The Treasury has announced its intention to set up a special unit to provide funds for PFI projects impeded by the recession. PFI companies' inability to raise bank finance has caused bottlenecks in some of the £13 billion worth of more than 110 projects currently in the pipeline. It is being estimated that up to £2bn will be made available to the Treasury unit to try to uncork the bottlenecks over the coming year.
The proposal is to set up a quasi-bank using professional lending skills and techniques to provide senior debt to projects where appropriate funding is not available from the market. The debt will be made available alongside commercial lenders and the European Investment Bank, or may be the sole source of senior funding. Funds are initially to be drawn from existing unallocated funds and from underspend on previous projects. However, this is a temporary arrangement and the intention is still for private debt to bear the bulk of the risk.
The Treasury "bank" loans will attract interest in the usual way, to be repaid over the life of the project, and it is likely that the Treasury will sell the loans when a more favourable lending market returns.
Projects eligible for the funds include those currently in procurement, and projects which are due to come to the market in the near future, although other eligibility criteria will apply.
This news will be welcome to those involved in PFI projects, but watch out for the wake of controversy that is bound to follow. Already there have been accusations that this kind of funding flies in the face of the concept of private sector-led infrastructure investment. As for critics of PFI generally, they are likely to have a field day as this is bound to be seen by them as a failure of the PFI concept.
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