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

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]

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]

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.[4] There have only been two cases of projects being terminated with banks suffering losses.[5]

4. After taking some time to consider options, the Treasury established The Infrastructure Finance Unit (TIFU) in March 2009.[6] 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 the banks.[7]

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.[8]

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.[9] 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 rates.[10]

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.[11]

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.[12]

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.[13]

2   Q93 Back

3   C&AG's report, Figure 3 Back

4   Q4 Back

5   Qq81-82 Back

6   Q3, Q40 Back

7   Q22 Back

8   Q46 Back

9   Q100; HM Treasury, National Infrastructure Plan 2010, October 2010  Back

10   Qq1-4 Back

11   Qq23-31 Back

12   Qq55-57; European Investment Bank Group, Annual Report 2009, Volume 3, Statistical Report Table F  Back

13   Q47 Back

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