Treasury’s new public-private PFI funder may not be set up until after next election.
Partnerships UK, the public-private body that the government hopes will re-invigorate the private finance initiative, may not be set up until after the next election because it requires primary legislation.

Whitehall sources and PFI bankers this week said fears that the Treasury was acting “ultra vires” – outside its powers – in setting up Partnerships UK have grown since late July, when plans to create the body were announced.

One source involved with Partnerships UK said the Treasury solicitor’s department, which advises all government departments on new proposals, is “by no means clear” whether the Treasury is “intra vires” in setting it up. The original plan had been that the body would start operating next March.

Some Treasury officials believe Partnerships UK, which will advise on and invest up to £1bn in PFI projects, can be set up under the government’s general expenditure powers.

But Whitehall sources said the solicitor’s department was examining whether the proposal would be vulnerable to judicial review by its opponents on the grounds that it is ultra vires.

It is understood to be arguing that a new act would be needed to confer Partnerships UK with the power to guarantee the loans that it and its private sector partners will make to PFI projects.

A Partnerships UK steering group of officials and PFI banks is due to hold a second meeting within the next two weeks, and the question of the ultra vires issue is expected to be high on the agenda.

One Whitehall source said: “This is a pretty fundamental point. If the whole premiss of Partnerships UK is built on sand, why bother continuing?” He said that if legislation were needed, this could take until the next election, and that even then it could face a rocky ride as Conservative and left-leaning Labour MPs are opposed to the idea.

There has been speculation that the Treasury may be contravening European Union procurement legislation, but bankers are more concerned about the ultra vires question.

Banks held up the progress of the first wave of PFI hospitals just before the 1997 election because they believed NHS Trusts were ultra vires in signing PFI deals. Legislation was needed to quell this fear, as well as suspicions that councils were similarly offside in signing their deals.

Meanwhile, speculation is continuing as to who will chair Partnerships UK if and when it is set up. Roger Brooke, chairman of leading PFI equity funder Innisfree, has been approached and ruled out because he does not approve of the idea. An approach is being considered to Sir William Purves, former chairman of HSBC.

Now 67, he is considered the type of banker needed to give Partnerships UK credibility. Another candidate is ex-Hambros director Sir David Hancock.

The next meeting of the Partnerships UK steering group is also expected to examine an early business plan for the project. One Whitehall source described this as “rudimentary; in some cases, wrong”, and said there was growing concern about the concept.

The main difficulty is expected to be the conflicts of interest that Partnerships UK will face when it advises government departments on projects it also plans to invest in. “It’s a knot we are already worried about untying,” said the source.