Treasury U Turn to ensure taxpayer is no longer the loser in PFI deals
PFI deals are still being negotiated – not without difficulty – in spite of the credit crunch as some banks see their government-backed revenues as a haven in the financial turmoil.
However, the credit squeeze has seen funders demanding higher margins on the debt put into them and that has opened up the possibility again of significant refinancing gains if investment and interest rates fall to pre-credit crunch levels.
In a move to avoid the acute embarrassment of the early days of PFI, when investors in projects made millions of pounds from refinancings and it turned out that the taxpayer had no right to any share in the gains, the Treasury has upped the share it is demanding.
Investors in one of the early hospital projects, for example, made a 60% windfall gain and hugely increased rates of return when they used falling interest rates to refinance. As a result, since 2001 contracts have required that any such gains should be split equally between the project’s backers and the taxpayer.
That will still apply to the first £1m of any gain. But for new deals the Treasury said yesterday that the next £2m would have to be shared 60/40 in the taxpayers’ favour and for anything above that the taxpayer would take 70 per cent.
As an additional protection, new contracts will give the public sector the right to demand a refinancing if it believes that will lead to better terms for the taxpayer, whereas previously only the contractors have been able to initiate such a deal.
In spite of the onset of the credit crunch last year, more than a dozen PFI deals have been signed this year, according to the Treasury, eight or nine of them in the second half of the year, despite the growing problems over bank lending.
Almost £600m of schemes by capital value have been agreed since the middle of the year, though most have been smaller deals in the £20m to £90m range.
Some European banks have withdrawn from the PFI market, and James Stewart, chief executive of PUK, the public-private partnership that advises the public sector on deals, said recently that sponsors had had to go to clubs of several banks to arrange financing – rather than doing a deal with one or two that then sold the debt on.