Signs of life can once more be seen in the government's PFI programme. But public agencies still face a huge bill.
Unpopular policies always have their obituaries written early, so it is no surprise to see people proclaiming the end of PFI.
They may, however, be confounded by events of recent weeks. It has taken an intervention by the Treasury, lending £120m of public money to Greater Manchester's massive waste deal, to get schemes going. But bank finance for PFI schemes – seemingly unavailable at the beginning of the year – is slowly returning.
Some 15 banks want to fund Building Schools for the Future (BSF) schemes, while 17 banks are understood to be lending around £75m each on the £1.2bn M25 widening project. Other much-delayed schemes, including a £147m road deal in Carlisle, have several banks on board. So it seems PFI will stagger on, albeit with public help.
The government remains wedded to PFI, as can be seen in the extraordinary contortions it is turning to keep the deals off its books.
The Treasury will perform a trick known as decoupling
New international accounting standards were supposed to bring the capital value of all PFI schemes onto the government's balance sheet. But it has emerged that the Treasury will perform a trick known as decoupling, in which departments will bring PFI schemes on the balance sheet for internal accounting purposes, but the Treasury will record overall government spending figures under the old rules – which allow most PFI schemes to stay off the books. Confusing? Yes. But legal, too.
The problem that remains is the cost of finance for PFI deals, which must be borne by councils and government departments. Worcestershire county council's £60m library scheme is a good example. Facing a £400,000 shortfall last year, the council lobbied for extra funding from the government, bargained down the contractor's initial bid, and made other savings. But now the bank it has lined up to fund the deal is asking for a margin on the finance of three or four times what the council expected last year. That increases the cost by £400,000 – taking the council right back to square one.
Council officers claim to have approached the Treasury and to have been rebuffed because the government will help projects only if they can't get enough funding. Publicly, the Treasury doesn't want to be seen undermining the financial sector or falling foul of EU state aid rules.
The banks, meanwhile, claim they are charging more simply because it costs them more to borrow. But critics point out that the interbank lending rate is lower now than it was last year. Nothing has changed about government-backed PFI schemes. It's just that with fewer banks willing to lend money because of the current economic crisis, those still in the market can increase their pricing. Public projects have, in other words, been tainted by a private failure.
Even some of those who work in PFI feel the government should intervene – and that may in fact be happening. A source close to the Treasury says: "If one bank [on a deal] had a much higher level of margin than the others, there could be an argument where a public agency would come to us and say they had three banks in at 200 basis points [2% above the interbank lending rate], and one at 300 basis points [3%] – and we would look at what is comparable in the market."
If the government doesn't act, it could be caught in a trap of its own making. Some fear the extra cost of private finance could make marginally affordable projects unaffordable. "For the future, projects will not pass the affordability test at the first stage, and therefore won't come forward, so there will be smaller programme of PFI projects," says Adrian Ewer, chief executive of John Laing, a leading PFI investor.
Max Rashbrooke is editor of PPP Bulletin
