Carillion collapse puts PFI under further scrutiny

The collapse of Carillion this week has reignited the debate about whether PFI infrastructure projects are value for money. A recent National Audit Office Report (NAO), written before the collapse of Carillion stated that there are 716 PFI projects under the PFI scheme in the UK with a capital value of around £60bn. The report provides an example of a group of schools that cost 40% more to build and a hospital 70% more to build than if they were financed by government borrowing.

A key pillar of PFI and its successor PF2, is that risk is transferred to the private sector and when the private sector raises finance for a PFI, this finance is off the government balance sheet. There are a number of different financing structures but typically the private sector partner will put 10% of equity into the SPV and then raise debt finance for the balance. This can often be bank senior debt which is generally more expensive than bond finance. The NAO believes that privately raised capital could be 2% to 3.75% more expensive when compared to state borrowing. Considering the size of some PFI projects, a slight increase in the cost of capital will have a significant effect on costs.

In the wake of the Carillion collapse, it remains to be seen whether large construction firms are able to effectively fund the construction and operational risk and make money from these contracts while the government receives value for money infrastructure.