Loans policy 'costing extra £120m'
The coalition's policy of guaranteeing loans for infrastructure projects is costing up to £120 million a year more than if the government was funding schemes directly, according to the public spending watchdog.
The National Audit Office (NAO) also warned that the Treasury was not fully assessing the risks of the UK Guarantees programme.
The policy was launched in 2012 to help free up lending for major projects in danger of stalling. Under the arrangements, the Government undertakes that lenders will be repaid in full and on time.
In return for taking on the risk, the public purse receives a "guarantee fee" set at market rates.
So far £1.7 billion of finance for eight projects has been underwritten - and a further £24 billion is in the pipeline, including up to £17 billion for the Hinkley Point C nuclear power plant.
The NAO report pointed out that there is "no upper limit on risk", and some projects are being guaranteed for decades.
"In providing guarantees, the Treasury does not consider the overall value for money of the projects, but uses a narrow test that the guarantee fee must represent a market price for the risk," the auditors said.
"To comply with European State Aid guidance the Scheme is not intended to provide subsidised loans to infrastructure projects.
"The NAO does not, however, have full confidence in the reliability or completeness of market benchmarks to measure actual risks to the taxpayer."
The report said investors in government-guaranteed debt usually received a higher return than on gilts, even though the risk was the same.
That is because guaranteed debt is not as easy to trade, making it less attractive to some of the market.
"The Treasury assumes guaranteed debt will typically be priced at 0.5% above gilts, although it has achieved better results when the debt has been competitively auctioned," the NAO said.
"Based on the use of the Scheme to date and the expected take up until it closes, the illustrative extra cost through using guarantees as opposed to direct lending could be between £35 million and £120 million a year, with and without Hinkley Point C."
NAO head Amyas Morse said: "The UK Guarantees scheme was introduced as a response to tough financial market conditions for infrastructure finance. Market conditions are now much less difficult but the Scheme is still supporting lending for new infrastructure projects.
"The Treasury takes a narrow view that guarantees are value for money if the fee covers the risk. It is good that Treasury has a formal governance process and commercial specialists to help evaluate, manage and set a price for risks to the taxpayer. However, we question whether this approach can measure long-term risks to taxpayers reliably.
"As market conditions improve, the Treasury should ensure that it is rigorous and objective in ensuring that guarantees for projects are genuinely needed and that the projects supported bring significant public value."
A Treasury spokeswoman said: "The UK Guarantee Scheme has been an important part of the financing options for UK infrastructure projects over the past three years; supporting almost £4 billion in capital spending.
"The Treasury has full confidence that the projects that receive a UK guarantee are sound investments, and that the scheme remains an important tool in attracting new finance into key infrastructure projects.
"All projects receiving a guarantee are rigorously assessed to ensure the taxpayer is protected."