Current PFI projects will not be affected by review, Treasury confirms

However, projects using the private finance initiative (PFI) funding model that are currently in procurement will be considered on a "case by case basis" and depend on their value for money to the taxpayer, a spokeswoman for the Treasury said.

Last week industry publication PPP Journal claimed that active PFI projects would not be halted because of the review, which was announced by Chancellor of the Exchequer George Osborne on Tuesday.

In a short article the publication quoted Lord Sassoon, commercial secretary to the Treasury, as saying that projects due to close imminently would be allowed to proceed as scheduled, while those not as far along the process would be encouraged to "employ lessons" learned from the government's review.

However the review would mark the end of the current PFI model for new projects, Sassoon said.

"Today marks the point at which we say PFI as we know it comes to an end. There has to be a better way to involve the private sector," he said, according to the article.

Barry Francis, an expert in public-private partnerships and infrastructure law with Pinsent Masons, the law firm behind Out-Law.com, said that Sassoon's comments were "timely and welcome" for the construction industry.

"PFI projects have a long lead time involving significant bidder commitment and so any suggestion that projects in procurement might slow down or be changed would almost certainly result in reduced commitment, lower quality bids and less competition," he said. "However the funding structures of these projects may need to change if there is insufficient appetite for long term lending or the historic risk profile".

He added that a new model would have to emerge quite quickly to prevent a further hiatus in infrastructure development.

"Gaps in procurement mean that the private sector cannot maintain necessary resources and so deployment when the pipeline reopens is delayed," he said.

"A great deal of work has been done looking at new models, for example by the European Investment Bank, and we have ourselves been looking at adapting structures both in the UK and elsewhere. This pool of existing research and experience may help move matters forward."

He added that new funding models which recognised "current abilities to absorb and manage risk" and which are "not too complicated" would be welcome.

The Government announced plans to change the way public projects are funded last week. Chancellor George Osborne said that industry stakeholders would be invited to advise the Government on a more cost-effective PFI system in a "call for evidence" next month.

PFI was introduced in the early 1990s as a way of using private sector skills and finance to provide public services. It allows the private sector to obtain finance to design, build and operate a facility for the benefit of the public. In return, the public sector will grant its private sector partner a long-term contract to run the facility and will pay a monthly fee over the life of the project to repay the loan.

However the model has been criticised for being too "costly, inflexible and opaque", Osborne said.

The review is intended to create a new delivery model which will "draw on private sector innovation but at a lower cost to the taxpayer, offering better value for our investment in public services," he said.