To the Treasury
a Market disruption, causing a lower availability of finance, has interrupted the Government's infrastructure programme. The Treasury should analyse the lessons from the past two years. It should use these lessons to prepare a contingency plan for how departments should handle future market disruption affecting procurement plans.
b There is limited evidence that projects fundamentally re-evaluated their business cases in light of the credit crisis. Where there are material changes, such as project costs increasing by 15 per cent, the Treasury should require that the department re-evaluate the project. This re-evaluation should assess all the benefits, and potential loss of benefits, of continuing the project in its current form, compared to other available options, including other forms of procurement.
c Increased reliance on a single type of finance, with reduced competition, promotes inefficiency. The Treasury should continue to consider how a greater mix of finance sources, with less emphasis on the use of commercial bank loans, can be used to finance infrastructure projects.
To the Treasury and departments
d Allowing individual projects to negotiate refinancing will lead to variable and overall sub-optimal outcomes. The Treasury should adopt a portfolio approach to refinancing, with input from the relevant departmental team, so that individual authorities do not exercise any right to a refinancing on a piecemeal basis. During the operating phase of a number of projects, taking a portfolio approach will enhance the public sector bargaining position, reduce transaction costs and increase potential gains. The Treasury should also consider whether the returns to equity investors are aligned with the changed risk allocation in deals that has arisen following the credit crisis.
e The increase in finance costs, including some reduction in risk borne by banks, makes PFI less likely to be a value for money solution. In line with Treasury guidance, departments should not presume that a wholly privately financed project offers a solution likely to secure good value for money. During procurement, and in drafting notices for the Official Journal of the European Union, departments should assess a range of financing options, including all public finance or part public and part private finance.
f The public sector gave greater priority to securing agreed contracts than to negotiating better outcomes. In such situations, departments should nevertheless make greater use of sensitivity analysis to inform decision-making over negotiation on possible small changes in financing rates and on each request to take on additional project risk.