Faulty risk ratings increase finance costs for PPP projects, according to fresh research
Money is being wasted on expensive financing for PPP projects because their investment risk ratings are higher than they should be, according to research.
A report by Robert Bain, a former director at ratings agency Standard & Poors, suggests that 25 PPP projects should have defaulted on their loans, based on the average default rate of firms with a similar risk rating. The actual figure is just eight.
Credit rating agencies assess the level of risk posed by a company and assign it a rating based on how likely a lender is to get its money back. The more risky a firm is deemed to be, the more interest it must pay.
PPP projects are generally classed as high risk, “non-investment” grade. Bain said that if the real risk of default were used as a basis for ratings, financing PPP projects could be much cheaper than is currently the case. However, assessing investment risk can be difficult.
Stephen Ratcliffe, director of the UK Contractors Group, said: “There has been a big improvement in the structure of PPP deals since they were first introduced, as people have a better understanding of the potential risks. But [PPP] isn’t very fashionable at the moment and it’s easy to see where it went wrong, with hindsight.”
A recent report by the Public Accounts Committee, a government spending watchdog, showed how much influence financing has on PPP project pricing. Its inquiry into the M25 widening scheme showed that delays in procurement increased financing costs by £660m.
The PPP market in the UK is one of the biggest in the world; projects with a capital value of £56.5bn have been signed since the early ninties. Over the lifetime of these deals, further payments will total £224bn, according to Treasury figures.
Further investment from the private sector will also be needed in the future, and, with the Green Investment Bank still at least three years away and no alternative yet proposed, PPP is the only solution at present.
Hear more on UK Infrastructure at Delivering Sustainable Transport, the one day conference taking place on 24 March, London. Today is your last chance to save £50! Click here to find out more and book…