Local authorities can now fund public sector capital projects
using private sector cash Rachel Downey writes.
The City of Westminster has become the first local authority to
agree to the use of the government’s Private Finance Initiative in
After last week’s decision, Westminster plans to use PFI to
build a residential and nursing home on the site of the Delaware
resource centre for elderly people.
And two other local authorities are about to follow suit, one to
develop a community centre with day care facilities, in conjunction
with its local health authority.
PFI is a way of using private sector money to fund capital
projects in the public sector. It is already in use in many areas,
including health and transport.
A change to local authority Capital Finance Regulations,
announced in May, allows local authorities to use PFI.
Draft regulations applying to England and Wales are expected
within weeks, and will be implemented in the autumn.
They follow previous easing of restrictions and will remove them
altogether for most key projects.
Local authorities had been obliged to set aside the full cost of
a project from their capital resources to cover risk, but now
councils will be able to offset part of the risk to private
PFI can only be used if a contractor designs, builds, finances
and operates a local authority physical asset.
Contractors will have to prove they are providing a service to a
standard as defined by the local authority, and if this service
fails to come up to the required standard, the local authority will
only have to pay 70 per cent of what was previously
There will also be discretion to use PFI when the risk element
for the private company is less than 30 per cent.
But this is not a free lunch. The capital investment by the
private company will be paid for through increased revenue costs to
the local authority, although to encourage the initiative, the
government has pledged to provide the additional cash.
Terry Cotton, the contracts manager at Westminster Council, said
there were many advantages in using PFI for the Delaware
‘It would have cost us over £2 million to pay for the
changes we wanted. We were reluctant to sell it off. We are very
excited about this,’ he said.
The Public Private Partnerships Programme – known as the Four Ps
– has been set up to encourage and aid local authorities to use the
Chief executive Paul Bryans says PFI will not just be used for
local authorities to continue to fulfil their statutory
‘They will be able to use this to deliver services they might
have had to wait five years for or would never have got.’ He wants
local authorities to prioritise their projects for using PFI rather
than just allowing the private sector to choose what it wants to
become involved in.
Peter Rousseau, Four Ps manager, says the scheme relies on value
for money and efficiency. Private companies will be expected to
drive down costs.
Contracts will be negotiated jointly between the companies and
the local authorities.
They will run for up to 25 years so the private company can
recoup its investment.
Rousseau says it is a new area for local authorities, and
details of what kind of contracts will be agreed have yet to be
seen. The scheme will remain flexible.
There may be contracts allowing the local authority to take back
control of residential homes when the contract has expired or to
buy it back at market value.
It will take considerable time to see what response there is
within the private sector to getting involved in residential care
in this way.
But the initiative has all-party support, reflecting the
realisation in local government that there is little money for
capital projects and what there is will become increasingly scarce
in the future.
But the Labour Party wants PFI to focus on the improvement of
public services rather than profits for private companies.
Time will tell whether this is the case.