Page last updated at 16:45 GMT, Sunday, 15 February 2009

PFI 'may need government funds'

Building site
Most new hospitals are being funded through PFI

The government could have to bail out Private Finance Initiative projects to the tune of 4bn in the next 18 months, an industry spokesman has warned.

Tim Pearson, of the PPP (public-private partnership) Forum, said the recession was limiting loans to firms on PFI projects like schools and hospitals.

There has been speculation that April's Budget may change PFI rules.

PFI schemes involve private companies paying for construction and maintenance of public infrastructure projects.

In return, the firms are then given payments from the state for between 20 and 30 years.

'Funding gap'

The opposition has urged Chancellor Alistair Darling to "go back to the drawing board" rather than use public funds for the projects.

But Tim Pearson, director of private equity firm Innisfree and spokesman for the PPP Forum, said private firms might need state help for funding that should have come from commercial loans.

"Because we are having problems raising the funding, what we are now looking at is alternative funding structures," Mr Pearson told BBC Radio 4's World This Weekend.

We need to be very careful about the taxpayer taking all the risks and the private partners taking all the benefits
Vince Cable, Liberal Democrats
Even with possible European Investment Bank funding and increased equity investment, there could still be a funding gap of up to 40%, he said.

"This is where the problem is, because although there is debt available, there is not much of it and the terms are much too expensive," said Mr Pearson.

"This is where we are looking to talk with the government and say we can go ahead with this business, but it is more expensive."

He said state funding would be "to some extent against the principle" of PFI, but added it was not fundamentally a problem.

Liberal Democrat Treasury spokesman Vince Cable, a long-time sceptic about PFI, said the government should go back to more traditional public financing structures rather than use taxpayers' money to prop up the public-private model.

"We need to be very careful about the taxpayer taking all the risks and the private partners taking all the benefits," he told World This Weekend.

PFI was created during John Major's Conservative rule, but the party's shadow chief secretary to the Treasury Philip Hammond said its time may have passed.

"It is simply a matter of being pragmatic. The world has changed. What was do-able two years ago is not necessarily do-able now," he told the BBC.

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