Companies told to help cut £200bn PFI bill or risk missing contracts


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The government has opened negotiations to cut the £200bn bill of building and maintaining schools, hospitals and prisons under controversial private finance initiative (PFI) contracts.

Companies have been told that unless they agree to "co-operate" to reduce the £8bn running costs of PFI they will risk losing out on future government business. At the same time, the carrot of £200bn of public-sector infrastructure contracts for new roads, railways and energy projects over the next five years is being dangled in front of them.

In an opening salvo, Chancellor George Osborne said yesterday he was sending a team of accountants and lawyers into an Essex hospital to comb through its £835m PFI contract, looking for savings that could be applied at other public-sector buildings.

But The Independent understands that this is running in parallel with industry talks to try negotiating even greater savings for the taxpayer. Any deal is likely to make PFI contracts more flexible and deliver a possible "rebate" to the Treasury. It is a similar approach that the Government used to secure the Project Merlin deal, under which Britain's banks agreed to lend more money to small businesses in return for concessions on bonuses.

The arrangement has been criticised as too generous to private contractors. One hospital was reported to have been charged £333 by a PFI firm to change a light bulb, while a school was charged £300 for an electricity socket. Under PFI deals, private firms build, operate and maintain public facilities – such as hospitals, schools and courthouses – on contracts lasting up to 35 years.

The industry could become the next target for public anger after the banks. Uncertainty around the future of the contracts could also impact on the companies' share price. Ministers think this is behind the willingness to do a deal. But they stress that any potential deal is complicated by the number of companies involved in the sector.

Last night a Treasury source said: "PFI is not immune from other savings in the public sector during the current economic downturn and we are looking to make savings.

"It is a voluntary approach but we have announced that over the next five years we will be investing around £200bn as part of the national infrastructure plan.

"The same companies will want to be involved in those projects as are currently involved in PFI. At present talks are going on and there is a willingness on all sides to co-operate."

Lord Sassoon, a Treasury minister, announced a pilot project at the Queen's Hospital in Romford, which will see a team of advisers identifying ways to reduce costs.

But there were warnings from business that a squeeze on PFI profits might jeopardise the chances of investment in future public-sector projects. Elizabeth Fells, head of public services reform at the CBI, said: "The Government needs to maintain private-sector confidence in the market, otherwise it could jeopardise future investment in infrastructure projects."