PFI revamp more rebrand than "revolution"

LONDON Wed Dec 5, 2012 7:00pm GMT

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LONDON (Reuters) - The government's relaunch of a controversial private infrastructure financing scheme for public projects received a lukewarm response on Wednesday from some of the companies expected to benefit most from the change.

Private Finance Initiative (PFI) was a favourite system of funding projects under the previous Labour government.

Chancellor George Osborne said since coming to power in 2010, he had already saved of 1.5 billion pounds on existing projects in England through tinkering with contracts, with a further 1 billion still being discussed.

However, this is a small fraction of the 144.6 billion pounds of current outstanding PFI liabilities.

Under the new version, called PF2, the government will seek to take an equity stake in new projects to get a seat on the board and take a share of any profits.

Government will also strip out soft services such as cleaning and catering from contracts to open up more competition and will demand all parties be subject to greater transparency.

Osborne called the measures, combined with a 5 billion pounds ($8 billion) commitment for further infrastructure spending, a "revolution", designed to rebuild the credibility of an initiative that has in some cases saddled hospitals and other social projects with large amounts of debt.

The relaunch is designed to kickstart investment in the stagnant British economy, which is set to post a 0.1 percent fall in output this year.

"Besides the change in name, the core of the model - ie, using private finance to finance construction and getting repaid over a long period of time - remains the same," Richard Abadie, the global head of infrastructure at professional services firm PwC said.

"The increase in equity required for projects is a surprise as it will likely make projects more expensive. Maybe the government feels that by buying up to half the equity, they can argue the increased cost is being returned to the taxpayer."

Andrew McNaughton, deputy Chief Executive of Balfour Beatty welcomed the changes, but he also said it was something that was definitely "an evolution of the current model rather than something that's a radical change".

"We've got a model, which is a great step, but we now need to move on and see what they're going to apply it to," he said.

Despite the feeling that the changes did not amount to a "revolution", businesses welcomed the Chancellor's statement.

A spokesman for support services firm Carillion , which has delivered nearly 60 PFI projects in the UK and Canada, said that the reforms should lead to a new pipeline of work for the group. Its shares were up 1.3 percent in mid afternoon trading, outperforming the wider FTSE 100 Index.

OUT WITH THE OLD?

"PFI schemes have been criticised over the years, but if targeted in the right areas they can deliver excellent results," said David Tonkin, who heads up the British arm of the design consultancy firm WS Atkins'.

PFI, which has its roots back in the 1992 mid-year statement under Conservative Chancellor Norman Lamont, has traditionally been used to develop social infrastructure such as hospitals and schools.

The National Audit Office said in 2011 that the future focus would be on economic projects such as energy and transport, with the majority of funding expected to come from the private sector.

The coalition government has tried to encourage pension funds to invest in infrastructure and now has seven of Britain's largest pension funds signed up to the Pension Investment Platform (PIP), expected to launch in the first half of next year.

($1=0.6209 British pounds)

(Additional reporting by Isla Binnie; Editing by Mike Nesbit)

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