Policy switch could boost public projects

PUBLIC investment worth hundreds of millions could effectively be disguised next year - without any increase in the Government's borrowing - under the Prime Minister's 'go for growth' strategy for the economy.

Hospitals, schools and other public buildings are likely to be the main beneficiaries of John Major's attack on what a senior source described as 'arcane and theological' rules of the Treasury. This is contrary to the expectations of the construction industry, which had thought the policy change was principally aimed at refloating large road and rail schemes.

At present the Government pays the full cost of infrastructure developments, and this counts in the public sector borrowing requirement. Mr Major's initiative aims to bring private funding into some projects, reducing the Government's up-front capital spending. Only the leasing cost or other annual payment to the private contractors by the Government would count as part of the PSBR.

The change of heart at 10 Downing Street follows a long campaign by the former Treasury knights Sir David Hancock and Sir Adam Ridley, both now at Hambros merchant bank. Sir David says Mr Major's relaxation of the 'Ryrie rules' when he was the Treasury chief secretary in 1989 left an obstacle to private funding of public investments. Essentially, the Treasury still operates a Catch 22: if the project is financially good enough to go ahead, the Treasury says it should be funded by the Government because it can borrow money more cheaply than private banks.

But the Treasury also says it still needs to set strict limits on the borrowing requirement, so that only a certain number of projects can be financed at any one time. This blocks public-sector funding for some viable projects.

Sir David gives the example of highly cost-effective energy efficiency investments in hospitals that have not gone ahead because health authorities have had to spend their capital allocations on more urgent needs, such as medical equipment.

Other examples include purchase- and-leaseback schemes for railway rolling stock on French lines, and the possibility of the Treasury awarding road and rail schemes to the private contractors who were prepared to go ahead for the least subsidy.

The extent of any relaxation is being debated between Downing Street and the Treasury, which is concerned that the abandonment of the 'value for money' criterion could allow public- sector managers to avoid its controls on spending and borrowing.

The scope of any relaxation will have to be considerable if it is to spark much private-sector interest. The leading construction companies have greeted the Prime Minister's proposal with caution if not cynicism.

A spokesman for Wimpey said: 'We are not anxiously pursuing this line because with many of these schemes, they will not start for at least five years. By then, hopefully, the construction industry will have got back on an even keel.'

Apart from the pounds 1.7bn Jubilee Line extension, there are relatively few large-scale infrastructure projects where spending could build up in time to help lift the economy out of recession.

Other projects, such as the high- speed Channel Tunnel rail link, could probably begin within two years because much of the planning and consultation work has already been done.

The Liverpool Street to Paddington Crossrail could possibly start sooner because it was given the go-ahead two years ago although construction was not scheduled to start until 1995. The Heathrow express link has already been planned, but was not scheduled by British Rail to open before 1997.

Some City economists believe the Government will accelerate future privatisations to finance more capital spending without increasing the PSBR. 'Anything that is not nailed down they will try to sell - they need the money,' said Neil MacKinnon, economist at Citibank.