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PFI to live on despite Hammond 'axe'

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Infrastructure lawyers are sceptical about chancellor Philip Hammond’s Budget announcement that PFI and PF2 contracts will be abolished, LGC’s sister title New Civil Engineer reports.

PFI and PF2 contracts came under fire from public spending watchdog the National Audit Office (NAO) in January. It claimed that government payments to privately funded infrastructure contractors will continue well into the 2040s, and that future payments will total £199bn, or an average of £7.7bn a year over the next 25 years – even if there are no future deals.

As a result of the perceived poor value for money, Mr Hammond has signalled the end of PFI and PF2 deals. Describing the model as “inflexible and overly complex”, Mr Hammond said “there is compelling evidence that the private finance initiative does neither” in terms of delivering value for money and genuinely transferring risk to the private sector.

But Pinsent Masons director Jonathan Hart, who specialises in drawing up PFI agreements, claims that private infrastructure funding is likely to continue in an alternative guise.

“[Mr] Hammond appears to have sounded the death-knell for the unloved PF2 programme that the Treasury itself had authored just two years ago,” Mr Hart told New Civil Engineer. “It misses the valuable contribution that private finance has and continues to play in the delivery of infrastructure.”

He added: “We have been here before. The first SNP government in Scotland ‘abolished PFI’ but ultimately replaced this with their own invention, the ‘not for profit model’ which has been in successful use for the best part of a decade.

“Not for profit’ has recently been followed by the Welsh government’s own ‘mutual investment model’.”

Civil engineering PF2 deals which were in the pipeline include the £1.3bn A303 Stonehenge tunnel and the £1.5bn approach roads to the Lower Thames Crossing.

According to the NAO report, there are more than 700 PFI and PF2 deals currently in operation, and their capital value is around £60bn. These include the 25 year, £2.2bn Streets Ahead PFI deal between Amey and Sheffield City Council, which has seen Amey become embroiled in a tree felling row with residents.

Mr Hart said: “It remains to be seen whether the announcement represents a total halt to future project finance investments, or else the further evolution of models: the key thing is to make sure that changes coming from this announcement do not represent a further delay to projects already in the pipeline and the delivery of future, much needed infrastructure.”

David Leam, executive director of infrastructure at business campaigning group London First, agreed that private investment in infrastructure will continue, but he argued that the government must clarify exactly what format that will take. 

“It seems PFI is dead but long live private investment in infrastructure,” Mr Leam said. “There is no world in which any government won’t still need private finance or investment in infrastructure. [What is] the precise form that will take in the future? Well they’ve (the government) have added a bit more uncertainty to it.”

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