Brussels threatens to scupper Blair's private finance schemes plan for private funding of public services

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Government plans to reinvigorate public services with private investment are under threat from a Brussels directive that will make the current Private Finance Initiative (PFI) illegal.

The Government's flagship PFI scheme will be made unworkable if a European Union directive, designed to cut corruption in public contracts, becomes law in 2003.

The Prime Minister has staked his reputation on improving public services in partnership with the private sector.

Britain's biggest contractors, including John Mowlem, are warning that the PFI scheme will be "brought to a halt" by the EU plans, which will make the PFI too expensive to operate.

The UK's building companies have told the Government that they will be forced to add millions of extra pounds to pursue a PFI bid under the new EU rules, thereby making the scheme unviable financially.

"This is not good news at all. If it goes through unamended we would have to completely reconfigurate the PFI initiative in the UK. The PFI initiative would come to a halt," said Arthur Moore of the John Mowlem construction group. "Clients and contractors would have to spend huge amounts designing projects up front. It would move us back in procurement terms 10 years."

The Construction Confederation, which represents most of the country's major building companies – including Bovis and Carillion – and has been involved in 15 private finance projects including hospitals, roads and prisons, yesterday held private talks at the Treasury about the threat to the PFI.

John Bromley, European affairs director of the Construction Confederation, said that the directive would deter many contractors from working on public-sector deals. "You couldn't risk losing £6m on a bid. This is a serious problem," he said. Next week, a delegation from the CBI will travel to Brussels to lobby against the directive, which is passing through the European Parliament and the Council.

The extra costs created by the proposals will make the Government's calculations on investing £200bn on improving public services in the next 10 years unworkable. Under the current PFI rules costs are cut by negotiating the details of new hospitals, roads and prisons with one successful contractor. But the directive will mean that contractors will not be allowed to frame the design, building and running of a hospital, prison or road scheme in consultation with the Government after it has gained preferred bidder status. All bidders will have to produce complete schemes to "stop anti-competitive behaviour".

The Treasury is planning to oppose these proposals and ask for the directive to be amended. But Britain will face strong opposition from southern European states – including Italy – which want to change the rules governing public contracts to cut down on corruption.

"We are extremely concerned about the adverse implications of this for the PFI," said Robin Herzberg, chairman of the CBI Committee on European Public Procurement. "It would slow the initiative down and make it far more expensive, no doubt about it at all. It would make it unworkable."