Concerns over debt financing

by Carol Millett



The Treasury's decision to hold a bidding competition for the debt financing of the £120 million refurbishment of its Whitehall offices is raising concerns among PFI contractors and bankers that a precedent is being set for future deals.

Contractors and funders believe that the scheme is being used to promote a new form of PFI which will separate the construction and management package from the finance package. They also believe the deal is being used to establish Partnerships UK, the privatised Treasury task force, as an effective medium for setting up PFI finance packages.

Treasury chief secretary Alan Milburn announced last week that the Treasury is about to finalise a deal to refurbish its offices at Great George Street in Whitehall with developer Exchequer Partnership, a consortium of Bovis, Chestertons and Stanhope. The consortium was chosen as the preferred bidder for the contract almost three years ago, but the project was scrapped just six months later. At the time the Treasury said it was too expensive and held "significant financial risks for the Government."

The consortium threatened to sue at the time, having spent more than £1 million on its bid. But in October last year the scheme was resurrected and talks reopened with Exchequer Partnerships. However, this time the debt financing will be raised through a bidding competition, which will be overseen by the Treasury's task force, led by Adrian Montague.

But a leading PFI funder said there was a hidden agenda to the Treasury's decision.

He said: "The Treasury's agenda is to prove that Partnerships UK is effective. It is a showcase for Partnerships UK. This scheme is deliberately being used to prove that the modus operandi works. We have also heard that they are offering attractive debt terms in order to ensure this method works and to prove that Partnerships UK can do the deal effectively."

A PFI contractor told CJ that separating the funding from the rest of the PFI package would limit innovation.

"We hope this does not set a precedent for future PFI deals. We prefer the freedom to set up the funding ourselves. We have established very good, long-term working arrangements with our funders, and believe the cross-fertilisation of ideas between the sectors would be lost."

Another banker warned that tendering for debt financing would cause the funder market to shrink.

"The banks will just avoid those Government departments which adopt that form of PFI deal. They will concentrate their resources elsewhere, which would result in a contraction of the lending market."

Innisfree director Tim Pearson questioned the cost effectiveness of the deal. He said: "We are disappointed that the conventional PFI route was not followed to give people an opportunity to see if they could make a difference. There is a question mark over whether this form of procurement leads to a more cost effective form of procurement."

A Treasury spokesman said: "The decision to use this form of public-private partnerships on other deals will depend on each individual case."