PFIs, dead or alive?

Three big policy announcements on the government's economic strategy, but still no word from the chancellor on PFIs does this mean the beginning of the end for this type of funding?
Shapna Roy Shapna Roy

We've had the emergency budget, the comprehensive spending review and this week the infrastructure plan.

That's three important policy documents from the coalition government in its first six months, and yet we are still only slightly better informed about how the chancellor, George Osborne, intends to recast the Private Finance Initiative (PFI) and the funding of large infrastructure projects.

We do know the chancellor is not a fan of PFI – last November he toldThe Observer that the current system lacked transparency, failed to shift risk from the public to the private sector and that fellow Tory MP Philip Hammond was investigating alternative models.

We also know the chancellor is keen to push ahead with projects that will stimulate growth but that there is little public money to fund them.

Greater private sector investment

We have yet to hear from Hammond and we learned next to nothing on PFI from the emergency budget, but the spending review and infrastructure plan have shed some light on the chancellor's thinking. He had already acknowledged that greater private sector investment was required and now we know he envisages increasing capital spending by around £2.3bn a year by 2014-15 to fund capital projects of long-term, high value.

He also gave the green light to a long list of projects and confirmed others would be deferred or axed, including a new 1,500-place prison and seven waste projects.

But these announcements lacked clarity. Not all the axed projects have been identified nor is it clear how much scrapping these projects will cost and whether the savings will offset the costs. The reality is that these important details can only come out in the wash as preferred bidders, local authorities and government departments thrash out how to exit these contracts and agree compensation, if any.

Perhaps more importantly, the chancellor has also scrapped ring-fenced funding, indicating that PFI credits are on the way out. This is the crux and could be the beginning of the end of PFI as we know it. The removal of this hugely important element of central government support and cuts in budget could leave local authorities with a dilemma as to how to plug the resulting funding shortfall, a dilemma the chancellor has yet to publicly address.

But the government is also planning to de-centralise the procurement of capital projects and services, giving local authorities the freedom to decide how to spend what money they have, and also appears open to the idea of local authorities raising funds from the sale of buildings, land and other assets. Combined with the other funding reforms, local authorities would have discretion over which services they provide and the means to fund them.

Finally, with smaller departmental budgets having to stretch further thanks to rising prices and in some cases rising demand, it makes sense for savings to be sought from existing projects. So while project departments might be left scratching their heads about exactly how the government will recast PFI over the coming months, they can at least start to prepare their cases ahead of the inevitable call for negotiations to improve value for money as the reality of the budget cuts sink in.

Shapna Roy is head of projects at Wedlake Bell

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