The Treasury's initial response to the impact on PFI contracts
1.2 The Treasury's initial response was to evaluate the extent of the impact of financial market disruption on projects. From June 2008, it analysed increasing evidence that the disruption to the credit markets was affecting funding for the market, in terms of both the pricing and availability of project debt. In particular, it concluded that market changes had increased project costs, leading to delays, and putting the overarching policy of stimulating the economy at risk. In addition, if cheaper finance were to become available in the future, the private sector would then gain more benefit from refinancing (see Glossary). Departments were, therefore, already being advised to seek a right to bring about a refinancing and obtain an increased share of any gains. In October 2008, this was made a formal amendment to standard contract terms.
1.3 Banks put up their fees and interest charges to borrowers generally, including borrowers, but most were unwilling to provide long-term loans in greater amounts than about £25 million per project. As a result many borrowers had to take time to assemble a club of five or six banks to do a large deal. Such a deal would previously have involved only one negotiating bank and later syndication on pre-agreed terms at the risk of that lead bank.
1.4 All-in interest charges and other lending terms worsened for deals during 2008, and most notably during 2009. Complex deals, like the M25 project and the Greater Manchester Waste project struggled to form bank clubs for the substantial amounts they needed.
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Figure 5
Key events and Treasury response
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Period/Date
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Key events and Treasury response
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Effect on infrastructure projects
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December 2007
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Last bond issue: Northern Ireland Road II project raises £146 million
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Projects, such as the Ministry of Defence's Future Strategic Tanker Aircraft project, change from bond to bank finance
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March 2008
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Future Strategic Tanker Aircraft financing raises £2,200 million
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Bank group formed with eight arranging banks and 15 participants. cost about 6 per cent, up to 1.15 per cent above the then bank cost of funds
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September 2008
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Lehman collapse
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Some banks withdraw, others charge more than 1.5 per cent above cost of funds (some as high as 2.2 per cent) compared with 1 per cent previously. This makes it difficult to procure debt finance to complete contracts. Major projects such as the Greater Manchester Waste project and the M25 are delayed
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October 2008
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Government provides banks with financial support
Treasury notes funding gaps for large or more complex projects
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Projects compete with corporate borrowers for scarce bank capacity. Finance cost increases are partially offset by falling underlying interest rates. Government support to the banking sector does not trigger a rapid resumption in lending
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November 2008
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Treasury proposes a range of possible solutions, including greater involvement
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• Increased Authority capital contributions
• Authority loans on commercial bank terms
• Working Group on medium-term solutions
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January 2009
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Treasury proposes direct lending - accepted 30 January 2009
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Advice leaves open any decision on the lending body, although Department for Transport may act as lender on the M25
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March 2009
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Ministerial Statement on The Infrastructure Finance Unit
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Treasury lends £120 million to the Greater Manchester Waste project which, in April 2009, is the first contract to be let following the credit crisis. Treasury places letter with lending criteria on website in May. The market realises that it is now possible to complete deals in the current market conditions. The M25 contract is let in May 2009 without the need for a departmental loan
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August 2009
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Treasury Application Note provides new guidance for taking forward private finance projects
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No significant change is made in the way that projects are assessed after the Outline Business Case. The intent is to avoid excessive reliance on uncertain financing proposals early in procurements, the flow of new deals is now becoming more established
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Source: National Audit Office
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1.5 The Treasury approached the European Investment Bank in September 2008, to step up its lending activity to help ease the situation. The Treasury, however, did not set lending targets for UK banks when they received government support during that winter. The Treasury initiated internal discussions about such targets but did not pursue them because the banks concerned were a sub-set of the lending market and because lending was only a small part of the issues facing the Treasury in relation to its banking support. Banks did not resume lending as expected and, between October 2008 and March 2009, only four smaller projects were financed, including two school projects.