After nearly a year deciding what to replace the widely criticised Private Finance Initiative with, the government has revealed the structure of its successor, which at first glance looks remarkably like the original.
In fact, the main elements remain the same, whereby private sector companies raise the finance to enter into long-term agreements to design and build schools, hospitals and roads, with essential maintenance requirements also thrown in, and are then paid back by the Treasury over 30 years.
A lot of effort went into creating an alternative, one idea being to encourage pension funds to bankroll infrastructure programmes. But pension funds were not keen on the idea and, short of taking all of the construction costs on to the UK's balance sheet - an unacceptable option given the drive to reduce the budget deficit - the government was left with very few alternatives. But there will be some taxpayers' money going into PFIs to counter criticism that they are controlled by private financiers, and the Treasury may separate out some of the facilities management services such as security and cleaning, again to give the government more control over costs.
The PFI system will remain expensive for taxpayers because private contractors demand far higher returns than the cost of wholesale money. In fact, Treasury figures show that the 717 existing PFI contracts with a total value of £54.7bn will cost £122bn by the time they are paid off. But the government needed to sort out the hiatus because thousands of projects have been stalled as a result of the year-long review, and infrastructure spending is a key component of the government’s pledge to boost the economy.
A formal announcement is expected some time around the end of October, and details of the scheme will be fast-tracked in time for the autumn statement on 5 December.
