U.K. Helps Finance 13 Billion Pounds of Building Work

By Reed V. Landberg and Kitty Donaldson

March 3 (Bloomberg) -- U.K. Treasury minister Yvette Cooper pledged public funds to rescue 13 billion pounds ($18.2 billion) of construction work at risk of collapse because of a lack of bank finance.

The lifeline, which may cost the Treasury as much as 2 billion pounds, is aimed at safeguarding projects including motorway widening, new schools and incinerators planned under the Private Finance Initiative, where companies pay for government projects in exchange for a share of the income they produce.

About 110 projects struggling to raise debt finance will be eligible for the money. The Treasury will lend alongside commercial lenders and the European Investment Bank, and where necessary provide the full amount of senior debt required. The plan aims to unblock infrastructure contracts and help lift the economy out of its worst recession in at least three decades.

“This action will ensure that crucial and valuable public investment will not be disrupted by problems in the financial markets,” Cooper said in a statement to Parliament. The projects will “help prepare the country for future recovery.”

The U.K. will use the money to support 3.1 billion pounds of transport projects, 3.5 billion pounds of waste treatment and environmental projects and 2.4 billion pounds of school building.

“Equity investors will continue to bear the primary risk in these projects and, where available, private sector debt will continue to be provided,” Cooper said.

Public Investment

PFI projects account for about 10 percent of public capital investment, and the government plans to write contracts worth more than 21 billion pounds in the coming years. The program allowed Prime Minister Gordon Brown to increase investment in public services without significantly adding to government debt. Projects worth almost 59 billion pounds have been signed since the Labour Party took office in 1997.

The projects benefit construction companies including Balfour Beatty Plc, Carillion Plc, John Laing Plc, WS Atkins Plc and Costain Group Plc. Service companies including Serco Group Plc and Jarvis Plc also benefit by operating PFI projects for the government.

The Conservative Party invented PFI finance under Prime Minister John Major, and Brown expanded the program during his decade as finance minister until June 1997. Liberal Democrats say the program should be scrapped so the Treasury can fund the projects directly, making clear the total cost to taxpayers.

‘Dishonest System’

“This was a dishonest system of accounting, designed to hide taxpayers’ liabilities,” said Vince Cable, a Liberal Democrat lawmaker who speaks on finance. “If the private sector cannot now come up with the money, and is unwilling to take the risks, we need to move to a simpler, more honest system of public investment for public projects.”

In all, the program may cost the Treasury between 1 billion pounds and 2 billion pounds in the next year. Chancellor of the Exchequer Alistair Darling may provide more solid cost estimates in his annual budget statement on April 22.

“Taxpayers are fed up seeing their money used to bail out failures in the private sector with no return,” Dave Prentis, general secretary of the Unison union, said in an e-mail. “Why doesn’t the government see sense by building and running major public works itself for the benefit of the public, not to line the pockets of big business?”

About 3.1 billion pounds of transportation projects including widening of the M-25 motorway circling London have been delayed by a lack of funds. They will benefit from the Treasury financing along with school building projects worth 2.4 billion pounds and 3.5 billion pounds for waste management and the environment.

‘Excellent Track Record’

“Getting PFI deals moving will help public service improvements continue and protect jobs in the construction and services industries,” John Cridland, deputy director general of the Confederation of British Industry, said in an e-mail. “The private sector has an excellent track record in delivering infrastructure projects on time and to budget, and it would be deeply regrettable if this expertise were lost because of the credit crunch.”

The program is the latest aimed at reviving the economy and bank lending after Brown offered 37 billion pounds to recapitalize Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc. He has also promised hundreds of billion pounds of loan guarantees for toxic assets on bank balance sheets.

To contact the reporter on this story: Reed Landberg in London at landberg@bloomberg.net.