Taxpayers to foot bill as PFI bonds spread risk

BZW, Lehmans and Warburgs have obviously read the Chancellor's mind. His announcement yesterday setting out how investors will be able to buy and sell stakes in Private Finance Initiative projects will have come as no surprise to them. They've already beaten him to it. Drive down the A1(M) between Alconbury and Peterborough when it is finished, or take the Docklands Light Railway to Lewisham when it is built, and you will be travelling courtesy of transport schemes funded by PFI bonds.

BZW arranged the bond issue for the DLR extension and Lehmans and Warburgs for Road Management Group, the Amec/ Alfred McAlpine consortium that is upgrading the A1. The surprise, if there is one, is that it has taken this long for the City and Government to cotton on to such an obvious way of funding PFI projects.

In the case of the A1 and the DLR, bondholders get paid their coupon and ultimately their capital from the shadow tolls the Government hands over every time a car uses the road or a passenger buys a ticket. What next? PFI bonds securitised against the income stream generated every time a criminal gets banged up or a patient has their appendix whipped out? The funding side of the PFI is pretty much sorted out. If the sheer volume of bankers and accountants in attendance at yesterday's beano to celebrate the PFI's fourth birthday is any guide, there is no shortage of money. The problems lie rather on the supply side. For all Ken Clarke's attempts to make the PFI user-friendly, it is still dogged by a civil service mentality that finds it hard to get its mind around risk transfer and building contractors who persist in seeing it as public spending in hire-purchase form.

For all that the PFI has probably gathered enough momentum to guarantee its survival. Labour has embraced it as eagerly as the present Government as a way of easing the public finances. What could be more seductive than an initiative that turns capital spending today into current expenditure tomorrow? Everybody knows that buying on the never-never always comes home to roost eventually but who cares when it is your successor who is going to have to sort out the mess? Spreading the risk through PFI bonds takes the process a stage further. What the investor would be buying, in essence, is a privatised gilt. That reality will need to be reflected in an enhanced coupon, inflating the ultimate cost of the project. As always, the financier's gain will be the public's loss.