MPs criticise Treasury for failure to get tough with banks on PFI finance

The Treasury failed to use its negotiating position during the credit crisis in 2009 to press banks to loan to infrastructure projects at lower rates, MPs have said.

A report by the Public Accounts Committee revealed that bank financing costs rose by 20-33% compared to bank charges before the credit crisis.

The extra cost to the taxpayer for 35 PFI projects financed during the period was £1bn, after banks increased the cost of financing by up to a third and transferred risks back to the public sector.

Other key findings and recommendations from the report included:

• The Treasury failed to require a fully evidenced evaluation of the impact of the increased financing costs on value for money at the time the contracts were let
• There was a failure to explore alternatives to high cost bank finance, such as Treasury loans or direct grant funding. Less use of European Investment Bank funding was made compared to other EU countries
• Life insurance and pension funds could be an important alternative source of finance but they have been reluctant to fund PFI projects. The Treasury needs to identify and address the regulatory and other impediments affecting their willingness to invest
• PFI projects with low operating risks have locked in high financing costs for up to 30 years. “The Treasury must consider unbundling service delivery from PFI contracts or find ways to lower the cost of financing the operating period”
• The government could claw back up to £400m if projects signed in 2009 are refinanced. There is no certainty of this happening but the Treasury should monitor market conditions and ensure departments are ready to maximise gains as soon as conditions are favourable. A portfolio approach to refinancing would enhance the public sector’s bargaining position
• The government needs to get good value from equity finance. “There is little transparency, however, about investor returns when selling shares – making the value for money of using equity less clear.” The Treasury already monitors debt refinancing but should also review the sale of PFI shares. Excessive gains could indicate an overpriced contract.

The MPs did, however, praise the Treasury’s decision to make project finance available at the time by lending public money – though the Infrastructure Finance Unit created in March 2009 – on the same terms as the banks. The move provided a boost to the market, they said, even if the unit only lent to one project (a waste treatment and power generation project) in the end.

Committee chair Margaret Hodge MP said: “We recognize that market confidence was helped by the Treasury’s setting up its own unit to lend public money on commercial terms where private finance was not available. But the Treasury could have done more.”