Cost fears raised but overhaul for PFI is given a welcome, too

Autumn Statement

The costs of the much-maligned private finance initiative (PFI) could increase under reforms laid out by the Treasury, according to George Osborne’s former adviser on the system.

Mr Osborne has been trying to overhaul PFI, which sees government pay the private sector to build and run schools, roads and hospitals, since becoming chancellor in 2010.

In the Autumn Statement, Mr Osborne described PFI as “discredited”. The Treasury insisted in accompanying documents that reforms to financing the system would tackle criticisms it doesn’t provide the taxpayer with value for money.

However, James Stewart, who headed PFI as chief of the Treasury’s Infrastructure UK in 2010, warned that altering the financial structure of the deals so that there is more equity and less burdensome debt would ultimately prove expensive.

“That’s the question you have to ask,” said Mr Stewart, who is now chairman of global infrastructure at Big Four accountant KPMG. “The value-for-money consequence has to be looked at, as cost of equity is more expensive than debt.”

The Treasury has made the changes, under what the department has dubbed Private Finance 2 (PF2), to get more sources of financing into building long-term infrastructure projects as banks are less keen to lend since the financial crisis struck. Government itself will now take minor equity stakes so that it can share in any profits made by private sector companies, which typically include construction firms and infrastructure funds.

This also means that officials will be able to take director-level roles on the vehicles that build and run the projects, which would enable them to keep an eye on private-sector contractors.

But Mr Stewart said that anyone involved in infrastructure would be “pleased” by Mr Osborne’s speech, as it showed that building these vast projects is “the main plank” of the government’s economic recovery strategy. Tom Bishop, executive chairman for Europe at engineer URS Corporation, which runs a £3.5bn waste management PFI in Greater Manchester, said the announcement was “quite exciting”.

PFI projects have built up a backlog since last year while the Treasury conducted its long-winded review, but Mr Bishop said yesterday’s detailed documents “finally provide the vision for them to move forward”.

“The fact that we have something that gets the infrastructure machine going again is a big step,” he said. “There is an insatiable need for infrastructure improvement in the UK.”