Analysis: how the government's £13bn PFI rescue will work

The Government kickstarted the sputtering PFI market this week with a commitment to lend up to 100% of the debt funding for PFI schemes.

The move secures the future of a £13bn pipeline of PFI projects and throws down the gauntlet to the banks, challenging them to deliver on PFI funding or see the Government muscle in on the PFI debt funding market.

It also bolsters the Government’s Keynesian assault on the looming recession, ensuring the creation of thousands of construction jobs through the delivery of dozens of major PFI infrastructure schemes.

A Treasury spokesman said the deal will ensure that £8bn of PFI schemes will reach financial close in 2009/2010. “That could involve up to £2bn of Government money in the form of senior debt in the first year,” he added. The £2bn will be raised from unallocated departmental funds and departmental underspends.

“All PFI projects in procurement will be able to apply as well as projects due to go to market soon” he added.

He insisted that the PFI risk profile remained the same with equity providers continuing to bear the risk of cost overruns and delays. He added that equity funding was not included in the package, since “contractors are still very willing to provide equity for these deals.”

A Treasury debt funding unit will be set up “in the next few weeks”. The spokesman said the unit will hit the ground running, turning around funding applications from public sector PFI clients “rapidly”, in order to unlock the current logjam of PFI schemes. 

The scheme will offer competitive terms. Some banks are currently offering only short term seven year deals with high margins on PFI deals, raising the costs of the schemes.

“We will co-lend with other banks at the normal rates and on the same terms and conditions as other banks,” said the spokesman.

In certain cases the unit will lend all the funding necessary to close a PFI deal. “However this will be in exceptional circumstances where, for example, the funders pull at out the 11th hour,” he added.

The unit will also challenge any PFI deal with funding in place, if it deems the deal poor value for money. The move will break the grip of the few banks currently lending senior debt to PFI schemes. The spokesman said: “If the banks know we are going to co-lend on a deal it might encourage them to give better deals. The additional competition might also encourage more banks to come back into the market, otherwise they risk losing business.”

The loans will be structured so that the Treasury can sell them on when the money markets recover.

The spokesman declined to identify schemes likely to apply for Treasury funding. However the Treasury has issued a list of 32 PFI schemes that could possibly use the scheme. These include the £5b M25 widening PFI and the £3.3bn Manchester waste scheme and the £374m Southmead Hospital PFI deal. The lending scheme is also open to PFI deals in Scotland , Wales and Northern Ireland .

The PPP Forum welcomed the news. PPP Forum member Matthew Webber of PFI firm Innisfree, said: “This is a clever deal which aims to make the banks more proactive in the current market. The Treasury is saying it is prepared to lend on more sensible terms. It will hopefully call the bluff of the banks.”

However another PFI expert warned: “The big issue is how the unit will be immune to political pressure to lend to pet projects? How can Government be a good credit manager? It is very welcome in some respects but this is in substance, if not in form, a nationalised bank.”

The spokesman insisted the scheme was not a bank but a temporary measure until liquidity returned to the market. He declined to say how long the scheme would run for.