"By introducing an Infrastructure Finance Unit, the
Treasury helped reactivate the market and prevent the stalling of
many government projects. During 2009, the cost of finance built
into the PFI programmes at that time was value for money, but there
is no guarantee that it will remain that way. Now that the market
is providing finance again, a project by project review should be
carried out using stricter criteria, to establish the most
appropriate funding methods."
Amyas Morse, head of the National Audit Office, 27 July
2010
The National Audit Office has concluded that, by setting up an
Infrastructure Financing Unit, HM Treasury helped reactivate the
lending market for private finance projects which was putting
government PFI programmes in doubt as a result of the credit
crisis. While the extra finance costs for projects in 2009 were
value for money in the short term to achieve the government
objective of stimulating the economy, the Treasury should not
presume that continuing the use of private finance at current rates
will be value for money.
Bank lending was so restricted in late 2008 that no sizable
contracts could be let. The Treasury helped to reactivate the
lending market for infrastructure projects and improved the market
confidence by setting up its own Finance Unit in March 2009. The
Unit helped to finalize a large waste treatment and power
generation project. Subsequently, 35 projects, including the
contract to widen and maintain the M25, were signed without any
further public lending.
In line with policy on acting to stimulate the economy, the
Treasury and other government departments gave priority to closing
deals at the prevailing market rates, even if this meant the public
sector paying more, and the banks carrying less risk. Analysis by
the NAO suggests that higher financing costs increased the annual
charge of PFI projects by six to seven per cent and that between
£500 million to £1 billion of higher cost has been built in over 30
years, partly offset by an increased public sector share of
refinancing gains.
The opinion of the NAO is that the extra finance costs of
projects financed in 2009 were value for money in the context of
stimulating the economy. The NAO also considered whether
reconsidering business cases - which might result in projects being
postponed or discontinued - would have improved value for money.
The NAO found that this might have put policy objectives to give a
boost to the economy at risk and would not have been a reasonable
yardstick to assess the protection of value for money.
The NAO recommends that there now be a thorough project by
project review of the forward programme to apply more exacting and
narrower criteria than applied to projects at the height of the
crisis.
Publication details:
HC: 287, 2010-2011
ISBN: 9780102965469