Growth hit by failure of private initiative

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The failure of the Government's Private Finance Initiative to make up for a 17 per cent fall in public-sector investment in the first half of the year has reduced economic growth by as much as 0.4 of a percentage point.

Public spending on capital projects dropped from pounds 6.8bn in the first half of 1995 to pounds 5.6bn in the same period of this year, and private investors have covered only a fraction of the pounds 1.2bn shortfall.

Under the PFI, private-sector companies design, build and operate projects ranging from bridges to schools for a fixed annual fee. Although the Treasury boasts that pounds 7bn worth of privately financed projects have been approved, it forecast that only pounds 600m would be spent on them in the 1995/96 fiscal year.

Actual figures for spending to the end of June have not been released. However, they are likely to be considerably lower than projections due to difficulties in getting projects started.

Had government investment remained constant in real terms, the UK's gross domestic product would have risen by 2.4 per cent in the year to June, 1996, rather than the actual 2 per cent.

This impact on short-term economic growth is likely to be discussed at the Private Finance Panel's annual conference at the Queen Elizabeth II Conference Centre tomorrow.

The main long-term concern is that spending commitments are being entered into outside the Treasury's control. Next month's Budget will be the first to project the Government's obligations under PFI.

Alistair Darling, Labour's health spokesman, plans to complain at the conference that the programme is mortgaging the future. "The Government is running a 'buy now, pay later' policy," he said.

While the Treasury can veto projects it finances directly, the final decision on PFI-funded projects is left to the spending ministries. Stephen Dorrell, the Secretary of State for Health, for example, has a backlog of 29 big hospital projects worth pounds 400m.

However, the actual cost of those hospitals will be several times higher over the lifetime of their contracts. And future ministers, faced with the need to reduce spending and unable to get out of contracts signed now, will have to focus cuts on institutions built by the public sector.

Under the old system, projects would have been prioritised, and future cuts could have been made across the board. Mr Dorrell can still block some projects, although his instinct will be to approve them all in the run-up to the next election.

The Department of Health, which has a flood of projects proposed by its autonomous trusts, is unlike other departments, where a few test projects have been authorised. "Prioritisation is mainly an issue in the health sector, where we're all very much aware of the problem and are working towards a positive solution," said a Treasury spokesman.