2 Re-evaluating infrastructure contracts
following the credit crisis
11. Some 35 privately financed contracts were let
in 2009 during the height of the credit crisis. Higher financing
costs increased the cost of a typical contract by 6 to 7 per cent
compared to commitments entered into before the credit crisis.[14]
When benchmarked against the rates available from the financing
markets just before the credit crisis, the higher bank changes
on the 35 contracts were around £1 billion.[15]
The Treasury and departments saw these substantial cost increases
as unavoidable, and the result of market pricing. Figure 1 shows
the increased cost of loans for school building projects in 2009,
compared to the Government's long term borrowing cost. Figure
1 The increase in PFI school borrowing costs after April 2009
figure 1 here
Source: C&AG's report, extracted from Figure
10
12. Despite the higher project costs from increased
bank charges, there was only limited re-evaluation of the value
for money of existing PFI projects. A project's value for money
was only reassessed if it needed departmental support to meet
cost increases of more than 20 per cent or £20 million.[16]
Out of the 35 projects that closed in 2008 and 2009, the Treasury-chaired
Project Review Group sent back only three projects to make improvements
before being approved.[17]
No PFI projects were cancelled over that period. Nor did the Treasury
alter existing value for money procedures when it eventually issued
updated guidance on PFI procurement in August 2009.[18]
13. Although the Treasury told us it was not under
political pressure to approve contracts, there were clear drivers
which created a need to close contracts despite the high financing
costs. The Government's overriding policy priority in 2009 was
to boost the economy by letting infrastructure contracts. The
Greater Manchester Waste PFI project, delayed by almost a year,
was an example of a project that had the potential to help the
economy by creating 5,000 jobs.[19]
That project, responsible for treating 5 per cent of national
waste, was also under legal and regulatory pressure to avoid further
delay.[20] It is not
unusual for other policy imperatives to take precedence over value
for money concerns, as we concluded in our recent report on the
multi-role tanker aircraft. In that case, the Ministry of Defence
wanted to procure specialist aircraft, and used the favoured procurement
route of PFI even though it was not appropriate for such a unique
project.[21]
14. The Treasury asked Partnerships UK to evaluate
whether the increase in bank financing costs undermined value
for money across the board. Partnerships UK analysed the Outline
Business Cases for a sample of PFI projects, but did not examine
all aspects of financing costs.[22]
It concluded that projects were likely to remain value for money
if the interest margin which banks add on to the cost of funds
for risk was below 3 per cent.[23]
Based on this finding, and normal department project review procedures,
the Treasury was satisfied that all 35 PFI projects let in 2009
were still value for money.
15. We remain unconvinced that there was sufficient
evidence to support this view. This Committee, and our predecessors,
have often been concerned about the value for money case for using
private finance. We would, therefore, have expected a significant
increase in financing costs to have prompted the Treasury and
departments to question more closely the value for money of the
privately financed contracts let following the credit crisis.
16. The Greater Manchester Waste PFI project was
approved as value for money, despite financing costs that included
risk margins well above the 3 per cent value for money ceiling
identified by Partnerships UK. In the Manchester waste project
the risk margin started at 3.25 per cent and after 21 years increased
to 4.5 per cent. These higher margins reflected a project that
was unique in terms of scale and technology. The Treasury told
us that this project was value for money, without the need to
make any assumption that high cost financing would be replaced
at a lower cost in future.[24]
14 C&AG's report, paragraph 21 Back
15
Q38, Qq129-130 Back
16
Qq13-16 Back
17
Q34 Back
18
C&AG's report, paragraph 1.16 Back
19
Q9 Back
20
Qq5-8 Back
21
Q6, Q141 Back
22
C&AG's report, paragraph 24 Back
23
Qq20-21 Back
24
Qq10-11 Back
| 
