Osborne set to unveil PFI reforms

The Chancellor will use his Autumn Statement to detail reforms to the heavily criticised Private Finance Initiative (PFI) aimed at reducing taxpayer costs and risks.

Among the changes will be limits on the types of services such as maintenance included in contracts and more flexible terms allowing the state to opt out of others later.

Existing arrangements have been criticised as too generous to private contractors, with one hospital reported to have been charged £333 by a PFI 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.

A strict 18-month limit will be imposed on the procurement process - some have taken up to five years in the past - with cash being reallocated if the deadline is missed.

Efforts will be made to make the scheme more attractive to long-term investors such as 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.

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 £1.5 billion of savings over the past 18 months, Mr Osborne is expected to tell MPs, with another £1 billion identified in future savings.

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

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 humiliating climbdown over one of the coalition’s 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 per cent in 2013 and 1.8 per cent in 2014, compared with previous estimates of 1.2 per cent and 2.2 per cent 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.

One move the Chancellor is tipped to make is postponing January’s planned 3p rise in fuel duty.

A survey of more than 13,000 users of a consumer website showed petrol prices were the biggest concern they wanted addressed.

More than two-thirds (68 per cent) of those who responded to the MoneySavingExpert.com questions picked it as a priority ahead of energy bills (60 per cent) and low saving rates (38 per cent).

A radical solution to concerns over the cost of motoring was put forward by the Civitas think-tank - a privatisation of the motorway network and the introduction of a toll system.

It said up to £100bn could be raised by tolls, with some of the proceeds used to pay off debt and the rest to fund the abolition of road tax and fuel duty.