Bailed-out banks put up cost of public works by over £1bn

Banks partly owned by the Government were allowed to increase the amount they charged to finance new schools, hospitals and roads by over £1 billion during the height of the credit crunch.

Ministers failed to capitalise on the public purse's unprecedented bailout of the banking system to ensure that the publicly owned banks continued to lend to the state at low rates.

A report by the Public Accounts Committee warns today that the cost of added interest will still be felt by the taxpayer in 30 years' time because of the long-term lending deals. And it calls on ministers to identify ways in which better finance can be obtained from banks supported by the public sector in future.

The committee found that in 2009, at the height of the credit crisis, 35 privately financed contracts were signed. The cost of a typical contract rose by between 6 and 7 per cent above that paid the year before – amounting to £1 billion over the length of the contracts.

Treasury officials admitted in evidence to the committee that they had tried to persuade the banks to lend to the Government at lower rates but were "unable to persuade them" because the cost of the banks' own borrowing was such that they would have been lending at a loss.

Margaret Hodge, chair of the committee, said: "The Treasury could have done more. It did not use its negotiating position to press the banks to loan to infrastructure projects at lower rates. It also did not explore the possibility of alternative and cheaper sources of finance. It is imperative that it does so now. The high interest charges to which new PFI projects have been subject as a result of the credit crisis will be locked in for up to 30 years."

The committee recommended that the Treasury look to renegotiate the contracts which, it said, could save up to £400 million.

"The Treasury must... monitor market conditions to help departments claw back as much in savings as possible if and when projects signed in 2009 are re-financed," Ms Hodge added.

Committee member Richard Bacon said the whole basis of PFI must be re-examined: "If PFI is going to be used to fund public infrastructure projects, then the Treasury will need to be more vigilant in future if it is to ensure that PFI financing provides value for money."

The Treasury said it would provide a written response to the committee's report in due course.

What is PFI?

Private Finance Initiative Projects (PFI) were introduced into Britain in 1992 as a way to pay for the upfront capital costs of building new schools, hospitals, and other public sector infrastructure projects, while keeping the debt off the Government books.

Under the scheme, the initial finance for projects is provided by the private sector, which then leases the facilities back to the public sector for up to 30 years. In addition, the private sector is often given contracts to operate facilities in the building as well as providing the finance. Critics say that while PFI may have reduced up-front costs, it is a very expensive way to finance capital projects over the long term.