2.1 During 2008, the market capacity for providing bank finance decreased, pricing increased and other terms tightened. Figure 7 shows the main changes in the financing market and their effect on the timing of the infrastructure projects we reviewed.
2.2 Helped by the Treasury's establishment of its lending unit, confidence improved, market activity resumed and 35 delayed projects closed between March and December 2009 (Figure 8 overleaf).
2.3 Where private finance has been used since the credit crisis, however, the cost was always more expensive than before, generally by around one per cent. The fact that the base rate is currently at an all time low has not fully offset the higher loan margins that banks are charging. This is because the cost of a fixed interest loan, as with government borrowing over 20-30 years, reflects future interest rate expectations. These rates are lower than two years ago but the reduction has not been sufficient to offset the significantly wider loan margins now charged by the banks (Figure 9 overleaf).
[Access Figure 7 Timeline of key events affecting case examples after notice in Official Journal of the European Union (OJEU) - PDF]
Figure 8 PFI deals concluded April to December 2009
Source: National Audit Office |
Figure 9 Increase in loan margins applied by the banks
NOTE 1 Project values shown above relate to the amount of senior debt and the annual interest cost reduces as loan repayments are made. Source: National Audit Office analysis |
2.4 The increased financing costs since the credit crisis have come after a period in which around 300 PFI contracts were let at relatively low financing rates when compared to other types of project financing, as shown earlier (Figure 2 on page 6). The low rates reflected the successful establishment of the PFI market and availability of bank lending which encouraged competition in the financing terms.