Interest rates on loans from the Public Works Loan Board (PWLB) are generally set to be a small margin (e.g. up to 10-30bp) above the cost at which the Government itself can borrow in the gilts market, over comparable maturities. Prudential Borrowings from private sector sources (e.g. commercial banks or bond markets) will only be considered prudential to the extent their costs are (broadly) no greater than the PWLB alternative. One
significant difference between PWLB and private markets is the availability of grace periods (on private sector loans) before repayments of loan principal commence - this may be particularly relevant where an asset in procurement has a long construction period. Since the Debt Management Office, which disburses PWLB loans, carries out no (project specific) due diligence on the uses to which its loans will be put (because it takes no risk on the performance of the underlying project assets), its arrangement fee (as well as its margins) are also much lower than private sector sources. The terms on which loan are available from PWLB (and a list of Authorities eligible to borrow) are available from the PLWB website at:
http://www.dmo.gov.uk/index.aspx?page=PWLB/Introduction.
The cost of finance is only one of numerous input costs of a procurement; whereas, value-for-money is assessed by reference to the contracted outputs and outcomes of the procurement, and the risks associated with their reliable delivery over the economic life of the project assets. When comparing a procurement utilising Prudential Borrowing with a privately financed procurement it is critical to evaluate overall value for money, including risk transfer, rather than cost. PFI (and PPP undertaken on PFI terms) provides a long-term contractual fixed price (i.e. gate fee) for a delivered service, which is underwritten by the invested capital of the private sector. The value of this fixed price assurance is, of course, reflected in the margin between private finance and PWLB loans and forms part of the relevant value-for-money assessment.