Geoffrey Robinson, the Paymaster General, said negotiations with the Treasury's preferred bidder, Exchequer Partnership, had been terminated because ministers had decided they had other spending priorities and that the project might expose the Government to "significant financial risk".
A spokesman added that there were question marks over the commercial viability of the project, since Exchequer Partnership had not been able to sign up other tenants for the building once it had been refurbished. He also said that ministers had decided other PFI projects, such as schools and hospitals, were a "higher priority than a gleaming new building for Treasury staff".
However, observers expressed surprise that the project had been dropped, suggesting it could only harm the battered image of the PFI.
A spokesman for Exchequer Partnership, a consortium of Stanhope, Bovis and Hambros, said: "Obviously we are disappointed that the project is not going ahead. A lot of work had gone into it."
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