Press Release - Financing PFI projects in the credit crisis and
the Treasury's response
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.
Amyas Morse, head of the National Audit Office, said
today:
"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."
Notes for Editors
- Press notices and reports are available from the date of
publication on the NAO website, which is at www.nao.org.uk. Hard copies can be
obtained from The Stationery Office on 0845 702 3474.
- The Comptroller and Auditor General, Amyas Morse, is the head
of the National Audit Office which employs some 900 staff. He and
the NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
- Refinancing is the process by which the funding terms, put in
place at the outset of a PFI contract, are later changed, usually
with the aim of creating benefits or 'refinancing gains'.
Refinancing may be beneficial where the risk of a project has
reduced due to, for example, the construction phase of a project
having successfully completed. In October 2008, the Treasury
increased the public sector share of most such gains from 50 per
cent to 70 per cent.
Press Notice 49/10
All enquiries to Phil Groves, NAO Press Office: Tel: 020
7798 5339
Mobile: 07770 678477