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.