Tories call for public takeover of stalled PFI projects_2

19 Feb 09
The Conservatives have called on the government to use public funds to rescue Private Finance Initiative projects that have ground to a halt because of the credit crunch

20 February 2009

By Tash Shifrin

The Conservatives have called on the government to use public funds to rescue Private Finance Initiative projects that have ground to a halt because of the credit crunch.

But shadow chief Treasury secretary Philip Hammond told Public Finance it would be ‘ridiculous for the government to lend money to PFI contractors’.

He argued instead to ‘restructure contracts as publicly financed procurement, with the risk transferred [to the private sector] by other means’, such as using fixed-price ‘design and build’ contracts.

The government has come under increasing pressure to bail out major projects, with industry figures calling on the government to step in with funding. Tim Pearson, director of private equity firm Innisfree and a spokesman for the PPP Forum, suggested £4bn should be pumped into PFI schemes over the next 18 months.

Experts have also warned that if the government fails to act quickly, the PFI could be seriously undermined, possibly for the long term.

Prime Minister Gordon Brown was forced to promise rescue measures at a February 13 meeting of the Commons Liaison Committee, made up of select committee chairs.

A Treasury spokesman confirmed that proposals would be produced in the next two weeks. Speculation is growing that the government might set up an infrastructure fund to lend money to PFI schemes or underwrite bank loans to encourage more and cheaper lending.

But Hammond said: ‘If the private sector can’t provide finance, we have to look at ways to take the financing role back into the public sector.’ The government should ‘go back to the drawing board’ rather than ‘pretend it’s a PFI project and having the government providing the finance and taking on the financing risk’.

The government should deliver ‘existing capital commitments through public sector finance rather than the PFI’, he said. That would create a problem for the government, which had used the PFI to keep borrowing for infrastructure projects off the balance sheet, he said. But a Conservative government would put such projects on the balance sheet however they were funded, he said. ‘The imperative to keep things in the PFI is gone.’

The PFI was not dead, and could offer value for money in future, Hammond insisted. But he added: ‘These are very unusual times. We’ve got to be pragmatic. We need to look at models that work in the current environment.’

Hammond said refinancing public sector schemes with private cash when the economic situation improves was ‘always a possibility’. He argued that ‘efficient management of the public sector includes periodically looking at the portfolio and the possibility of refinancing’.

Public bodies that are struggling to bring major PFI schemes to financial close are already exploring public funding mechanisms. Such schemes include the £5bn M25 widening project and Greater Manchester’s waste disposal scheme, which will now cost £4.6bn. The Highways Agency confirmed this week that

‘co-funding by government is one option being considered’ to secure finance for the M25 scheme.

The Greater Manchester Waste Disposal Authority will become a senior lender to its own scheme, in addition to providing a £68m capital contribution, budget papers for its special purposes committee revealed. The authority has tripled its prudential borrowing limits to more than £300m over three years to enable the move.

The government is also in talks with less traditional funders. Toni Miller, head of new business at Norwich Union Commercial Finance, said the insurance giant had been in discussions with the Treasury. Norwich Union was ‘stepping in’ to schemes where banks were pulling out, she said, adding: ‘We’ve had a lot more interest [from the public sector] in the past six months than in the past two years put together.’

Experts signalled how precarious the situation was for the PFI as a result of the credit crunch. Nick Prior, head of the government and infrastructure team at consultancy Deloitte, said the government must take short-term action to ease the liquidity problem and ‘get away the big projects currently on the blocks… otherwise the market is in danger of being undermined, with potentially serious long-term consequences’.

Mark Hellowell, a PFI expert at Edinburgh University, said all the signs were that the Treasury remained committed to the PFI as it still had ‘a good fiscal rationale for it’ while the debt remained off the balance sheet. But the increasing cost of interest on private finance, compared with public funding, meant the economic case for PFI was ‘looking increasingly shaky’, he said.


Did you enjoy this article?