Pressure mounts on Clarke to reform private funding scheme

Chancellor Kenneth Clarke came under renewed pressure yesterday to reform the Government's Private Finance Initiative after the Confederation of British Industry called for most small capital projects to be exempted from the scheme.

In a hard-hitting report the CBI said that, henceforth, no project costing less than pounds 10m should have to seek PFI funding before being given the go-ahead.

This would simplify the PFI but it would almost certainly mean that the Treasury would miss its target of funding pounds 14bn worth of public projects through the initiative by 1999.

The Government's private finance panel has identified 1,500 projects worth pounds 27bn which could be financed through the PFI. However, of these only about 150 are valued at more than pounds 10m.

If the CBI's recommendations are accepted, the PFI would effectively be limited to larger infrastructure projects in the health, transport and environment sectors. Hundreds of small projects costing less than pounds 10m, many of which are Department of Health schemes, would slip through the net, leaving them to be funded conventionally through the Government's capital expenditure budget.

The CBI report also criticises the Government for abusing the PFI by using it as an excuse to cut back on capital spending when it was supposed to be additional.

Under the PFI, private contractors finance, build and run public sector schemes and then charge an annual fee or lease them back to the Government. But the CBI report warns that the future liabilities this creates for public spending need to be clearly accounted for.

It also calls for action to allocate risk better between public and private sectors and cut down on bidding times and costs - a bugbear of firms interested in taking on PFI projects.

Blair Turner, the CBI's director-general, said: "Business is frustrated at the waste of resources and low progress when sound PFI principles are not applied. Unless the PFI is better managed, it could fail to deliver the benefits available and fall short of the targets set, delaying key infrastructure projects."

Michael Jack, Financial Secretary to the Treasury, welcomed the report, saying it agreed with the CBI's main conclusions. However, he declined to say whether the Treasury would now introduce a cut-off point below which Whitehall departments no longer automatically had to test projects against the PFI.

Mr Clarke is due to address a CBI conference on the PFI in London next Tuesday, when a fuller response is expected to yesterday's report.

Economic view, page 26