How a Jarvis crash could bring public services to a grinding halt

If the PFI contractor goes under then schools, hospitals and highways could be hit

As Jarvis teeters on the brink, in breach of its banking covenants and with debts of £230m, an obvious question is perplexing the City. What if it goes bust? The same question is also beginning to exercise the minds of ministers and civil servants, however, because Jarvis is also one of the biggest players in the Government's private finance initiative.

The company had an order book at the last count of about £10bn - more than a third of which is accounted for by projects awarded under the PFI. Typically, these are long-term contracts, lasting up to 40 years, to service and maintain and, in some cases, provide everything from school buildings and student accommodation blocks to hospitals, highway maintenance and street cleaning.

If the company collapses, its banks will be left with bad debts. But will local authorities and health trusts also be left with schools that cannot open, hospitals that cannot treat patients and roads that are unlit or choked with debris?

It is a nightmare scenario which Jarvis, understandably enough, is keen not to encourage and which civil servants would rather not think about. But unless the rescue talks now taking place between the company and its banks succeed, it is something they may soon have to confront.

The company is currently responsible for some 94 schools up and down the country stretching from Liverpool and Leeds to Brighton and Hove and Richmond-upon-Thames. Of these, eight are still under construction. In addition, it is the preferred bidder for a further 50 schools, of which 37 are in Norfolk.

But it also provides tens of thousands of rooms for students attending college in 14 different locations and has recently won big new contracts from universities in Plymouth, Nottingham and Lancaster.

Last year, Herefordshire County Council entrusted a wide range of environmental services to Jarvis, from school meals to vehicle management for a period of 20 years. And in Newbury, a new community hospital has just opened which Jarvis will run for the next 30 years.

All of these contracts are financed off the balance sheet of Jarvis through what are known as special purpose vehicles (SPVs). These are companies set up specifically to bid for and operate PFI projects. In most cases, Jarvis has a tiny equity stake while most of the risk is borne by the bank or banks providing the finance.

While a PFI project is under construction, say a specialist health unit or a new library to take two of the deals Jarvis is currently involved in, the SPV bears the risk of late delivery and cost-overruns and can be penalised accordingly.

But once the PFI is up and running, it is the responsibility of the procuring authority - be it a local council or a health trust - to find a new contractor should the one it is dealing with go bust.

The Treasury and the Department for Education and Skills - the two ministries which will find themselves in the front line should Jarvis collapse - both say they are monitoring events but would prefer not to comment on what, at present, is a hypothetical situation.

However, Vince Cable, the Liberal Democrats' frontbench Treasury spokesman, is pressing for an answer and has written to the Education Secretary Charles Clarke, demanding to know what contingency plans are in place should the hypothetical become a reality. "What I am concerned about is the danger that it will be left to the Government, which in other words means the taxpayer, to pick up the tab."

Whitehall sources insist this is not so. In the case of projects still being built, the responsibility will lie with the banks involved in the SPV to find a new partner to complete the work because of the financial exposure they face.

In the case of PFI deals which are already up and running - such as long-term facilities management contracts - the cost of buying the service has already been factored into departmental budgets so the main task of the public sector customer is to find a new service provider.

Officials admit this might lead to an interruption in the provision of services, but they say there are plenty of contractors around only too willing to take on the work. Others are not so sure, pointing out that one of the reasons Jarvis has found itself so exposed is because it bid too aggressively for some PFI projects. Any private sector contractor wishing to replace Jarvis would want to make sure the sums worked satisfactorily, which could mean a lengthy delay in re-letting projects.

Despite the acute nature of its difficulties, Jarvis says it is continuing to win new PFI bids. "In fact, we have a high strike rate," says a spokesman. A sale of assets - such as its one-third stake in the London Underground contractor Tube Lines and its roads division - could also raise perhaps £200m to help pay down debts.

But there is no disguising the alarm bells that are beginning to ring in some quarters. The City law firm Lawrence Graham is forming an action group to represent the 80 local authorities with which Jarvis has contracts. Meanwhile, Paul Boateng, the Chief Secretary to the Treasury, is understood to have taken time out from preparing for next Monday's public spending review to safeguard against any failure at Jarvis blowing up in the Government's face.

With Jarvis given a lifeline by its banks only until the end of the month, time is running out for the nightmare scenario to be avoided.