Back issues: May 1989

PFI: The conception

The scrapping of rules governing private spending on public works has won a warm initial reaction from the construction industry.

The formal retirement of the Ryrie Rules was announced last Friday by John Major, chief secretary to the Treasury. Named after the civil servant who drafted them, the rules laid down tough limits on the terms by which industries and government departments should be allowed to raise private cash for one-off projects.

"We are delighted that this decision has been taken," said Sir Christopher Foster, chairman of the construction industry sector group of the National Economic Development Office. "It was absolutely necessary if the private sector is to play any appreciable role in providing transport and other social infrastructure in accordance with the government's wishes."

Major said the eight-year-old rules had "clearly outlived their usefulness". He said the Treasury would now be happy to assess any private scheme, provided it offered the taxpayer value for money."

The rules were a bar to private investment because the Treasury calculated it could borrow money more cheaply than anyone else.

But the minister said: "While we cannot ignore the fact that that the government can raise money relatively cheaply because it is a large low-risk borrower, we must also take account of the benefits that tend to go with private finance, such as improved efficiency, lower costs and reduction in the risks falling on the taxpayer."

Ian Clark, chairman of Costain's private finance arm, Costain Ventures, said: "While it is a positive move to retire the Ryrie Rules it is still too early to answer the big question of how many stand-alone private schemes there will be."

Base rate at 14%

Housebuilders saw their shares plunge to new lows as base rates hit 14%. The City was worried by the impact of higher rates on house sales and by the level of debt some housebuilders are carrying.

Even the excellent results from Westbury could do little to lighten the gloom. Housebuilding shares are now trading on a price-to-income ratio of about one to five, almost half the figure common for material producers' stock.

But analysts seemed agreed that housebuilders' shares are nearing the bottom of their fall, and bid activity is expected to set off a surge in the other direction, perhaps in the autumn.

"The 14% base rate is the top," said Ted Phillips of ANZ McCaughan. "15% would not allow the economy in time for an election window.

"Land prices are holding up well, so buying a company makes sense. Housebuilders' rates are at a discount to the value of their landbanks."