27. Financing costs are an important difference between private finance and traditional procurement routes. Private finance projects are usually financed with high levels of debt, at risk in the event of failure (Olsen Q 459), which cost more in interest than Government borrowing through gilts, which takes no account of project-specific risks.
28. The cost of debt for private finance projects pre-credit crunch was typically about one percentage point (60-150 basis points) above the nominal cost of government borrowing (NAO, p 87). Mr David Metter, PPP Forum, suggested that the overall cost of capital for PFI projects over 10 to 15 years had been about the reference gilt rate plus one and a half to two percentage points (Q 496).
29. Publicly financed procurement benefits from the lower rates of interest at which the Government can borrow. In PFI projects the private sector aims to make up for higher borrowing costs by taking on, pricing, and managing project risks more effectively.11
30. Even though the cost of debt in private finance projects will usually be higher than under traditional procurement, this factor alone does not rule out the use of private finance. The higher cost of debt reflects risks carried by the private sector and a margin for profit. And, apart from bearing risks that would otherwise fall to the public sector, private finance can offer other advantages over traditional procurement to offset the higher interest rates. We return to these potential advantages in Chapter 4.
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11 HM Treasury (2003), PFI: Meeting the Investment Challenge.