5.11 The cost of private finance is a substantial part of the costs of PPPs and especially of PFI. Ensuring as competitive a rate as possible is essential to achieving value for money. The difference between the cost of the private finance used and Government borrowing should closely reflect the value of the risks transferred.
5.12 Most bidding consortiums have included the lead lenders as part of the bidding team. A few other projects have run a funding competition in the late part of the tendering process, to ensure the most competitive rates possible at the time. Such competitions can be complex and therefore risky. They require thorough preparation and a strong project management team to make them effective. The Treasury was the first to use a funding competition, when it tendered for its office building.84 We have called for departments always to consider using a funding competition, although they have only occasionally been used since.
5.13 The recent credit crisis has made finding competitive and economic funding harder. It is not always possible to get much competition because each bank is only prepared to lend a small amount, and not always for the full term of the project. Large deals may need all the lenders available to contribute something. This makes it essential that project teams commissioning new projects adopt alternative strategies for considering the VFM of the financing.
5.14 The Treasury has set up a unit to offer debt funding to projects that are finding it impossible to find sufficient competitive private lenders.85 This provides some additional competitive tension against the banks. But Departments need to consider the value for money of deals given the current high financing costs. They need to consider at what point the deals would simply not be good value for money compared to options less reliant on private finance.
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84 Innovation in PFI financing: the Treasury building project, National Audit Office (HC 328, 2001-02).
85 Infrastructure Finance Unit (TIFU): http://www.hm-treasury.gov.uk/ppp_tifu_index.htm.