Interest rate swaps are derivative contracts that fix interest rates on loans to reduce the risk of variations in interest rates on loans. They are a form of protection if interest rates rise. But in the current situation, with very low interest rates (the Bank of England interest has been 0.5% for several years), the finance for PFI projects prior to 2009 will have been arranged on higher rates than later projects. The current situation favours the banks, which receive a fee for arranging swaps, payments reflecting the difference between interest rate when the swap was agreed and current interest rates, and the financial penalties imposed for breaking the terms of swaps. For example, the Hexham Hospital buyout included a £27.0m swap breakage fee (Hellowell, 2015).
This situation would change if interest rates increased to the level at which swaps were negotiated, because the banks could no longer gain from the interest rate difference and the breakage fees should also reduce. However, interest rate swaps would remain a financial burden for PFI/PPP projects.