Your browser is no longer supported

For the best possible experience using our website we recommend you upgrade to a newer version or another browser.

Your browser appears to have cookies disabled. For the best experience of this website, please enable cookies in your browser

We'll assume we have your consent to use cookies, for example so you won't need to log in each time you visit our site.
Learn more

Credit crisis damaged value for money of PFI

Government action to protect PFI projects during the credit crisis stimulated the economy but threatened long term value for money and will cost an additional £500M to £1bn, the National Audit Office (NAO) has found.

In its Financing PFI projects in the credit crisis and the Treasury’s response report, published today, the NAO said that by giving priority to closing deals at the prevailing market rates and by setting up an Infrastructure Finance Unit in early 2009, the Treasury helped to reactivate the lending market for PFI programmes.

“The Treasury should not presume that continuing the use of private finance at current rates will be value for money [in the long term].”

National Audit Office

But it said that while these actions secured short term value for money, “the Treasury should not presume that continuing the use of private finance at current rates will be value for money” in the long term.

Between £500M and £1bn of additional cost has been locked in by the PFI deals made during the credit crisis, said the report. Committee of Public Accounts chair Margaret Hodge said she would seek evidence from the Treasury on this point. “We will want to know whether they understood the cost implications of the decisions they made during the credit crisis,” she said.

The NAO said it is unlikely that more than half of those current higher costs could be recovered through refinancing. It recommended a review of the forward programme to identify the best funding models for projects now being developed.

Stricter project review

“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,” said NAO head Amyas Morse. 

The report suggested that loans from the European Investment Bank (EIB), or the French model of the government guaranteeing 80% of debt once a project is operating successfully, could be relevant in future.

The value for money of the PFI model has been threatened by the credit crisis because while the typical estimate of the cost advantage of PFI lay in the range of 5%-10%, financing rate changes during the credit crisis increased the annual contract charge of PFI projects by as much as 6%-7%, said the NAO. The credit crisis caused the total interest cost of bank finance to increase by between one fifth and one third, it said.

Readers' comments (1)

  • I think the ICE should try to obtain from the current programme of PFI Contracts the % of the overall project costs for overall finance charges including service charges, overall bank charges including service charges, interest charges, legal charges, and any other non-materials, non-engineering, non-installation and construction, and non-O&M charges etc.

    Only then can we begin to identify whether we are obtaining value for money. Most, if not all, of these "additional charges" would not be incurred in a normal design and construct contract, and any ongoing O&M works could be asssed or even let separately at lower costs. The cost of financing should also be much lower.

    Years ago, I managed an overseas Wastewater Treatment Plant Design and Build Contract in which the Lump Sum Price included for an ongoing parallel 2 year Defects Period and Full Cost O&M responsibility. This proved beneficial for everyone: single party responsible for design and build works, no debate/dispute about takeover as any defects known at that time which did not prevent start up and beneficial use were dealt with by the Contractor during ongoing operation, any defects in design or materials or installation/operation flushed out and fixed during the 2 year O&M period, excuses of "defects" only being due to mal-operation not available as being operated by the Contractor, extended period of vetted operation through all seasons and all loadings better able to identify defects, even latent defects, Final Witnessed Tests prior to Final Certificate could be adjusted to accommodate past operational findings and concerns.

    I cannot believe that such a contract strategy would normally provide better, CAPEX/OPEX cheaper and more long term reliable works and performance than PFI.

    Unsuitable or offensive? Report this comment

Have your say

You must sign in to make a comment

Please remember that the submission of any material is governed by our Terms and Conditions and by submitting material you confirm your agreement to these Terms and Conditions. Please note comments made online may also be published in the print edition of New Civil Engineer. Links may be included in your comments but HTML is not permitted.