Brutal push that could discredit private finance for public projects

Click to follow
The Independent Online
If there was one really serious grumble about the Government at the CBI conference this week it was the failure of the Private Finance Initiative to deliver the grand promises made for it by ministers.

The PFI, a centrepiece of Treasury policy that has the full backing of the Prime Minister, is meant to draw private money into projects that in the past have been funded directly by the taxpayer. But much of business now sees the whole idea as no more than a fig-leaf to cover the nakedness of the Government's commitment to spending on roads, railways, hospitals, education and prisons.

The consensus in Birmingham was that it was a good idea gone horribly wrong. The public spending cuts are going ahead, but the PFI is bogged down in bureaucracy and incapable of filling the gap.

Kenneth Clarke, the Chancellor, will promise yet another expansion of the PFI in the Budget but you do not have to be a wizard at arithmetic to see how easily this can camouflage public spending cuts, to pay for a tax giveaway. The Chancellor and Michael Jack, the minister responsible for the PFI, are aware enough of the risk of the PFI falling apart if nothing is done.

Possible new projects worth a total of pounds 25bn have been identified. The message from the Treasury to departmental permanent secretaries during the public expenditure round has been to bring forward your PFI projects because that is the only way you will be allowed to meet your investment targets.

This method of implementing the PFI has proved brutal indeed, and it is said that careers will be broken by failure to deliver.

The campaign is at least in part a reaction to foot-dragging throughout Whitehall during the first 18 months of the PFI, when the number of contracts let was embarrassingly tiny. This summer, the Prime Minister got stroppy about it, and insisted that the whole Cabinet - which had not been uniformly enthusiastic - came into line. That resulted in the boot being put into permanent secretaries and a sharp increase in the number of deals clinched.

Even now, only pounds 1.3bn of the pounds 5bn contracts the Chancellor said a year ago would be let by next March have actually been agreed. That pounds 5bn figure includes the pounds 2.3bn Channel tunnel rail link, which does appear to be grinding slowly towards an agreement, but probably because of a rapid increase in the bribe - sorry, contribution - from the public purse.

If the CBI attack were not enough, Sir Alastair Morton, the leading propagandist for the PFI until this summer, stuck the knife in deeper this week by asking in a public lecture, "Where's the beef?" Sir Alastair, a co-chairman of Eurotunnel, was chairman until the summer of the Private Finance Panel, a body whose job is to steer and promote the initiative.

He likened the situation when he left the panel to a tube of toothpaste: "Pressure on the initiation end has produced a bulging of the tube followed by a spurt from time to time as some, but not enough, of the product came out." He blamed private industry and - with a particularly sharp tongue - Whitehall.

The basic requirement of a PFI contract is that it transfers financial risk from the public to the private sector, so that the outlay no longer counts as public spending. Overruns on conventional public sector works are invariably paid for by taxpayers. Under the PFI, the company is also the operator of the project once it is completed, a new and higher level of risk.

Sir Alastair believes that to cope with this the PFI requires far stronger, better capitalised bidders than the ad hoc consortia of construction and IT companies, consultants and medical or prison equipment firms at present involved. ICI, BP, Shell and other giants used to owning as well as managing big projects might make a much better fist of PFI contracts, but sadly are not interested.

Sir Alastair's harshest complaint is reserved for the way the Government has been implementing the PFI. Civil servants, he believes, have yet to come to terms with a cultural change that requires them to understand and price commercial risks, and oversee services to be provided by the private sector over as long as 25 years.

The Treasury claims that as well as the effort from the top to persuade departments to push the PFI forward, it has begun a drive to retrain civil servants at all levels in spending departments in the new disciplines. But the numbers of people are small and the pace so slow it is hard to believe - given that the task is to change the working method of entire divisions of the civil service - that this will make a dramatic difference within the timescale of the public spending cuts.

A deeper problem may be the Treasury itself. An organisation whose role in life is saying yes or no to other people's spending plans is not best suited to a crash programme of instilling an entrepreneurial culture in the rest of Whitehall.

Worse still, some projects, such as the Channel tunnel rail link, are being squeezed into the PFI when they are probably better suited to public sector investment.

It may be that a brutal push is needed to make anything happen fast in Whitehall. But in this case, the motive for haste seems to be to kick- start the PFI before the election, so the Government can take the credit for the hoped for new investment.

By building up expectations, for political reasons, of how fast the PFI can deliver work to companies, the Government is discrediting a worthwhile exercise before it is fully operational.