The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
“During the credit crisis, in 2009, at the very time that the taxpayer was providing unprecedented support to the banking system, the banks were increasing the cost of financing PFI projects by up to a third, and transferring risks back to the public sector.
The extra cost to the taxpayer for PFI projects financed during this period was some £1 billion.
We recognize that market confidence was helped by the Treasury’s setting up its own unit to lend public money on commercial terms where private finance was not available. But the Treasury could have done more. It did not use its negotiating position to press the banks to loan to infrastructure projects at lower rates.
It also did not explore the possibility of alternative and cheaper sources of finance to reduce reliance on expensive bank financing. It is imperative that it does so now.
The high interest charges to which new PFI projects have been subject as a result of the credit crisis will be locked in for up to 30 years, even when the project is up and running and posing less of a risk to lenders.
The Treasury must find ways to reduce these high bank financing costs; and monitor market conditions to help departments claw back as much in savings as possible if and when projects signed in 2009 are refinanced.”
Margaret Hodge was speaking as the Committee published its 9th Report of this Session which, on the basis of evidence from the Treasury, examined its response to financing PFI projects in the credit crisis.
The 2008 credit crisis had an enormous impact on the Government’s public infrastructure programme. Severe restrictions on bank lending at that time meant no sizeable Private Finance Initiative (PFI) contracts could be let. This affected the viability of a large number of infrastructure projects, including school and road building schemes, with a total investment value of over £13 billion.
The Treasury’s response was to make project finance available by lending public money on the same terms as the banks. This approach reflected a fear that doing nothing would slow the flow of new PFI contracts, jeopardising the economic stimulus that would be generated by new infrastructure. Providing that stimulus was the Treasury’s overarching priority.
However the Treasury did not put pressure on government-supported banks to either make lending available or reduce the extent of increased financing costs.
Overall, bank financing costs increased by 20-33 per cent compared to bank charges before the credit crisis. This added £1 billion to the contract price, payable over 30 years, for the 35 projects financed in 2009. Furthermore Treasury did not require individual projects to submit detailed re-evaluations to assess whether contracts were still value for money.
The Treasury helped to reactivate the lending market for infrastructure projects by setting up its own Infrastructure Finance Unit in March 2009. This Unit was prepared to lend public money on the same terms as the banks, but lent to only one project – a large waste treatment and power generation project. The committee recognises, however, that this willingness to lend helped to re-establish market confidence.
But other alternatives to the high cost bank finance were not properly explored during the credit crisis. Greater use of Treasury loans, or direct grant funding, could have put pressure on banks to lower their charges. Neither did the Treasury adequately explore how lower cost finance sources such as life insurance and pension funds could be encouraged to invest more in PFI projects.
The Treasury also could have made more use of funding from the European Investment Bank. The appropriate mix of financing sources for future project contracts, including public and private finance, is an issue that needs serious reconsideration.
The committee accepts that the circumstances of the credit crisis, and in particular the need for economic stimulus, warranted the Government making lending available to projects that would otherwise have been threatened.
Nevertheless, the committee remains concerned about other aspects of the Treasury’s response to the lack of PFI project finance.
The impact of the bank crisis on projects will continue to be felt over the next 30 years, as financing costs are locked in for the life of each project (both construction and operation phases). Higher financing costs will persist throughout the operating period, even though the project operation phase normally represents a lower risk for lenders.
The Treasury needs to be better informed about the active market in the sale of PFI shares. At present, unlike debt refinancing, the Treasury does not monitor the extent of gains to private investors from selling their shares. If gains are excessive, this may indicate an overpriced contract in the first place, raising concerns about value for money for taxpayers.