* UK cutting defence but under pressure to make more savings
* Government could take advantage of its low borrowing costs
By Adrian Croft
MUNICH, Feb 2 (Reuters) - Britain’s defence ministry, casting about for possible savings in a time of austerity, is looking into restructuring privately financed projects to take advantage of lower interest rates, Defence Secretary Philip Hammond said on Saturday.
The ministry has used private finance initiative (PFI) schemes to fund projects ranging from a new fleet of aerial refuelling planes to military housing. But some of the deals have been criticised for saddling the government with long-term, expensive repayments.
PFI schemes, used in Britain since the 1990s, tap the private sector to finance infrastructure or equipment needed by the public sector. The government then typically repays the loan over a long period.
Britain has sharply scaled back government spending, including its defence budget, to rein in a big budget deficit but the government is looking for further savings.
“We have a whole web of contracts which are financed with legacy financing arrangements that come from a period of time when financing conditions were different and the government didn’t have access to markets on the kind of prices that it does now,” Hammond told reporters at a security conference in Munich.
“Any contractual arrangement where a significant part of the cost is constructed around financing is always worth looking at if financing conditions change - and they clearly have changed.”
One of the most controversial PFI deals in the defence sector has been a 10.5 billion pound ($16.5 billion) military air tanker contract with a consortium led by European aerospace giant EADS. Hammond declined to say whether this was one of the projects his department was examining.
He said the government was looking into whether there were ways the Ministry of Defence could use the government’s good credit rating and low borrowing costs to restructure the financing of some of the PFI deals and reduce the annual operating costs of the contracts.
“It doesn’t have any impact on front-line capabilities at all, but could, if got right, take out some serious cost,” he said, adding that his department had experts looking at the potential for restructuring PFI deals “right now”.
Hammond gave no details of how his proposal might work.
The British government, helped by its top-notch triple-A credit rating, has been able to borrow at low interest rates during the financial crisis, although rating firm Fitch warned recently that Britain faced greater risks of losing that rating.
Britain and France, Western Europe’s leading military powers, and many other European countries have been forced to downsize their armies in response to budget pressures, raising U.S. concerns about declining European military capabilities.