Councils face greater financial risk under the Government’s revised private-finance initiative (PFI) programme, but by becoming equity holders in schemes they will achieve lower costs over time, the Treasury has claimed.
The original PFI model, which was used to levy private investment in road building, highways maintenance and other infrastructure projects, has been replaced by ‘PF2’ – unveiled by chancellor George Osborne in the Autumn Statement.
The new model will provide public bodies with opportunities to take equity stakes in infrastructure projects to help overcome the uncertainty of the debt market. Under the plan, equity holders could receive a long-term return on their investment through regular dividend or interest payments. Treasury officials claimed the payments would ‘offset’ any extra costs associated with the equity model compared with previous debt financed initiatives.
Treasury staff and not the local procuring authority, such as councils or NHS trusts, would sit on the project board of future PF2 schemes to avoid any potential conflicts of interest.
‘The Government is keen to widen sources of equity, including from local authority pension funds,’ a Treasury source confirmed.
However, it does mean the Treasury would be compensated for the costs of managing the projects by taking payment from procuring authority’s dividend or interest returns.
The new model presents councils with similar risks to any private venture, but they would be expected to help jointly finance any efforts to get the project back on track, if it collapsed or partners pulled out.
A Treasury official conceded this did present ‘slightly more risk’ for a local authority than under previous schemes.
Government guidance also states that the public sector would take on more risk to ‘reduce the contractor’s need to build up reserves against increases in insurance premiums’
