Radical new measures will encourage the private sector to fund and run major public sector projects, Local Government minister David Curry told the House of Commons today.
Launching proposals today under PFI to ease Capital Finance Regulations, Curry commented: “We are sweeping aside restrictions that have acted as a barrier to councils encouraging the private sector to fund and run major projects. The rules have been relaxed before but this proposal is much more radical – it removes the restrictions all together for most key projects.
Big changes in these government-imposed finance rules will mean that major projects can be provided by the private sector, not directly by councils themselves – projects like schools, transport schemes, police stations and council offices. In future, local authorities should look first at the PFI option when planning flagship projects.
Previously, councils had to set aside the full cost of each project from their capital resources to cover the risk. Provided that schemes meet certain “risk transfer” tests and offer value for money, they will now be able to provide their services from facilities delivered by the private sector without any cost whatsoever to these capital resources. The schemes will also be eligible for revenue support.
Eligible contracts will be those where:
- The contractor is providing a service to a defined standard.
- He is responsible for designing, building, financing and operating any physical assets.
- The authority’s payments relate to quality and availability of the service, or usage, or both. If the service falls significantly below expectations, payments would be no more than 70% of those anticipated. This will mean real risk being taken by the private-sector provider.
The DOE will be consulting Local Authorities Associations and other interested bodies on these proposals. It is hoped to publish draft Capital Finance Regulations for consultation within a few weeks, and lay them before the House in time for them to come into effect in the autumn.
PFI measures already introduced by regulations earlier this year relate to building replacement and allow partial abatement of authorities’ credit cover requirement. These remain in force and will also be extended to the new build schemes.
The new regulations (which will apply to all activities outside authorities’ Housing Revenue Accounts) will allow this reduced credit cover requirement to be completely extinguished in cases where there is sufficient transfer of risk to the private sector. The new regulations will apply in both England and Wales but will be the subject of separate discussions in Wales.
Mr. Curry made his announcement in a written parliamentary answer to a question from Conservative David Congdon (Croydon North-east). Mr. Curry said: “Since launching the local government PFI in October 1994, we have encouraged links with the private sector by making important changes to the capital finance rules. These have been welcomed by authorities, but we promised to go even further.”
“I am today announcing radical measures to help local authorities harness private-sector finance and management expertise. In many cases these will remove genuine private finance projects from local authority capital spending limits and provide revenue support for such projects. My aim is to encourage the provision of privately-financed and serviced facilities such as schools, leisure centers, transport schemes and police stations. I hope local authorities will take maximum advantage of these new opportunities.”
“Provided that schemes meet certain risk transfer tests in the regulations, and subject to the usual requirement for value-for-money appraisal, local authorities will in future be able to provide their services using facilities delivered under private sector contracts, without any cost whatsoever to their capital resources. The new regulations will define the circumstances in which such contracts need make no charge on authorities’ capital resources.”
“We envisage that these regulations will cover the bulk of worthwhile PFI cases, and will give a clear target for authorities and prospective contractors to aim at. However, where the project is not strictly eligible under the regulations but nevertheless involves significant risk for the private-sector partner, we will allow authorities a second chance to protect their capital resources. Government departments will be able to issue additional Supplementary Credit Approvals (SCAs) on a case-by-case basis for PFI schemes meeting more flexible criteria than those in the regulations.”
“We recognize that these measures, while eliminating the capital impact of qualifying projects, could leave pressures on the revenue account. To combat this, we will ensure that authorities undertaking projects will be eligible for revenue support. This will be arranged by adapting the existing system of Standard Spending Assessments and Revenue Support Grant.”
References: PA News (Parliament) 22/05/96
