Government bailout for private finance initiatives

March 03, 2009 4:52 PM

Since Private Finance Initiatives (PFIs) were introduced by the Major government in 1992, they have been fraught with controversy. Despite promising to reduce costs and improve efficiency, projects have tended to go over budget and overtime.


PFI allows the Government to pay for the building – and often the running – of public sector projects over a long, defined period of time (usually 25 years). Private partners are found to finance the development upfront, in return for state payments overtime.


However as the taxpayer underwrites the risk in PFI contracts, they have frequently been called upon to bail out projects that falter or stall. Consider the billions committed to Metronet after they widely underestimated the costs of the London Underground redevelopment.


This sorry saga took a new turn today, with the Treasury’s announcement that the Treasury is to lend firms involved in PFI up to £2 billion through a new government ‘infrastructure bank’. Firms struggling to raise funds in the recession will now be able to seek loans from the government in order to fund and complete PFI projects. Projects such as the £1.45bn widening project for the M25 that are seen by the government as particuarly important will be the first to receive funding, while those less important, such as £711 million project for University Hospitals Leicester and a £600 scheme for Leeds Teaching Hospitals,will be abandoned or put on hold.


Despite arguments from the Chief Secretary to the Treasury, Yvette Cooper, that 110 PFI projects and £13 billion of public investment, along with jobs, would be safeguarded by the bail out, it is ironic that the initiatives which sought to relieve the Treasury of the financial burden of new infrastructure projects, are now forcing the government to implement new financial measures in order to protect them.


Current PFI repayments are squeezing an already tightly constricted public sector budget. Now, thanks to this new ‘infrastructure bank’, the British taxpayer will be landed with further debt to add to those of the recession and bank bailouts. As a consequence of the recent huge increase in government borrowing, British national debt at its highest level since 1978 and as a result the government will be forced to limit public expenditure and raise taxes in the future to the detriment of those schools and hospitals the PFI has sought to provide.

Since Private Finance Initiatives (PFIs) were introduced by the Major government in 1992, they have been fraught with controversy. Despite promising to reduce costs and improve efficiency, projects have tended to go over budget and overtime.


PFI allows the Government to pay for the building – and often the running – of public sector projects over a long, defined period of time (usually 25 years). Private partners are found to finance the development upfront, in return for state payments overtime.


However as the taxpayer underwrites the risk in PFI contracts, they have frequently been called upon to bail out projects that falter or stall. Consider the billions committed to Metronet after they widely underestimated the costs of the London Underground redevelopment.


This sorry saga took a new turn today, with the Treasury’s announcement that the Treasury is to lend firms involved in PFI up to £2 billion through a new government ‘infrastructure bank’. Firms struggling to raise funds in the recession will now be able to seek loans from the government in order to fund and complete PFI projects. Projects such as the £1.45bn widening project for the M25 that are seen by the government as particuarly important will be the first to receive funding, while those less important, such as £711 million project for University Hospitals Leicester and a £600 scheme for Leeds Teaching Hospitals,will be abandoned or put on hold.


Despite arguments from the Chief Secretary to the Treasury, Yvette Cooper, that 110 PFI projects and £13 billion of public investment, along with jobs, would be safeguarded by the bail out, it is ironic that the initiatives which sought to relieve the Treasury of the financial burden of new infrastructure projects, are now forcing the government to implement new financial measures in order to protect them.


Current PFI repayments are squeezing an already tightly constricted public sector budget. Now, thanks to this new ‘infrastructure bank’, the British taxpayer will be landed with further debt to add to those of the recession and bank bailouts. As a consequence of the recent huge increase in government borrowing, British national debt at its highest level since 1978 and as a result the government will be forced to limit public expenditure and raise taxes in the future to the detriment of those schools and hospitals the PFI has sought to provide.

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