PFI borrowing costs are consistently higher than public borrowing costs. In 2002, Audit Scotland reported PFI borrowing rates 2.5% to 4% higher than the rates at which a public authority would have been able to borrow. In a study of the first 12 PFI hospital projects in England, Shaoul et al. (2008) found private finance costs of about 8% - well in excess of the 4.5% available on public finance at the time.6
The difference between public and project rates of interest increased following the banking crisis. After the crash, the cost of public borrowing fell to historically low levels whilst bank lending rates increased, in some cases fivefold, as to raise their profits banks exploited the collapse of the bond market, the other main source of project finance. In 2011, the House of Commons Treasury Committee concluded that the cost of capital for a typical PFI project was then double the long-term government gilt rate (or official lending rate):
"The cost of capital for a typical PFI project is currently over 8%-double the long term government gilt rate of approximately 4%. The difference in finance costs means that PFI projects are significantly more expensive to fund over the life of a project. This represents a significant cost to taxpayers."7
Since the banking crisis the UK taxpayer has had to rescue several of the banks lending at these inflated rates. To restore confidence in the financial markets and to free up lending, the UK government increased public borrowing to support the banking sector. It is this increased borrowing that lies behind the austerity drive across the public sector. In 2008-9, the government recapitalised the Royal Bank of Scotland Group (RBS) and the Lloyds Banking Group at a total cost of £37bn to become the major shareholder in both banks, holding 84%% of RBS shares and 43.5% of Lloyds shares (REF). The government also agreed to protect RBS from losses on risky assets up to £282bn (table 1). The effect of government rescue is to transfer the risks, completely or in part, from the private sector back to the taxpayer.8 The banks are using the high interest rates and equity returns on PFI contracts to rebuild their balance sheets and reserves. These financing costs are excessive as we show below.
Table 1
Banks that are equity and senior loan providers for 102 NHS England PFI projects as of November 2008
Bank | Equity investor (43 projects) | Loan provider and equity investor in same project (19 projects) | Taxpayer bailouts |
ABN AMRO | Yes | Yes | As part of RBS |
Bank of Scotland | Yes | Yes | Yes |
Barclays | Yes | Yes | No |
HSBC | Yes | Yes | No |
Lloyds TSB | Yes | No | Yes |
NIB Capital Bank | Yes | Yes | No |
Royal Bank of Canada | Yes | No | No |
Royal Bank of Scotland | Yes | Yes | Yes |
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6 Shaoul, J., A. Stafford and P. Stapleton (2008) 'The Cost of Using Private Finance to Build, Finance and Operate Hospitals', Public Money and Management, 28, 2, 101-108.
7 House of Commons Treasury Committee. The Private Finance Initiative. 18 July 2011.
8 Pollock AM, PriceD. The private finance initiative: the gift that goes on taking BMJ 2010; 341:c7175 doi: 10.1136/bmj.c7175 (Published 15 December 2010)