Ministers prepare for project bids worth pounds 14bn

POST BUDGET: PRIVATE FINANCE INITIATIVE
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NICHOLAS TIMMINS

Public Policy Editor

Details of the pounds 14bn worth of private finance contracts which the Government hopes to have in place in little more than three years' time were released yesterday as ministers moved to meet criticism that the initiative has produced delays in capital projects and unacceptable bidding costs for the private sector.

The schemes, if approved, will commit the Government to billions of pounds more in revenue expenditure in future years, with the running cost of an average project crudely estimated by the Treasury to be between two and four times the capital cost.

In total, according to Sir Christopher Bland, chairman of the Government's Private Finance Panel, well over 1,000 potential schemes worth pounds 25bn have now been identified - not all of which will come to fruition. But while the private sector will find that cash, the revenue costs of the services bought - from hospital buildings to private prisons and much else - could total between pounds 40bn and pounds 60bn over their lifetime, according to the Treasury.

To underline the Government's determination to drive the initiative through, Michael Jack, Financial Secretary to the Treasury, issued guidance stating that no more than three or four bidders should be invited to tender for projects which range from roads and schools, to prisons and hospitals. And between 5,000 and 10,000 civil servants are to be trained over the next 18 months in how to make the initiative work.

Sir Christopher's list includes 153 "A" priority projects with a capital value of almost pounds 9.5bn, which he said could be signed by the end of 1996-97. A further 1,286 projects worth pounds 17.5bn have been identified, he said, which were "there to shoot at".

Priority projects include a new pounds 140m Norfolk and Norwich hospital to be built on a green-field site, an pounds 80m rationalisation in Bromley and a pounds 180m new hospital in Edinburgh, all part of 23 National Health Service schemes worth almost pounds 750m.

Home Office projects include the privately financed and run prisons at Bridgend, South Wales, and Fazakerley, Merseyside, agreed earlier this year at a capital cost of pounds 50m each. A pounds 500m redevelopment of Home Office radio communications tops its list.

Education projects include a pounds 100m new university for the Guys/St Thomas's and King's medical school in London, and a pounds 20m rebuild of Pimlico school, Westminster, part of 12 education department projects worth an estimated pounds 291m. Transport includes 20 projects worth an estimated pounds 4bn, dominated by the pounds 2.7bn Channel tunnel rail link.

In some areas, the initiative marks a watershed - with the private sector running prisons, for example. In the NHS, the announcement of the pounds 35m South Buckinghamshire NHS Trust rebuild is a crucial step down the road that could lead to the NHS becoming solely a purchaser of health care which would largely be provided by the private sector.

Although Stephen Dorrell, the Secretary of State for Health, has said that staff directly employed by NHS trusts will continue to provide direct patient care in the "overwhelming majority" of cases, the dividing line between clinical and non-clinical care is not always clear cut. In addition, health authorities are already, on a small scale, letting NHS contracts to private hospitals.

Despite the massive sums potentially involved, the time scale of building means the Treasury expects actual private spending to run only at pounds 600m this year, rising to pounds 2.8bn by 1998-99 - while the Government's own capital spending will fall away from almost pounds 21bn last year to just over pounds 19bn, leaving government-sponsored capital spending broadly level. The revenue consequences for government will be felt later as it buys in the services provided.

The key difference is that "the public sector no longer simply signs a contract to buy a prison, a train, or a computer system", Mr Jack said. Instead "it pays to have specific services at guaranteed levels of performance over 20 or 30 years". In the case of the pounds 400m London Underground train deal, for example, the contract specifies a level of reliability four times better than for existing fleets.

Mr Jack rejected criticism that the Treasury is simply buying capital projects and services "on tick", building up public spending problems for the future. The schemes were not financial leases, he said. They were about government procuring services to defined outputs, with the private sector using its expertise to deliver them in the most cost-effective way possible.

The diverse nature of the contracts means break points - and therefore the public sector's long-term commitment to them - varies. For instance, the Northern Line tube-train contract is initially for 20 years when the trains have an expected life of 36 years. In the case of prisons and roads, the assets transfer to the public sector at the end of the contract.

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