Banking crisis fails to dampen enthusiasm for PFI deals

22 October 2008

The promoters of private-finance initiative projects for new transport and waste infrastructure were this week upbeat about their prospects of reaching financial close.

There was speculation in the press that higher borrowing costs were making debt less affordable, which was threatening private-finance initiative projects, including the £5bn upgrade of the M25 and the £4.4bn Greater Manchester waste deal.

This came as chancellor Alistair Darling said last weekend that he wanted to bring forward major infrastructure projects in order to stave off recession.

Cabinet office minister, Liam Byrne, has been tasked with identifying a ‘hit list’ of projects which have been placed at greater risk by the financial crisis, or that would bring a significant boost to employment.

However, a spokeswoman for the Highways Agency denied the scheme to upgrade the M25 was under threat. The financial close of the waste management PFI for Greater Manchester has been delayed from the June target date.

Since June, the Greater Manchester Waste Disposal Authority has said it was ready to sign the contract, but that preferred bidder Viridor-Laing was going through the process of approving funding.

Viridor-Laing and the GMWDA said this week: ‘While we recognise fragility in the current markets, we are confident that, working with our funders, we will reach financial close.’ The Scottish Government has attacked the ‘very high gains’ made by PFI contractors, while the Liberal Democrats last month said PFI deals had ‘not offered best value to the taxpayer’.

A spokesperson for the 4Ps said that PFI financing ‘remains high-quality debt, because it is backed by the Government, which has the highest credit rating’. While borrowing costs had increased over the past month, raising questions about the affordability of debt, ‘following the recent major intervention in the banking system, we are hopeful that bank margins will fall back’.

The situation meant that ‘it is just taking extra time for PFI deals to reach financial close’, given that, for example, banks were having to club together to fund projects and spread debt between them, which created extra work.

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