Banks put PFI deals on hold as questions are raised over the government's ability to guarantee cash flow.
Nervous bankers this week stalled PFI deals nearing financial close as they attempted to calculate the implications of Railtrack's demise.

City sources said the deals were on hold because there was a growing feeling among financial institutions that the government could no longer be trusted to guarantee PFI revenue streams.

A source said: "There is a greater perceived risk associated with PFI projects now after the way government has handled Railtrack. This has made the bankers very nervous and distrustful."

PFI deals are highly geared, with banks providing up to 80% of their value. Banks were comfortable with that before this week because revenue streams were thought to be guaranteed by the government.

A banking source said: "We could afford to take the risk when we thought the government would always front up 鈥� but what's to stop it pulling the plug on a poorly-performing hospital trust, just like it has on Railtrack?"

Sources predicted that the banks' uncertainty would result in a rise in the cost of borrowing to fund the deals as lenders seek to cover their risk. Companies in turn would be likely to demand higher returns from the government to enter PFI deals.

There are thought to be more than 100 PFI projects under negotiation, with firms such as Carillion, shortlisted on 15 deals, waiting to reach financial close.

Although it is not thought that the fallout from Railtrack will damage PFI deals in the long term, any delays in reaching financial close could hit companies' results over the next 12 months.

The company is only guaranteeing that existing contracts will be honoured, casting future work into doubt. Firms with large rail contracts, such as Balfour Beatty, Jarvis and WS Atkins, have been in close contact with Railtrack and government officials this week.

The industry was also given cause for concern with the news that Railtrack administrator Ernst & Young would deal with new contracts.

A spokesperson said: "Companies [negotiating with Railtrack] will have to go to their regular contact at Railtrack who will then put the contract to the administration team. They will then decide whether to sign it or not."

QSs holding framework agreements with Railtrack are publicly robust, but less confident in private. One QS said: "Contractors calling us get the 'business as usual' message. But there is uncertainty."

The source added that each framework agreement has break points that allow Railtrack to terminate the contract.

The Railtrack saga

1996 Railtrack privatised with shares at 拢3.80
September 1997 Southall crash kills seven people
October 1999 Ladbroke Grove crash kills 31 people
October 2000 Hatfield crash kills four people
June 2001 Railtrack criticised in Ladbroke Grove report
25 July 2001 Boss John Robinson asks DTLR head Stephen Byers to suspend regulations controlling Railtrack
5 October Byers informs Robinson that he is going to wind Railtrack up. Only the subsidiary of Railtrack Group that operates and runs the railways is to be put in administration. The Channel Tunnel Rail Link, some property, and railway safety are unaffected
6 October Railtrack decides not to challenge the plans
8 October Railtrack shares are frozen at 拢2.80
10 October Railtrack starts legal action against HSBC bank over 拢363m it claims is owed to Railtrack Group