The cost of private finance has always been more expensive than the cost of government borrowing. This has particularly been the case following the financial crisis, which saw a further widening in the difference between the costs. This recent increase in private finance costs has resulted in private financing being argued to be even more inefficient. 25 The implied interest rate for government borrowing was around 3% in 2013/14, whilst the implied interest rate for private finance was around 7%. | Cost of private finance is double the cost of government borrowing |
Estimated Financing costs |
|
| 2013/14 |
Government borrowing: implied interest rate Private finance (including finance leases): implied interest rate | 3.1%-3.4% 7.2%-7.4% |
Source: Calculated from HM Treasury, Whole of Government Accounts, 2013/14, March 2015
PricewaterhouseCoopers published a report (alongside a HM Treasury document) which looked at returns on PFI projects, in comparison to the benchmark cost of capital (the cost of capital for similar and comparable projects). The report found that on average, there was a 2.4% difference between returns on PFI projects and the benchmark cost of capital. The returns on PFI projects were higher than the benchmark figures for a number of reasons: unsuccessful bid costs, swap costs (for fixed interest rate contracts), and limited competition.26
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25 Treasury Committee, Private Finance Initiative, Seventeenth Report of Session 2010-12, August 2011, HC 1146, para 30
26 HM Treasury, PFI: meeting the investment challenge, July 2003, p127