Osborne looks to save hundreds of millions on PFIs

Chancellor targets potential savings of £500m in the £300bn being spent on schools, hospitals and other public projects

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George Osborne, the Chancellor of the Exchequer, is hoping to shave hundreds of millions of pounds off the cost of thousands of controversial private finance initiative deals in an attempt to cut Government spending still further.

The Chancellor has targeted potential savings from the almost £300bn paid out by schools, hospitals and government departments over the past two decades for buildings and services under "expensive and inflexible" deals with contractors, The Independent on Sunday can reveal.

Under the PFI system, state authorities were able to lever in private investment to fund the much-needed construction or renovation of hundreds of public buildings.

But the bills for the deals, often spread over three or four decades, are several times the cost of the original project. The IoS revealed earlier this year that the total bill for almost 700 PFI schemes will have risen from £55bn to more than £262bn by the time they are paid off, in 2047.

The Tory MP Jesse Norman, who is campaigning for a voluntary cut in charges for PFI deals, claims a reduction of just 0.05 per cent in contractors' fees could save £500m a year.

Treasury officials have met "major equity holders and other key industry players" – including those responsible for schools and hospitals – to urge them to cut their annual charges for rental and service charges.

The move follows the success of the Cabinet Office minister Francis Maude in slashing at least £500m from charges made by government contractors, to help cut the national deficit.

Osborne pledged to replace the PFI system, but changing it is fraught with difficulty. He was confronted with the huge charges involved in his own department during the summer when he was told a £33 fish-and-chips lunch for six in the Treasury cafeteria would cost £148 if the food had to be brought up to his office. This month, he was told it would cost £875 to supply a Christmas tree for the department.

A Whitehall source said last night: "The PFI system presents some of the greatest opportunities for savings, but we have to be careful to do it with the agreement of the contractors because we cannot breach existing contracts."

The Chief Secretary to the Treasury, Danny Alexander, has warned that PFI deals are "not immune" from the cuts process. He added: "Officials have met with the major equity holders and other key industry players, including those responsible for schools and hospitals... to discuss options for savings." Local councils will be given guidance about where they can find savings in their own PFI deals.

Norman, the MP for Hereford, said: "The industry really needs to come to the table and start having a conversation about this. There are significant benefits for the organisations involved. They can't hide their heads in the sand over this issue."