A powerful committee of MPs yesterday recommended that the new organisation being created by the Government to take over the Private Finance Initiative should not be allowed to take stakes in projects on which it has advised.
The Commons Treasury Select Committee said that if Partnerships UK was to take equity shares it would create a conflict of interest. The MPs also said that projects on which PUK was not providing financial support could be unfairly discriminated against.
The findings are a blow to the Treasury just as it prepares to finalise the funding and work programme of PUK, which will be majority owned by private investors.
Several organisations, including the Confederation of British Industry, the British Bankers' Association, the Business Services Association and the TUC, expressed concerns about PUK taking equity stakes to the select committee.
The BSA said: "The fundamental concern is that a body giving advice to the public sector with a view to becoming a private-sector investor in that project is an interested party and cannot be regarded as giving unbiased advice."
When PUK was set up last July, the Treasury said its remit would be to "provide development funding to get PFI deals off the ground where existing forms of private finance are not available". Andrew Smith, the Chief Secretary to the Treasury, said he did not want to rule out the possibility of it taking equity stakes but told the committee: "Clearly, one would need to avoid any conflict of interest or perception of conflict of interest."
The MPs recommend that, for there to be proper public oversight of PUK, the newly created Office of Government Commerce should have "an overriding duty" to promote competition in PFI projects.
The committee also says that the case for the attracting additional private investment through the PFI is now weaker because of the improvement in the public finances and the Chancellor's "golden rule", which allows the public sector to borrow for investment.
The MPs say the main criteria for the PFI should therefore be whether it obtains better value for money. In particular, they recommend the National Audit Office examines the number of beds resulting from the hospital programmes carried out under the PFI. In 1998 some £2.7bn worth of hospital projects were approved. PFI is set to generate £11bn of new investment between this financial year and 2001/2.