Finance: Partnership scheme in the balance

Public sector finance: can new Treasury reforms tempt more bidders into the Private Finance Initiative? By Paul Gosling

The next few weeks will decide the future of the Private Finance Initiative. Attacked in forthright terms by many on whom it depends, the PFI has to evolve quickly to survive. The Government desperately hopes that last week's announcement by the Treasury of new procedures for PFI schemes may give it the kickstart it needs.

Each government department will have one minister responsible for promoting the PFI. Contracts will be standardised, and more public procurement will be carried out on a partnership basis with initial shortlists used to identify preferred bidders, who will be assisted in drawing up final tenders. Public bodies may have to compensate bidders when tendering is cancelled at a late stage.

This is still some way short of the steps demanded by Martin Laing, chairman of the construction group John Laing, who last month called for a new mini-department in Whitehall to oversee the PFI. He described the existing system as "farcical" and bound to lead to a failure by government to meet its own capital spending plans, which assume a steady growth in PFI schemes.

In a few days these complaints will be echoed by the House of Commons' Treasury committee, which is expected to say that the Government's capital programme is at risk of being unachievable. Last week's Treasury announcement has met some of the committee's criticisms that PFI proposals are not properly vetted at an early stage, allowing impractical bids to waste time and money.

Not all departments are genuinely committed to PFI, with the Ministry of Defence accused of being overtly hostile. Only transport, hospitals and prisons are the subject of complete PFI projects. But some departments are worried at the private sector being in the driving seat on some delicate political questions.

Within the NHS the market reforms could be undermined by pressures from the private sector to reduce the elements of competition. This is a factor in the proposals to merge the St James and United Teaching Hospitals in Leeds to form the country's biggest NHS trust.

Frank Suttie, a partner in the law firm Pinsent Curtis, is advising St James. He says: "The NHS can be very different from other sectors because of its fragmentation, which the private sector finds more difficult to understand. An amalgamation of trusts would help. The scope for losing patients would be less, though it does reduce choice and competition, but that is not necessarily a bad thing from a PFI point of view."

Many parts of the public sector may become asset-free, by leasing buildings and equipment. The sensitive question is whether the public sector needs to remain in charge of the services. If management can be contracted out on housing and refuse collection, why not in hospitals or universities, which in accounting terms are part of the private sector. The deciding factor here is not efficiency, but what is likely to upset the public.

The PFI is not, after all, apolitical, although it is broadly supported by Labour. The Chartered Institute of Housing last month published a study, Consensus for Change, by Coopers & Lybrand, as part of an attempt to have the Public Sector Borrowing Requirement redefined in line with that used elsewhere in the EU. Under these proposals, public bodies that could be ring-fenced, such as council housing departments, would be permitted to borrow without it being counted against the PSBR. But this would stymie a Government objective of removing social housing from local authority control.

If the only criterion of the PFI were to attract private capital, local authorities might be permitted to sell and lease back their housing, while still managing the properties. But the Department of the Environment rules this out, saying that PFI solutions for council housing are to sell estates to housing associations or to form local housing companies with the council holding a minority stake.

Nor will the PFI always put money where it is most needed. The private sector has been unwilling to finance renovation of schools with outside toilets and decades-old "temporary" classrooms. Time will tell whether the shadow education secretary David Blunkett's initiative with Hambros Bank, announced at the NUT conference, will succeed where the Government has failed. Even private money will not easily put right decades of underspending on our public assets.

As Joel Barnett, chief secretary to the Treasury in the Seventies, wrote: "In the public sector, capital expenditure will have been deferred, deferred and deferred again. The only plea in mitigation is that it was politically easier to cut capital rather than current expenditure." It was a sin of repeated omission that will take decades to put right.