Banks worry about PFI investment

Closer personal relationships must be created between local authorities and the private sector if Private Finance Initiative schemes are to succeed, according to the British Bankers Association.

Preliminary results from research, jointly funded by the BBA and the Department of the Environment, Transport and the Regions, has revealed banks’ impressions of local government PFI processes.

The survey highlights banks’ concerns when lending councils money for PFI projects. More than half saw councils as low-risk investments, and 44% saw local authorities as a potentially big market.

Skills gaps are preventing the relationship from prospering, the survey said. Two-thirds of the 40 banks – which included High Street and investment banks – surveyed said councils failed to understand market powers and 61% thought they should prepare business plans.

BBA director John Thirwell said: ‘Public and private sectors have a lot to learn from each other. Partnership is the key.’

Of greatest importance to the banks for long-term relationships were financial requirements (58%) followed by personal contact (38%).

Negotiations are taking too long, presenting major challenge to 69% of banks, the survey adds. Councils’ lack of project management expertise also caused problems for 55% of respondents. The growth area is in the medium-sized deal with 25 of the 40 banks surveyed declaring that deals between #5m and #25m were the most attractive.

‘Banks want to do business with local authorities but do not understand what they want or how they work. It is important for local authorities to explain how they operate,’ Thirwell said.

Legislation which has removed legal obstacles to funding through the Local Government Contracts Act has increased banks’ interest, with 70% of those surveyed either ‘completely assured’ or willing to do business with local government.

The survey was undertaken in response to work conducted by the Local Government Management Board and the DETR. Of the 269 councils surveyed, two-thirds thought private sector funders were a real alternative to traditional funding, but 95% thought it too expensive and only 15% thought funders understand the political factors in local authority finance.

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