Private Finance impasse

Schools, hospitals, homes? What the Chancellor needs for his spending plans is brickies

Gordon Brown's gamble of lavishing £61bn on public services could come unstuck because of a series of flaws in the construction industry.

The Chancellor's spending relies on the Private Finance Initiative (PFI) to deliver new schools, hospitals and social housing. But private contractors are backing out of PFI schemes because bidding costs are spiralling and there is a severe shortage of construction staff.

Last week, PFI specialist Amey warned that it would cut back on the number of schemes it bids for. Anglo-Dutch industrial group Ballast Nedam, also a PFI specialist, said it would drastically scale back its British operation.

Digby Jones, director general of the CBI, said he knew of at least two member firms that were planning to pull out of PFI bidding. "Unless we have quality people running the procurement process – and if the private sector companies start pulling out – this is going to increase costs substantially."

Hardest hit are small PFI schemes, such as a schools and hospitals, where margins are lower.

Richard Tierney, head of public-private partnerships at accountancy firm RSM Robson Rhodes, said: "The Government is beginning to run out of time. PFI projects will be a major plank of its huge investment in public infrastructure. There is a danger that the time and cost involved for these projects will lead the private sector to 'cherry pick' the attractive deals and ignore those it considers less attractive."

Building firms and banks believe it is up to the Government to streamline the PFI to make bidding cheaper. Philip Grant, head of infrastructure finance at Bank of Scotland, said: "We have to make the process more efficient. The time it takes to go through bidding is an issue as this ties up consultants and project staff." It can take up to two years, he added, to go through the PFI process for a school or hospital.

The problem is exacerbated by new accounting rules that force companies to write off bidding costs more rapidly. Last week, builder Carillion said this would lead to an 11 per cent cut in its operating profit.

There are also fears that there aren't enough skilled construction professionals to build the schemes. The Construction Confederation estimates that it needs an extra 76,000 people a year until 2006 to cope with the demand. Public affairs director Martin Hughes said: "It's a big challenge getting people into the industry, which does require action from the Government."