16 October 2008
By Tash Shifrin
The financial crisis will increase the cost of Private Finance Initiative projects, while the slowdown in the economy could cause further problems if contractor firms are hit, experts have warned.
The warning came as it emerged that Aberdeen Council's £120m 3Rs school building project with private consortium Nyop was underpinned by financing from disaster-struck Icelandic bank Landsbanki.
The council said it was confident the part-built schools would be completed, although no comment was available from Icelandic developer Nysir this week. Gordon Edwards, Aberdeen's corporate director for resources management, said: 'It was only very recently that Landsbanki was downgraded from the highest credit rating to a lower one — and that was months after the 3Rs project reached a financial close.'
Mike Harlow, a partner in KPMG's infrastructure advisory business, said the state of the financial markets would slow down imminent PFI deals. 'There are a whole load of projects about to reach financial close and quite a significant backlog.
'Undoubtedly the difficulties the banks are facing has had an impact on the speed that deals are closing, but they will still close.' He added that there were 'a number of schemes where banks have had to be changed at the last moment'.
A three-fold rise in the credit margin charged by banks in the past year would increase the cost of projects, he added.
Nick Prior, senior partner, corporate finance, government and infrastructure at Deloitte, warned that the imminent recession 'will affect contractors that work for government in PFI and PPPs'. Public sector bodies should be 'attuned to the financial robustness of the contractors they are seeking to enter contracts with', he said.
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