3 December 2012 Last updated at 18:02 ET

Article written by Robert Peston Business editor

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PFI becomes less private

 

The chancellor is changing the private finance initiative (PFI) to make it more public and less private.

The last government financed the building and maintenance of vast numbers of schools, hospitals and other expensive investments by asking the private sector to bear the big costs, in return for regular payments from the public sector.

But the Treasury under George Osborne became concerned that huge long-term liabilities were being created for taxpayers - and that lousy negotiation by civil servants was allowing private companies to make huge windfall profits.

So in the Autumn Statement on Wednesday George Osborne will unveil what will be called Private Finance 2 (PF2) - which will involve the public sector taking stakes of up to 49% in individual private finance projects (20% stakes are likely to be typical) and appointing a director to the boards of each project.

This is to ensure that the taxpayer gets a share of any profits from the deal.

Other innovations will be that each private finance project will have to publish its financial performance every year and the Treasury will publish a running total of taxpayers' cumulative private finance liabilities - to allay concerns that these liabilities are becoming unaffordable.

Also there will be an attempt to speed up the signing of deals, or the procurement process - which can take up to five years at the moment - by setting an 18-month deadline (at which point, any public sector money allocated to the project would be reallocated).

Contracts under PF2 are also supposed to be smaller, simpler and less leveraged (they will involve less debt finance).

So they will no longer include what is known as soft facilities management, or contracts for catering, cleaning, security and IT.

And in the past a typical PFI deal would be funded to the tune of 90% by debt, but that debt proportion will fall to 80%.

If these reforms are designed to make the contracts less speculative, the Treasury has resisted pressure to change contracts to explicitly penalise those investors who sell their PFI projects early to generate vast profits.

The Treasury thought about introducing clauses that would have explicitly punished those investors who trade their PFI stakes before the expiry of contracts but feared these investors would have increased what they charge to be involved in the first place.

Also, in a separate but linked initiative, the Treasury has renegotiated existing PFI deals to find £2.5bn of savings over the lifetime of the contracts - which is £1bn more than it originally hoped.

In today's money, future PFI liabilities for taxpayers are £144bn, according to the Office for National Statistics.