Taxpayers Will Bear Brunt Of Higher Pfi Costs

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http://www.guardian.co.uk/business/2008/ma....marketturmoil1

Taxpayers will bear brunt of higher PFI costs

Prices of public-private building projects such as hospitals are also being forced up by banks' reluctance to lend, writes Nick Mathiason

Taxpayers face higher bills for new hospitals, schools and roads built under the controversial private finance initiative (PFI).

Banks' reluctance to lend money is forcing up borrowing costs despite the best efforts of central bankers to reduce interest rates. As a result, the price of the UK's much needed infrastructure improvement is escalating sharply.

Under PFI new facilities are financed using a 30-year hire-purchase-style arrangement. Building firms own facilities and rent them back to local authorities. The private sector is responsible for funding the building of infrastructure through bank finance.

But there are signs that banks are pulling out of PFI projects. One leading PFI financier said he knew of at least one school project that had failed to get funding because of the credit crunch. Consortiums now have to approach several banks to achieve medium-sized loans, when before one bank would take on the risk. This is happening even though the government and local authorities are regarded as risk-free blue chip tenants.

It is possible that deals will be refinanced when conditions in debt markets improve. The government may then be able to claw back some extra costs through refinancing the debt on better rates. It was forced four years ago to renegotiate PFI contracts to ensure taxpayers shared in refinancing windfalls, which previously went to the private sector.

Professor Allyson Pollock, who heads the University of Edinburgh's Centre for International Public Health Policy, said: 'The implication is [that it will be] even more expensive under PFI and this comes at a time when the government has deferred for a year a decision as to whether to place NHS PFI on or off the government balance sheet.'

Alistair Darling's Treasury has given the NHS and other public bodies a year's stay of execution over changes to accountancy rules, which will have major implications for PFI schemes. The move to international financial reporting standards was due to be implemented across the public sector from next month. Most of the NHS's £10bn of PFI assets are currently 'off balance sheet' and so do not count as public sector debt.

Nevertheless, despite financing risks, sources close to the £13bn deal to supply mid-air refuelling tankers to the Royal Air Force say that debt financing is likely to be agreed in days. A deal under PFI for a consortium of aerospace companies to provide replacements for the RAF's TriStar and VC10 fleet, overseen by Defence Secretary Des Browne, has been long in the making.

Originally Deutsche Bank, adviser to the AirTanker consortium, wanted to arrange a £2bn bond to pay for the deal, but that plan was blown off course. So the consortium - of EADS, Thales, Cobham, Rolls-Royce and VT Group - turned to debt finance for the project.

As the cost of public construction rises, a report for the Construction Products Association published this week will also cast doubt on the government's target of an annual 240,000 new homes built to zero carbon standards by 2016. The report, by the Wood Holmes Group, argues that insufficient land will be released to achieve this. It concludes: 'The overall vision of housebuilding appears to be one of stability in terms of the number of houses built due to persistent land supply restrictions derived from the planning system and the inertia of the housebuilding industry'.

Construction Products Association chief executive Michael Ankers says: 'The government has recognised the need to build more houses and suggested ways that these might be delivered. It is disappointing that there seems to be no evidence that the planning system is capable of delivering the land needed. It is clear that we are almost reaching saturation point as far as building flats and apartments are concerned and inevitably this will lead to even greater pressure on land to accommodate these new homes.'

There will be an increasing trend towards more off-site construction in housing to improve speed and quality. This will also help address concerns about the shortage of skills and health and safety in the industry. Timber-frame construction is forecast to rise to about 25 per cent of UK building.

Is this correct that banks won't even lend on PFI ?

What hope has BTL ?