Industry calls for changes to PFI

The Government's beleaguered Private Finance Initiative will come under further attack this week in a report from the Confederation of British Industry calling for key changes in the way it operates.

The CBI report, due to be published on Thursday, will recommend that in future the PFI should apply to fewer and bigger projects with a threshold below which Government departments would no longer need to seek private funding for public transport and health schemes and the like.

This would be an important change in the way the PFI functions. Two years ago, in a bid to kick-start the initiative, Kenneth Clarke, the Chancellor, said that no public sector capital projects would be considered unless Whitehall had first sought to finance them under the PFI.

Although projects worth nearly pounds 5bn have been awarded, the Channel Tunnel rail link accounts for pounds 3bn. of this. A further 1,500 schemes worth pounds 27bn have been identified but the vast majority are small projects worth under pounds 25m.

The CBI will argue that this has clogged up the system, making the PFI still more cumbersome and the bidding process too costly compared with the projects on offer.

The fresh criticism comes amid growing concern in government circles at the failure of the PFI to deliver, and the withdrawal of construction group Taylor Woodrow from the bidding for a prestige pounds 100m PFI hospital project in Dartford, Kent.

Mr Clarke has reportedly written to the Deputy Prime Minister, Michael Heseltine, warning that the initiative risks being "discredited" unless Whitehall departments speed up the awarding of contracts.

The CBI report, drawn up by a steering group representing contractors, IT and facilities management firms and financiers, will also call for a case-by-case approach to the way that risk is divided between the public and private sector.

One source said that a "culture change" was required in the way Whitehall assessed risk management and risk transfer.

The report will voice concern that the PFI is being used to substitute normal public spending on the infrastructure rather than bringing in additional finance. It will also warn that insufficient attention has been paid to the impact on the PFI of future levels of government spending since the initiative is in effect a way of replacing capital spending today with current expenditure tomorrow. Under the PFI, the private sector pays the up-front cost of a project and then earns an annual fee for running it or leasing it back to the Government.

The CBI will caution that this may distort investment decisions, resulting in projects going ahead not on the basis of their need but whether the private sector can make a profit. Charles Cox, an executive director of the computer group Hoskyns and the head of the CBI's steering group said: "We support the objectives of the PFI but there is a great deal of frustration at its implementation. It is not living up to the expectations of the business community or of the Government."

The report will concede that when the PFI works it works very effectively, typically producing cost savings of 20 per cent. But the CBI believes that the delivery is too patchy.

In his letter to Mr Heseltine, the Chancellor says that when a preferred bidder has been selected things should not be allowed to "drift', adding that some service providers feel the Government loses interest once the initial announcement has been made.

Mr Clarke's observations may cause some wry smiles among contractors since one of the most high-profile PFI projects - a pounds 200m scheme to refurbish the Treasury's headquarters in Whitehall - is running a year behind schedule.

The Financial Secretary to the Treasury, Michael Jack, the minister responsible for the PFI, introduced new guidelines to speed up the bidding process earlier this year. He said pounds 5bn worth of deals had been done and pounds 14bn of projects would have been agreed by 1998-99.