ESTATES & FACILITIES
Buy now, pay later T
here are currently eight major hospital building PFI
projects either being
negotiated or planned with a combined capital value of around £2 billion.
For many years, the cost of raising finance from the private sector was relatively cheap, and the construction industry was in a stable and confident position.
Now, in the wake of the financial crisis, neither of these conditions prevail and the impact on the PFI market has been significant.
“The economic case for PFI can only be understood with reference to the alternatives. The traditional mechanism for funding large capital projects is through government borrowing,” says Mark, who is a researcher and lecturer at the Global Public Health Unit at Edinburgh University.
“The interest rate which the government would be paying on a gilt is generally between four and five percent. This compares to the typical overall rate on a PFI project seven and 10 per cent.”
Labour got
it working but the idea was the Conservatives’
72 nhe
So is the government paying twice as much as it needs to for its capital? As always, the devil is in the detail. The government argues that the extra cost of capital is accounted for by the risk being taken on by private investors, which generate incentives to deliver projects with greater efficiency than public procurement and public
financing could achieve.
So does Mark think that this is the case?
“I think that given the current state of affairs in the financial markets, it is unlikely to be true, because the cost of finance has risen so sharply. The cost of debt, for example, is what one might expect to see in the commercial property sector yet the amount of credit risk being faced by banks on a typical accommodation PFI project is much lower.
“If you consider the Mid- Yorkshire NHS Trust’s Wakefield Hospital building project, that was a deal that signed during the ‘boom’ years. Private finance was relatively cheap – the credit margin on the banks’ cost of funds was around half of one percent.
“An appraisal carried out at the time found that the net present cost of the PFI solution was less than one per cent lower than that of a public procurement option. So if you plug today’s cost of finance into that model,
Mark Hellowell
Many people are now questioning whether PFI is the right way to finance capital projects. National Health Executive spoke to infrastructure finance expert Mark Hellowell to find out the current state of play
where credit spreads are two to three percent, that appraisal would have found in favour of the public option by quite a significant margin.”
Although PFI is considered now to be a Labour flagship policy, it was first used by the Conservative Party.
“It is hard to say who came up with the idea, but Norman Lamont was the chancellor who introduced it and it was his successor Kenneth Clarke who got the ball rolling. This meant that PFI had already been running for five years before Labour picked it up. Labour got it working but the idea was the Conservatives’.”
Despite the high costs of finance today, Mark believes that the use of some kind of private finance arrangement will still have to be used to finance future large projects.
“Private finance in some form will have to be used because public capital budgets are set to fall dramatically in the next five years. There are also political costs to borrowing money on the market because that borrowing will then show up on the balance sheet.
“This means that any government will most likely carry on using some kind of private finance but perhaps just change the name in the case of a Conservative government, because the term PFI is seen as politically unattractive.
Jul/Aug 10
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