[8]

8. How much impact has the financial crisis had on launching new Private Finance projects? Is the crisis likely to have a permanent effect on the Private Finance market?

8.1 The headline figures on projects reaching financial close over the last couple of years are as follows:

8.2 So there were fewer projects reaching financial close in 2008-09 than in the year before but there is evidence of a recovery in 2009/10. It is difficult to isolate the impact of the credit crunch as the capital value is only an indication of the amount of third-party finance raised and the timetable is led in the first instance by departmental spending programmes rather than market factors. Nonetheless, the use of third-party finance in most PFI projects has meant that the financial crisis has put pressure on timescales and costs.

8.3 We make the following specific observations about the impact of the credit crunch:

- fewer banks are participating because of the closing of the syndication market;

- the bond market has closed to PFI because of the retrenching of the monoline insurers, removing a source of competition for bank funding;

- there have nonetheless been some new market entrants, bank and non-bank;

- direct government finance through The Infrastructure Finance Unit (HMT's funding entity designed to fill gaps in the PFI project finance market) has been required on only one project to date;

- the cost of finance has risen due to rising credit margins, but underlying rates have fallen, and

- any permanent effect is likely to arise more from regulatory changes, such as increases to capital adequacy requirements, than the underlying economics. PFI has experienced limited losses compared to other lending sectors.

8.4 HM Treasury has issued guidance to help authorities manage the impact of the current financial climate, which PUK helped to write.22

8.5 If the appetite for lenders to provide funding were permanently diminished then the future of PFI financing would have to look different if investment continues. However, the UK has spent a lot of time building up the credibility of the PFI process to financiers and that knowledge remains in place within the market. Moreover, deals have still been reaching financial close, new lenders have entered the market, and in any event the PFI model is not premised on project finance from the banking market although that is the most common financing route to date.

__________________________________________________________________________________________________________________

20 Data from Partnerships UK projects database.

21 The structure of BSF projects is more complicated than a standalone PFI therefore we have separated the figures.

22 See "Financial Markets Dislocation Guidance" on www.hm-treasury.gov.uk/ppp_finance_guidance.htm.