Treasury to overhaul PPP rules to bring in more private sector funding

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The Treasury is set to rewrite the rules governing its controversial Public Private Partnership in an attempt to encourage even greater private funding of public sector projects.

The Treasury is set to rewrite the rules governing its controversial Public Private Partnership in an attempt to encourage even greater private funding of public sector projects.

The changes, due to be announced shortly, are likely to provoke a political storm and prompt accusations from critics that the Government is cooking the books in favour of the PPP in an effort to take private sector funding still deeper into areas such as health and education.

Treasury officials are working on a fundamental revision of the "Green Book", which sets the standards for accounting for public investments. Assumptions made in the Green Book are key to testing proposed PPP schemes to see if they pass the crucial "value for money" test.

Under the present rules, PPP financing is only allowed if it can be demonstrated that the private sector efficiency gains achieved will outweigh the cheaper borrowing costs of financing a project in the public sector.

The changes being planned will allow Whitehall departments to take into account for the first time factors such as cost overruns and delays in the public sector as well as the quality of service and design delivered by operators in the private sector.

Opponents of the PPP have always charged that the system is biased in favour of the private sector ever since its forerunner, the Private Finance Initiative, was introduced by the former Tory Chancellor Kenneth Clarke in the early 1990s.

However, the Treasury believes that, far from favouring the PPP, current public accounting standards discriminate against it. It now aims to fix that. The Treasury may get the National Audit Office to endorse the new methodology before publication.

"The Green Book is careful and conservative. But the quality and consistency that PPP has achieved is better than anything the public sector ever did. A new analysis must reflect that," said a source close to the Treasury.

The Treasury and firms heavily involved in PPP schemes believe the way that the public sector comparator test is applied takes too generous a view of the capabilities and track record of the public sector and fails to acknowledge the proven advantages of the private sector.

David Toplas, director of the Norwich Union PPP Fund, said: "The PPP provides for Rolls-Royce because these are long-term projects and we recognise that spending more now will provide long-term value."

Although features such as the quality of service delivered and superior design are difficult to quantify, the new Green Book will attempt to do so. Other aspects it will tackle are areas such as cost over-runs, which under current rules are assumed to be around 12 per cent in the public sector. Experts believe the reality is more like 40 per cent. It will also take into account the likelihood that a project will not be delivered as quickly in the public sector.

"The fact that the PPP will deliver the hospital two years ahead of the public sector is not currently in the analysis. We must get the argument away from emotion to the facts," said one PPP consultant.

Supporters of the PPP believe its solid track record means that assumptions now need to be reworked. Since 1992, when PPP was first introduced, some 180 projects have been completed and are now operational. Of these, 73 projects have a capital value in excess of £15m. Together these projects amount to some £5.1bn in capital value and include eight roads, seven hospitals, six prisons, a number of schools and colleges and various training projects for the Ministry of Defence.