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SIMPLER FUNDING SYSTEM FOR PFI SCHEMES INTRODUCED

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The government today gave local authorities further encouragement to ...
The government today gave local authorities further encouragement to

explore partnership approaches for the provision of key public

services. The move came as local government minister Nick Raynsford

introduced a new system for calculating government support for

Private Finance Initiative (PFI) schemes.

The simpler revenue support system for PFI schemes will be easier for

local authorities to understand as they develop proposals for their

schemes. The changes should help streamline the process from

proposal to delivery of key public services.

Announcing the introduction of the new system, Mr Raynsford said:

'The private finance initiative is making a substantial contribution

to the delivery of better local services, with some 188 projects

already endorsed. From 1 April, we introduced a simplified formula

for calculating the government grant for approved PFI schemes. The

move underlines our continuing commitment to this kind of partnership

between local authorities and the private sector.'

'It is a further example of our policy of reducing regulation and

complexity, which was a key theme of last December's white paper

Strong Local Leadership - Quality Public Services. I am convinced

that the simpler PFI grant formula will be welcomed by all local

authorities - both those that are already receiving revenue support

and those applying for it in the future.'

Revenue support is given by a 'special grant', which starts when PFI

schemes become operational. The 'special grant' covers a significant

part of the regular charges authorities have to pay throughout the

PFI scheme's contract.

The amount of this 'special grant' is calculated by formula. The new

formula underpinning the modified revenue support system for PFI

schemes replaces a formula devised in 1998. The formula changes give

the system greater flexibility with timing issues, making the it

easier to apply to the different timetables for individual PFI

schemes.

The government introduced the new formula after consultation with all

local authorities and interested parties. Following a positive

response, the changes to the revenue support system for PFI schemes

was published in the Special Grant Report (No.90) [HC 611].

Parliament has now approved this report, and the formula will be used

for all local authority PFI schemes eligible to receive revenue

support from 1 April 2002 onwards.

NOTES

1. Under the PFI the public sector does

not buy assets (buildings, roads, etc), but rather pays for the use

of assets held by the private sector. When local authorities borrow

to buy assets outright they receive central government support to

meet most of the costs of servicing the debt. To encourage

authorities to explore PFI as an alternative to traditional

procurement, support is given for the major part of the charges for

approved PFI schemes.

2. The system used for the last four years is based on an estimate

of the capital cost of a scheme (a value expressed as 'PFI credits').

Grant support is paid broadly as if that amount were a loan. None of

this changes under the new system. However there are two main

changes.

3. The first relates to the calculation of the total value of the

payments to be made during what might be a long contract. Originally

based on the date of contract signature, this was found to put at a

potential disadvantage schemes where there was a longer than normal

period between that date and the start of payments to the contractor.

A complex means of compensation had to be introduced. Under the new

system the calculation will be based on the date when payments to the

contractor begin. This puts all projects on the same footing in a

much simpler and more accurate way.

4. The support given for a project reduces slightly each year. The

other main change relates to the way in which this reduction is

calculated. Again a formula-based approach has been replaced by a

more transparent and flexible method. In addition the opportunity has

been taken to introduce a change which allows payments to be made as

soon as the scheme is operational, even if that is earlier than

expected.

5. No authorities lose out financially and some get very slightly

more grant this way. Everyone benefits from the greater simplicity of

the method.

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