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Let the Treasury use its review to get PFI right – and quickly

This week, the Treasury will receive responses to its review of the private finance initiative.

Many in the industry are sceptical whether this will lead to a new financial mechanism that is palatable to government and many are worried that decisions about the way forward are a long way down the line.

But we need decisions now to lift the uncertainty within the industry and prevent projects being stalled.

We have watched with dismay over the past 18 months the constant stream of bad press that PFI has generated. It has become so toxic that one contractor told me his mother was “worried about his immortal soul”.

Press battering

This is part of a wider phenomenon - the reputation of private business is taking a real battering. Some elements of the press have forgotten the contribution of private business in raising living standards and paying taxes.

So it is with PFI. The achievements in delivering hundreds of hospitals, schools and roads that would otherwise not have been built has been lost in the media haze.

As a country, we will need a continued flow of private finance to deliver future infrastructure projects and so the principle of private finance should not be undermined. What can be done to repair the damage?

First there needs to be a clear acknowledgement by the Treasury of the benefits of PFI. PFI contracts have delivered high-quality services.

The vast majority of projects are completed on time and to budget and, when things go wrong, it is the private sector (not the taxpayer) picking up the bill for putting it right.

There is a real opportunity to deliver PFI more cheaply. The industry has spent the past decade highlighting how procurement could be streamlined to save millions in bidding costs.

But in the UK we still haven’t got that right. The average time to procure a PFI hospital here is about two years. In Canada it takes about 12 months.

Nor have we got the balance of risk between the private and public sector right. The public sector often seeks to transfer unnecessary risk, such as insurance, which comes with a high price tag.

More could be done to make PFI attractive to institutional investors. They have traditionally seen construction as high risk, yet asking them to finance the operational phase of PFI could deliver lower costs.

A short-term goal might be to encourage institutional investors to pick up the finance five to seven years into most projects, when construction is complete and the asset is properly functioning.

The UK Contractors Group and its members are keen to help achieve a more cost-effective mechanism. This is about evolution rather than revolution.

Finally, both industry and the government need to work harder to make the process more transparent. Before we can do this we need a clear signal from the Treasury on the direction it wants to go. There have been well over 200 reviews of PFI over the years.

It is time for action.

Stephen Ratcliffe is director at the UK Contractors Group

 

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