1.11 Following the worsening of the credit crisis in autumn 2008, it became clear that sufficient debt finance, whether bank loans or bonds, was no longer available to privately finance larger government infrastructure projects. The Treasury wished to close the contracts in the pipeline to re-establish the market for government infrastructure projects as part of the broader fiscal stimulus package. The Treasury therefore considered options and developed a contingency plan to establish a lending unit. This unit obtained Government approval at the end of January 2009.
1.12 In March 2009, the Government implemented its plan for the lending unit to ensure that some 110 privately financed infrastructure projects (exceeding £13 billion) would go forward, despite difficulties in raising debt finance. The unit, known as The Infrastructure Finance Unit, was created with the purpose of funding any shortfalls in bank finance on privately financed infrastructure projects. The lending terms would be on the same commercial terms as the banks.
1.13 After ten months of negotiation, with almost all of the available banks, the Greater Manchester Waste project had remained unable to raise the last £120 million to complete its financing. In March 2009, the Treasury agreed to make up this shortfall through a £120 million loan. The Infrastructure Finance Unit subsequently monitored and provided support to a number of other projects but no further loans have been required.
1.14 The Treasury intervention on the Greater Manchester Waste project was timely and helped to reactivate the market. The Treasury chose this project because it clearly met its lending criteria. Raising enough bank finance had proved difficult because the project carried more risk than the average PFI project (see Part Two). The possibility of Treasury loans was not needed on the other large complex deal, the M25 project, as the Department for Transport had already developed a contingency plan to be ready to act as a co-lender to the project. Other projects were smaller and did not appear to have financing gaps or could be grant-funded on a temporary basis, as permitted in the exceptional case of the Newham school.
1.15 Although helpful in moving projects in the pipeline towards contract closure, Treasury lending created increased risks for the public sector parties. Public sector lending also caused some concerns for the private sector about information sharing (Figure 6).
1.16 During the onset of the credit crisis from autumn 2008 through to summer 2009, the Treasury amended refinancing provisions and continued to apply existing guidance to departments on how they were to consider value for money issues on PFI contracts. Rather than issue additional guidance, the Treasury focused on getting procurements moving again and later on the formation of its lending unit. A guidance note on eligibility for Treasury loans was issued in May 2009, and an Application Note on PPP projects in current market conditions was issued in August 2009. The latter did not make material changes to the tests that should determine value for money in the financing conditions that had arisen following the credit crisis because the Treasury believed its value for money guidance remained sound.
Figure 6 The main risks and concerns related to Treasury lending • If the project failed then the Treasury might lose part or all of the money it had lent. As the economy was in recession there was a higher risk of project failure due to service deliverers running into financial difficulties than before the credit crisis. This risk was mitigated by hiring staff with appropriate professional experience. • There was the potential for conflicts of interest within government over decision-making if a project ran into difficulties. The procuring department would be seeking to protect service delivery, and if the project had to be terminated it would expect the banks to share in any losses that would arise. The Treasury, as lender, would be motivated in the opposite direction to ensure that it recovered as much as possible of the money it had lent. This risk was mitigated by a governance structure including a credit committee and a steering group with some independent members. • The commercial banks lending to the project would be concerned that the Treasury, as lender, might receive information about the department's intentions for the project which had not been communicated to the banks. The Infrastructure Finance Unit is, however, treated in the same way as any commercial lender in terms of access to information. Source: National Audit Office |