By Vivienne Russell
27 July 2010
Whitehall departments should re-evaluate the business cases of their pending Private Finance Initiative projects, government auditors have said.
A National Audit Office report published today concludes that the establishment last year of the Treasury Infrastructure Financing Unit succeeded in both stimulating the lending market and providing value for money.
But it adds that it should not be assumed that this would continue to be the case, and future projects should be reviewed according to much stricter criteria.
‘This re-evaluation should assess all the benefits, and potential loss of benefits, of continuing the project in its current form, compared with other available options, including other forms of procurement,’ the report states.
Tifu was set up by the Treasury in March 2009 as an arm’s-length body to help struggling PFI schemes to secure financing. In April 2009, it lent £120m to finance the Greater Manchester Waste project. This succeeded in stimulating the lending market enough that a further 35 PFI deals were signed without any further public lending. Priority was given to closing deals at prevailing market rates, even if this meant the public sector paying out more and the banks carrying less risk.
The NAO’s analysis revealed that these higher financing costs increased the annual charge of PFI projects by between 6% and 7%. It added that between £500m and £1bn of extra costs will have to be absorbed over the next 30 years. This is partly offset by an increased public sector share of refinancing gains.
NAO head Amyas Morse said: ‘During 2009, the cost of finance built in to 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.’
Public Accounts Committee chair Margaret Hodge said PFI costs were locked in ‘for generations to come’. She added: ‘When my committee meets to take evidence from the Treasury on the basis of this report, we will want to know whether they understood the cost implications of the decisions they made during the credit crisis.
‘More widely, given the increase in the cost of capital, we will want to discuss with the Treasury the best way to finance infrastructure projects in future. We will also be keen to ensure full transparency for all PFI projects in the government’s accounts.’
27 July 2010
Whitehall departments should re-evaluate the business cases of their pending Private Finance Initiative projects, government auditors have said.
A National Audit Office report published today concludes that the establishment last year of the Treasury Infrastructure Financing Unit succeeded in both stimulating the lending market and providing value for money.
But it adds that it should not be assumed that this would continue to be the case, and future projects should be reviewed according to much stricter criteria.
‘This re-evaluation should assess all the benefits, and potential loss of benefits, of continuing the project in its current form, compared with other available options, including other forms of procurement,’ the report states.
Tifu was set up by the Treasury in March 2009 as an arm’s-length body to help struggling PFI schemes to secure financing. In April 2009, it lent £120m to finance the Greater Manchester Waste project. This succeeded in stimulating the lending market enough that a further 35 PFI deals were signed without any further public lending. Priority was given to closing deals at prevailing market rates, even if this meant the public sector paying out more and the banks carrying less risk.
The NAO’s analysis revealed that these higher financing costs increased the annual charge of PFI projects by between 6% and 7%. It added that between £500m and £1bn of extra costs will have to be absorbed over the next 30 years. This is partly offset by an increased public sector share of refinancing gains.
NAO head Amyas Morse said: ‘During 2009, the cost of finance built in to 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.’
Public Accounts Committee chair Margaret Hodge said PFI costs were locked in ‘for generations to come’. She added: ‘When my committee meets to take evidence from the Treasury on the basis of this report, we will want to know whether they understood the cost implications of the decisions they made during the credit crisis.
‘More widely, given the increase in the cost of capital, we will want to discuss with the Treasury the best way to finance infrastructure projects in future. We will also be keen to ensure full transparency for all PFI projects in the government’s accounts.’
