22 May 2009
By Tash Shifrin
The Highways Agency has finally signed off its Private Finance Initiative deal to widen the M25 motorway without a Treasury bail-out – although the project’s costs have risen by almost a quarter to £6.2bn.
Transport minister Andrew Adonis welcomed the agreement, saying: ‘The widening schemes, combined with the maintenance and operation of the M25 network for the next 30 years, will reduce congestion, improve journey time reliability and safety and bring benefits to road users.’
The contract was signed on May 20 with the Connect Plus consortium, comprising Skanska, Balfour Beatty, Atkins and Egis. But the 30-year deal has rocketed in value from an estimated £5bn a year ago.
A Highways Agency spokesman said the agency had always described the cost as ‘in excess of £5bn’ but conceded that the cost of financing had risen since tenders were received in April 2008.
‘This was because margins paid to the banks have increased as a result of the current economic climate, but there has also been a significant fall in interest rates, mitigating the increase in costs,’ he said, adding that the PFI deal was ‘still value for money’.
The agency has secured all the senior debt from a club of 16 commercial banks and the European Investment Bank, despite speculation that it might require a loan from the Treasury’s Infrastructure Finance Unit because of problems securing private finance.
So far, Greater Manchester’s £4.7bn waste scheme, signed off last month, is the only PFI project to include finance from Tifu. It received £120m. But, as the M25 deal was being signed, Treasury officials at a conference in London said they expected that Tifu loans would be needed to push through some of the £8.5bn of deals scheduled to close in 2009/10.
Tifu head Andrew Rose told the conference, run by City and Financial, that although 16 banks had come forward for the prestigious M25 project, ‘I’m not in my own mind convinced all those banks are players in the long-term PFI market’.
Rose said Tifu’s success would not be measured by the amount it lent. ‘It’s about deals closing. There is no target [sum] to use. There are no drivers to lend money.’
But it is unclear whether Whitehall departments will have to contribute to Tifu’s funds before they can secure PFI finance. When the unit was launched in March, the Treasury said some funding would be clawed back from unspent capital budgets.
Charles Lloyd, head of public-private partnerships at the Treasury, told the conference: ‘There has been a series of discussions between the Treasury and government departments on exactly that point. This has been a concern. What we don’t want is departments treating Tifu as a last resort because they have to contribute to it, rather than the next place to go in order to [get a deal closed].’
The Treasury also appears to have ruled out future use of the unprecedented measure taken by Greater Manchester Waste Disposal Authority. It became a senior lender to its own scheme, providing £35m of financing as well as a £68m capital contribution.
Lloyd warned that public authorities lending to their own PFI schemes was ‘not generally acceptable’, with government guarantees to underwrite private sector lending also frowned on.
In answer to questions from Public Finance at the conference, Rose said the Treasury wanted to ‘centralise government lending’ through Tifu, where there was a team with substantial banking experience that most public authorities would be unlikely to have. GMWDA’s move to lend to its own scheme had been made before Tifu was established, he noted.
Rose said government guarantees could not be sold on. But an eventual sale of Tifu loans was part of the Treasury’s exit strategy when the finance markets recover.
GMWDA treasurer and deputy clerk John Bland told delegates the authority had talked to both the Treasury and to the Department for Environment, Food and Rural Affairs before contributing 12% of the scheme’s funding through capital contributions and the unprecedented provision of senior debt.
‘Did we get it right? We were inventing it as we went along, I don’t know,’ he admitted. ‘Did we have the powers to do it? Well we have, so we have.’
Conversations with the banks about joining them as a lender had been ‘at times surreal’, Bland said, adding: ‘We did it, I think, properly. Time will tell.’
Bland acknowledged ‘a conflict of interest’ in the authority being both the procuring body and a lender to the PFI scheme. He told PF its voting rights as part of the club of lenders were ‘turned off… in certain areas where there is that conflict’.
