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PF2 will end ‘trench warfare over costs’

By Richard Johnstone | 11 December 2012

Reforms to the Private Finance Initiative are aimed at ending the current ‘trench warfare’ between the public and private sectors over running costs, the head of Infrastructure UK has said.


Geoffrey Spence, chief executive of the Treasury agency that has developed the new ‘PF2’ model, said it will lead to ‘more flexibility for the end user’ of privately financed buildings, such as NHS trusts and councils.

Under the scheme, the government will become a shareholder in the special purpose vehicles that build, fund and operate the schemes, to ensure ‘a more collaborative approach to improving project performance and managing risk’.

Speaking at a briefing on the new model yesterday, Spence said the investment level will be determined on a project-by-project basis, but was most likely to between 20% and 25%, and would not go above 49%.

The shareholding will be managed by a unit within the Treasury, which will nominate individuals to sit on the boards of each project.

However, the funds will be provided by the procuring authority – a Whitehall department or council. The ‘benefit’ from the investment, such as shareholder dividends, will be passed back to the authority.

Greater public sector involvement in the projects, with the procuring authority attending board meetings as an observer, will lead to a ‘better relationship’, Spence said.

PFI projects have been criticised by both the Treasury select committee and the Public Accounts Committee. MPs said the deals do not provide taxpayers with good value for money and are too inflexible.

Spence said yesterday that some problems encountered, such as the high costs of minor maintenance, would be resolved by exempting smaller repairs and services from PF2 contacts.

‘One problem has been with difficulties in hospitals with costs of minor maintenance. So we’re not going to have that type of contract in the future, and that’s the point about leaving minor maintenance to the authority, as well as taking out soft services.

‘That’s one item that has grated, I think, with quite a lot of authorities in terms of the delivery of their project, so we get rid of that.’

He added that direct public sector involvement in the special purpose vehicle would create a ‘better understanding between the pubic and private sector involved in these schemes to anticipate the need for change’ to existing terms.

‘At the moment there is probably, in too many cases, trench warfare between public and private sector, occasioned as much by mutual incomprehension than by anything real.

‘Quite a lot of the private sector see a way forward in terms of having a better relationship through this joint working at board level. The transparency that gives will also, I think, improve matters concerned with flexibility and buildings.’

Spence added that the model, which was announced by Chancellor George Osborne in last week’s Autumn Statement, might be used only sparingly.

‘Don’t forget that PF2 will still have pressures in how and when it can be used, from general constraints on public expenditure. That hasn’t changed. In one sense, when you look at the Autumn Statement in terms of the bigger economic picture, it looks as if it’s getting tougher for departments, not easier.’

Ministers will also set out what Spence called a ‘control total’ that could cap the overall value of both PFI and PF2 liabilities.

‘We are introducing a separate control total for off-balance sheet liabilities, principally PF2 going forward and existing PFI stock. And obviously, as part of that, we want to have a process with departments that looks at all elements of PF2,’ Spence said.

This is ‘quite a complicated thing to do’, he added. ‘There’s a lot of work going on presently in the Treasury, and we said we would report back in the Budget [next year].’



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