Page last updated at 17:08 GMT, Tuesday, 3 March 2009

Government to 'prop up' PFI deals

Building site
Most new hospitals are being funded through PFI

Ministers are to lend 2bn of public money to private firms building schools and other projects under the Private Finance Initiative (PFI).

There have been concerns that projects like the M25 widening scheme would be held up, as firms faced difficulties raising money due to the credit crunch.

Minister Yvette Cooper said the move would save projects and jobs.

But the SNP called it a "humiliating bail-out". The Lib Dems said pumping public funds into PFI was "ludicrous".

PFI sees private firms building - and in some cases running - public projects such as schools and hospitals in return for state payments over 20 or 30 years.

'Support jobs'

BBC political correspondent Norman Smith said ministers had rejected calls for the government to take over the projects and instead would lend up to 2bn this year to prop them up.

In a written statement, Chief Secretary to the Treasury Ms Cooper said the loans would ensure projects worth 13bn - including waste treatment projects, environment schemes and schools - would not be disrupted.

She said the loans would be temporary and would be repaid at a commercial rate.

It will be a temporary intervention. As with normal commercial lending these loans will bear interest and will be repaid over the life of the project
Yvette Cooper
Chief Secretary to the Treasury

Some projects were "finding difficulties obtaining sufficient debt as a result of the global credit crunch" and the government would lend to those that could not raise the money on acceptable terms.

The money would initially be found from "unallocated funds and departmental under spends on previous projects", she said.

The government says it is best to stick with the PFI structure because it means construction will begin more quickly and the private sector will "continue to bear the risk of cost overruns and delays".

'Ludicrous situation'

But Liberal Democrat Treasury spokesman Vince Cable said the government should consider going back to more traditional public financing structures rather than propping up PFI.

"The whole thing has become terrible opaque and dishonest and it's a way of hiding obligations," he told BBC Radio 4's World at One.

"PFI has now largely broken down and we are in the ludicrous situation where the government is having to provide the funds for the private finance initiative."

It's a bit of a climbdown really
David Taylor
Labour MP

SNP Treasury spokesman Stewart Hosie said it was a "humiliation" for the government, adding: "Labour have bailed out the bankers, and now Alistair Darling seems set to prop-up PFI projects."

He added: "Why is public money being used to prop up a failing system that gives such a bad return compared to traditional public procurement?"

And Labour backbencher David Taylor told the BBC: "It's a bit of a climbdown really. It's deeply ironic that public funds are needed to save the private finance initiative."

But David Messer, chairman of the PPP Forum, told the BBC PFI had only ever been a "procurement method" to get around a lot of the inefficiencies there had been in public sector procurement - which had often led to delays and cost overruns.

He said there was "no reason" for the government not to step in, adding: "In France up to 80% of the debt in public private projects can be provided by the government."

Meanwhile Norman Lamb, the Lib Dems' health spokesman, said government figures released in answer to a Parliamentary question, showed more than 2.5bn of hospital building projects were under threat.

'Completely unconnected'

Twelve major projects had been cancelled - half of all NHS projects were due to be finalised this year or last which he said showed PFI was "clearly collapsing now that times are tough".

But a spokeswoman for the Department of Health said the 12 projects had been stopped over the course of 2007 and 2008 - having effectively been on hold for a year or more before that due to local health reviews.

"The last one to be 'cancelled' was last summer 2008, so nothing new has happened, this pre-dates the credit crunch and the reasons are completely unconnected with any credit crunch issues," she said.

TUC general secretary Brendan Barber said: "The chancellor is absolutely right to take this decisive action to put money into PFI projects to stop their collapse.

"But this rescue is another example of privatising the very good profits that many PFI companies have made but having to nationalise the losses now times are tough."

John Cridland, deputy director general of the Confederation of British Industry, said: "Getting PFI projects moving will help public service improvements continue and protect jobs in the construction and services industries.

"The private sector has an excellent track record in delivering infrastructure projects on time and to budget, and it would be deeply regrettable if this expertise were lost because of the credit crunch."

The government has also announced that thousands of school modernisation projects across England will start a year early to boost the construction industry.

Ministers said more than 100 local authorities will share 499m capital investment brought forward from 2010-11.

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