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Thursday, 17 October, 2002, 05:23 GMT 06:23 UK
Private finance spending to fall

The government's reliance on private finance for funding the building of public hospitals, roads and schools is set to fall.

The value of projects commissioned under the controversial private finance initiative (PFI) will drop from 3.5bn this year to 2.9bn by 2005/6, Geoffrey Spence, head of the Treasury's Private Finance Unit, said.

The figure excludes 1bn spent each year by the government on modernising London Underground, and about 300m on the Channel Tunnel rail link.

Nonetheless, PFI spending will account for less than 10% of total public investment by 2006.

'Stringent tests'

The statement follows a revolt, spearheaded by unions, over PFI at the Labour Party conference two weeks ago.

Critics have claimed that initiative brings huge profits to the private sector firms contracted, at the expense of taxpayers.

But Paul Boateng, Chief Secretary to the Treasury, said the initiative met "stringent tests for value for money".

The government's priority was to "see new hospitals, schools, transport infrastructure and other projects delivered quickly to the highest standard, on time and to budget".

In the 1975-95 period, before PFI was employed, the average public sector project cost 47% more than planned, and was completed on average 16 months late.

"Opponents of change have mounted a determined and sometimes strident campaign," he said.

"We must meet their arguments head on."

Concession

At the same time the government has moved to allay critics of PFI who feared it was a licence for private companies to make profits.

Peter Gershon, chief executive of the Office of Government Commerce, announced that from now on the public sector would get at least 30% of profits from refinancing any PFI deal.

Paul Boateng told the BBC: "This gives a fair deal for everyone.

"It will be widely welcomed both within the government and the private sector."

In the past some private companies who have received a fixed monthly fee from the government, in return for building and running a school or a hospital, have been able to increase their profits by renegotiating with their banks a lower interest rate after the deal has been signed.

The government had already announced that all future PFI deals must return at least 50% to the public sector in this circumstance.

Under the new deal, which has been agreed with the Confederation of British Industry (CBI), the public sector will also benefit from a significant share of the profits from already existing PFI projects.


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