Thursday, 26 November 2015

Linkage


The Private Finance Initiative does not look like good value for money. Sigh.
Private finance provides a short-term cash flow benefit for a department. However, over the long term it will not have an advantage as it will have to spend its future budget (over a 25- to 30-year period) to repay the capital and interest of the debt and a return on the investors’ equity to compensate the private sector for their participation in the project....

The Office of Budgetary Responsibility estimates that official government debt levels would be 2% of GDP higher if public rather than private finance had been used in government private finance deals. 
In [two previously mentioned] cases the decision to use private finance was made at a time of low private finance costs relative to gilts but by the time these deals were closed the spread above gilts had increased significantly but the ability to use public financing was no longer available to the department....
Note that the NAO's method of calculating private vs. public borrowing costs looks rather back-of-the-envelope (divide total payments this year by total debt held this year).