Safeguarding Government infrastructure investment

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Issued 03 March 2009
The
Chief Secretary to the Treasury, Yvette Cooper, today announced
Government action to ensure vital PFI infrastructure projects will go
forward as planned despite the current financial market conditions.
This
action will ensure that crucial and valuable public investment will not
be disrupted by problems in the financial markets. In total, £13bn of
public investment in procurement will be safeguarded. This protection
will assure the future of a broad range of public infrastructure
projects including £3.5bn of waste treatment and environmental
projects, £3.1bn of transport projects and £2.4bn of schools projects –
investment that will prepare the country for the future recovery. It
will also avoid the significant delays which would be entailed by
switching these projects to alternative procurement approaches. These
projects can therefore go ahead swiftly and support jobs and the
economy and help prepare the country for the future recovery.
Yvette Cooper said,
“These
projects will create jobs and support the economy as well as delivering
vital infrastructure that local communities need. That’s why we’re
determined to get them moving as soon as possible without extra delays.
Where the private markets aren’t working properly, it’s right that the
Government should act to get things moving.”
Around 110 PFI
projects are currently in the pipeline, and PFI projects make up
typically 10 per cent of public capital spending.
PFI projects
continue to be able to secure equity as private construction companies
and investors are still willing to put money in and bear the risk of
delays or cost overruns, rather than the taxpayer. Some projects,
however, are finding difficulties obtaining sufficient debt as a result
of the global credit crunch.
From today the Government will lend
to those PFI projects that cannot raise sufficient debt finance on
acceptable terms, lending alongside commercial lenders and the European
Investment Bank. It will also be able, where necessary, to provide the
full amount of senior debt required by a project. Funding will be
provided from across Government, including initially from unallocated
funds and Departmental underspends on previous projects. Equity
investors will continue to bear the primary risk in these projects and,
where available, private sector debt will continue to be provided.
The
Government believes it is vital to get these infrastructure projects
under way as swiftly as possible – to support jobs and the economy this
year as well as delivering important public services. Switching to
alternative procurement methods or conventional funding for these
projects at this late stage would incur significant additional delays
or risk projects failing. For these reasons we have decided that
providing additional debt finance is the most effective way to get
construction underway swiftly and support jobs now.
Retaining the
PFI structure will mean that the private sector will continue to bear
the risk of cost over runs and delays. A recent Ipsos MORI report on
the operational benefits of PFI has shown that contract managers are
highly positive about the overall performance of PFI projects, contract
service levels are being achieved and user satisfaction is high.
The
Treasury will use professional lending skills and intends to lend to
projects only where appropriate funding is not available from the
market. It will be a temporary intervention. As with normal commercial
lending these loans will bear interest and will be repaid over the life
of the project. The Treasury envisages, however, selling the loans it
makes prior to their maturity when favourable market conditions return.
All
PFI projects in procurement (that have, to date, issued a notice in the
Official Journal of the European Union (OJEU)) will be eligible for
this finance from the Government. Future projects intending to go to
market soon will also be eligible, provided they meet the usual value
for money and affordability criteria, and subject to Treasury approval
before issuing their OJEU notice.
Notes
1. The
Private Finance Initiative (PFI) is an arrangement whereby the public
sector contracts to purchase services, usually derived from an
investment in infrastructure assets, from the private sector on a
long-term basis. The private sector typically finances its investments
in the underlying assets through a combination of equity and debt. In
the majority of cases ownership returns to the public sector after a
period of years. PFI has played, and continues to play, a small but
important part in the Government’s investment plans. The Government has
no in principle preference between PFI, conventional procurement or
other approaches to procurement of infrastructure. Its policy is that a
procuring authority’s choice of procurement approach should be based on
value for money considerations. Of the 630 signed PFI projects, 540 are
operational.
2. A recently published survey of operational
projects by IpsosMORI indicated that PFI continues to perform well
delivering high levels of user satisfaction in vital areas of public
service delivery:
- 96% of contract managers rate overall
performance as satisfactory or better of which 73% of contract managers
rate overall performance as good or very good;
- 94% of contract managers report that contract service
levels are always or almost always achieved; and
- 92% of contract managers who have carried out a user
assessment found services were being delivered to an acceptable
standard.
3. Operational
PFI projects and, those which have already reached financial close, are
not directly affected by the current financial difficulties in raising
new finance.
4. A total of 110 PFI projects with an estimated
capital value of £13 billion have issued an OJEU notice but have not
yet reached financial close. These include projects such as the M25
Widening, Manchester Waste, North Bristol NHS Trust Southmead Hospital
Redevelopment, Bradford Building Schools for the Future, Victoria
Hospital Fife, North Tyneside Housing and Croydon & Lewisham
Streetlighting.
5. HM Treasury will be prepared to lend to PFI
projects alongside, commercial lenders and the European Investment Bank
- or where required may act as sole lender.
6. With commercial
lending and the European Investment Bank continuing to provide
financing to PFI projects, where available, Treasury expects to
contribute considerably less than 100% of the debt requirements.
7. The
exact funding requirements will be determined by market conditions.
Departments have already set aside funding for a number of projects.
Where necessary the Treasury will provide additional resources funded
from additional borrowing. An update will be provided at the Budget.
8. The Treasury will run this facility at arm’s
length from procuring authorities.
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Article Published/Sorted/Amended on Scopulus 2009-03-04 12:05:41 in Economic Articles