisis
and the Treasury's response |
1. Banks stopped lending to government infrastructure
projects during the 2008 credit crisis. In seeking to manage
this situation the Treasury found that the market conditions were
unprecedented, fast moving and hard to forecast.
2. The lack of private finance held up 110 PFI projects
with an investment value exceeding £13 billion. Two-thirds
of the pending projects by value were in four sectors - waste
treatment facilities (30 per cent), schools (15 per cent), transport
(12 per cent) and housing (11 per cent).
3. In early 2009 the banks were prepared to lend
again but in smaller amounts than before the credit crisis. Major
projects had to rely on a large club of banks if private finance
was to be used. This lack of competition, together with increases
in the banks' own cost of funds following the credit crisis, contributed
to the banks increasing their financing charges for government
projects by 20-33 per cent and transferring risks back to the
public sector. This was despite the fact that the banks had received
substantial financial support from the Government during the credit
crisis, and that lending to projects where the Government is the
customer is a very safe form of lending.
There have only been two cases of projects being terminated with
banks suffering losses.
4. After taking some time to consider options, the
Treasury established The Infrastructure Finance Unit (TIFU) in
March 2009. The purpose
of the Unit was to lend where there was a lack of available finance
from the private market. The Treasury lending would be on commercial
terms, with the lending temporary and reversible. The Treasury
intended its lending facility to increase the pool of finance
available to projects but did not want to interfere in the market's
pricing of the use of bank finance. The Unit provided one loan
of £120 million to the Greater Manchester Waste PFI project
in April 2009. The Unit did not provide any more loans thereafter
as projects were then able to secure all their debt finance from
5. Following the credit crisis, departments were
heavily reliant on expensive loans from the banks. The Treasury
told us that doing without the banks would have involved a change
in the form of procurement for most projects. The Treasury argued
that any such change would have caused unacceptable delays.
6. The Treasury's new National Infrastructure Plan,
published the day before our hearing, recognised that a one per
cent reduction in the cost of capital for infrastructure investment
could save £5 billion each year.
Notwithstanding the market difficulties, the Treasury should have
done more to try to obtain finance for infrastructure projects
in 2009 on less expensive terms:
7. Firstly, the government financial support to the
banks and the low credit risk of lending to government projects
should have provided levers to negotiate better financing terms.
The Treasury did not, however, press the banks to lend at lower
8. Secondly, the Treasury did not consider making
more loans to projects in order put pressure on the banks to reduce
their rates. If the banks had felt the threat of being replaced
by Treasury lending and losing the opportunity to earn interest,
it is likely this would have created competitive tension to drive
financing rates down.
9. Thirdly, whilst the Treasury did increase the
amount of loans provided by the European Investment Bank (EIB),
other countries have made greater use of the EIB, whose loans
are provided on cheaper terms than commercial bank loans. Over
the five years from 2005 to 2009, Italy and Spain borrowed Euro
35.1 billion and 41.4 billion, respectively, compared to Euro
20.8 billion for the UK.
10. Fourthly, greater use could have been made of
temporary grant funding to replace expensive bank loans - an approach
which enabled the Newham school project to go ahead at the end
of December 2008.
2 Q93 Back
C&AG's report, Figure 3 Back
Q3, Q40 Back
Q100; HM Treasury, National Infrastructure Plan 2010, October
Qq55-57; European Investment Bank Group, Annual Report 2009, Volume
3, Statistical Report Table F Back