Chancellor unveils drastic shake-up of private finance initiative

Chancellor George Osborne has announced a "fundamental reassessment" of the government's controversial Private Finance Initiative (PFI), with the aim of cutting costs and improving transparency.

The review will aim to create a new model for using private-sector expertise to deliver public assets and services at a lower cost to the taxpayer, said the Treasury.

PFI was introduced under John Major's administration in 1992 and was expanded dramatically by Labour as a means of enabling private investors to take on the financing, construction and operation of public-sector infrastructure projects. But the scheme has come under harsh criticism over cost, with taxpayers facing escalating bills over the term of PFI contracts, which typically last for decades.

A recent report by the Commons Treasury Committee put the cost of capital for a typical PFI project at eight percent - double the long-term government gilt rate of around four percent. Paying off a PFI debt of £1 billion could cost taxpayers the same as paying off a direct government debt of £1.7 billion, said the committee. About 800 PFI contracts are in operation, with a capital value of around £64 billion. Some £267 billion in repayments are due to be made to private companies over the coming 50 years.

The coalition government has continued to use PFI but has announced a number of measures to improve cost-effectiveness and transparency, such as abolishing PFI credits in last year's spending review and including PFI liabilities in the government's published accounts. "We have consistently voiced concerns about the misuse of PFI in the past and we have already taken steps to reduce costs and improve transparency. But the review I have announced today will take this a step further with a fundamental reassessment of PFI," Osborne said. "We want a new delivery model which draws on private-sector innovation, but at a lower cost to the taxpayer and with better value for public services," Osborne added.

The Treasury said the review will create a model for private involvement in public-sector projects which is cheaper than PFI, accesses a wider range of financing sources and strikes a better balance of risk between the private and public sectors. Ministers hope to retain the benefits of the PFI model, including getting projects delivered to time and to budget and giving the private sector the right incentives to effectively manage risk, said a spokes-man. "This looks like the end of PFI as we know it. After a year-long campaign involving more than 80 MPs from all the major parties, I am absolutely delighted at the news," Hereford MP Jesse Norman, who founded a campaign to win rebates for the taxpayer on PFI deals, said.

"The Government has already taken important steps to tighten up existing PFI contracts, and £1.5 billion in projected savings have so far been announced. But this clears this way for a new, less expensive and more transparent and flexible approach to the private funding of public infrastruc-ture. That means more money for front-line public services and a better deal for the taxpayer," Norman added.