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Treasury unveils £2bn PFI bailout

The Government announced a £2 billion bailout of the troubled PFI sector this week, potentially enabling £13 billion-worth of construction projects to reach financial close and begin construction from April onwards.

The money will be available from the start of the next financial year, and could see the Treasury become a lender on major PFI projects like the M25 widening and the Greater Manchester waste project.

There are about 110 PFI projects currently in the pipeline worth £13 billion. That comprises £3.5bn of waste treatment and environmental projects, £3.1bn of transport schemes and £2.4bn of schools projects.

All projects will be able to apply for funding from the Treasury on a ‘co-lending’ basis. The government will provide loans which it anticipates being able to sell on at a later date.

The Treasury will only lend to projects where commercial funding is not available. Treasury head of PPP policy Gordon McKechnie said at a conference on Tuesday: “It would have made no sense for us to allow PFI projects that are shovel-ready to stall because of the current problems in the credit market.”

Mr McKechnie said he hoped the Treasury would be a minority lender, and added that the move was conceived as a temporary measure.

Although it will offer loans in the first instance, the Treasury is understood to be willing to consider other ways of helping finance stalled projects, possibly through underwriting bank
debt.

The £5.5 billion project to widen the M25 is believed to be close to being finalised, with 19 banks having come up with around £1.2 billion to get it off the ground. Financial close is expected on 2 April.

Others are not so close to being signed off, however, and the European Investment Bank (EIB) has had to step in to prop up the £55 billion Building Schools for the Future project.

Experts said that the Treasury lending plan would prove a crucial lifeline for PFI projects, contradicting suggestions from opposition politicians that the move constituted the demise of the funding method.

Head of research at investment bank Brewin Dolphin Michael Parkinson said: “Although the Government has stepped into the funding breach at present, when the recovery starts to dawn and banks increase their lending, PFI is likely to be one of the immediate funding targets. We think that they are likely to continue to be a key part of the UK Government’s procurement plans in the longer term.”

Local government PFI expert body 4Ps executive director Chris Wilson said: “Some local government projects have been held up because too little money has been chasing too many projects. The Government’s investment will enable projects to move forward and bring a
measure of confidence to the PFI market.”

Liberal democrat shadow chancellor Vince Cable said the moves signalled the death of PFI: “It is now very clear that PFI has largely collapsed as a mechanism for funding infrastructure.

Rather than trying to give the kiss of life to PFI, the Government should simply accept that these are core public investment commitments.”