Autumn Statement: New Private Finance Scheme

Chancellor George Osborne is set to overhaul the heavily criticised Private Finance Initiative in a bid to boost the economy.

Mr Osborne will include plans for a "faster and more transparent" system of private funding for public infrastructure projects in his Autumn Statement on Wednesday.

It is understood that safeguards will be built into the system to make sure that the costs and risks to the taxpayer are minimised.

These will include limits on the type of services, such as maintenance, that can be incorporated into contracts and more flexible terms allowing the state to opt out.

Existing PFI schemes have been attacked for their generosity to private contractors, with one hospital reported to have been charged £333 by a firm to change a lightbulb.

The taxpayer will also take a minority shareholding in the delivery companies to ensure a share in any profits and allow closer oversight.

Some previous projects have taken up to five years but a new, strict 18-month limit will be imposed on the procurement process and cash reallocated if the deadline is missed.

Safeguards will be built into the new scheme to protect taxpayers

Efforts will also be made to make the scheme, more attractive to long-term investors like pension funds in a bid to reduce the amount of debt involved in the financing.

The reforms will promise more transparency over future liabilities facing the taxpayer, placing a cap on the total charges controversially going "off balance sheet".

The new system is expected to be named Private Finance 2 (PF2).

Mr Osborne ordered a review of what he said was the "discredited" PFI system last year and will claim up to £2.5bn savings have been identified in existing contracts.

Set up under John Major's government in 1992, PFI was expanded dramatically under Labour and has been continued under the present coalition administration.

It allows private firms to build, operate and maintain public facilities like hospitals, schools and courthouses under contracts lasting as long as 35 years.

But it has faced harsh criticism over escalating costs, inefficiency and "perverse incentives" to use it over more cost-effective funding methods.

David Cameron's main focus is restoring Britain's economy

More than £267bn is due to private firms in repayments over the coming years and MPs recently called for the liabilities to be recorded in the national accounts.

Among the first projects to be put out to firms under the new process is expected to be the recently announced £1.75bn school repair programme.

A review of 100 existing contracts to run schools and other government buildings has found £1.5bn in savings over the past 18 months with another £1bn identified in future savings, Mr Osborne is expected to tell MPs.

The bulk - £630m - came from bringing services in-house or ending them and £615m from renting out buildings, increasing occupancy and using more energy-efficient equipment.

Another £140m was shaved off by ending the "gold plating" of services - such as firms charging for washing windows more often than required.

This week's mini-budget is expected to deliver bleak news for welfare claimants as well as the wealthy in the form of a possible benefit freeze and big cuts to pension tax relief.

Economists also expect Mr Osborne to make an embarrassing climbdown over one of his key goals - to have debt falling as a share of national income by 2015/16.

He conceded at the weekend that it was "clearly taking longer to deal with Britain's debts, it's clearly taking longer to recover from the financial crisis than one would have hoped".

On the eve of the statement, the British Chambers of Commerce (BCC) became the latest respected body to slash growth forecasts.

It now expects the economy to grow 1.2% in 2013 and 1.8% in 2014, compared with previous estimates of 1.2% and 2.2% respectively.

The organisation demanded a "laser-like focus" from the Chancellor on growth-boosting measures such as delivering key infrastructure projects and creating a business bank.

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