Revealed: taskforce aims to limit contractors' funding role through new "Government Investment Bank".
Treasury officials are working on a radical plan that would see the private finance initiative scrapped in its present form.

Treasury PFI taskforce chief executive Adrian Montague is behind the scheme to create a "Government Investment Bank". This would mean that contractors would no longer be involved in arranging funding for PFI projects.

Private talks were held between the Treasury and bankers before Christmas, and the PFI Finance Providers Forum – a 40-strong group including Tarmac, Laing, Kvaerner, banks and law firms – has already set up a subcommittee to respond to the proposal.

But industry sources said Montague, with backing from the Treasury Finance, Regulation and Industry Directorate chief Steve Robson, is lobbying hard for the new approach.

Montague plans to pioneer it by arranging funding himself for the £100m redevelopment of the Treasury's Whitehall HQ, which is being built by Bovis and Stanhope.

Sir Malcolm Bates, the Pearl Assurance chief carrying out the second review of the PFI under chancellor Gordon Brown, is also interested in the central bank plan and has floated the idea with bankers.

Plan may be unveiled soon

He is studying what to do with the taskforce, whose two-year term ends this summer. Sir Malcolm's review will be published in February. Industry sources opposed to the plan say they fear it will be announced next month.

"Information about this idea is just starting to come out now, but it has got a lot further than just a suggestion," one said.

Under Montague's masterplan, the PFI taskforce would be expanded from 12 to 50 seconded PFI experts who would engage a contractor to build a facility after identifying a PFI venture. They would also let a facilities management contract.

However, instead of the contractor arranging the funding for building and running a project, the taskforce, which would be renamed the Government Investment Bank, would secure funding from private banks. The contractor would then borrow this money.

Industry sources said Montague believes this is a way to prevent banks charging contractors high interest rates, which are then passed on to the public sector client.

By setting a maximum interest rate, the Government Investment Bank, which would also act as guarantor on debts, could ensure that projects are built at favourable rates for taxpayers.

Bankers slam backward step

Bankers have dismissed the plan, claiming it would be a retrograde step after the private sector has spent hundreds of millions on the initial PFI model.

One said: "The logic of this eludes us. Why bother when PFI, particularly in areas like the roads market, is going very well? If you were being very harsh you could say this is Adrian Montague looking for jobs for his boys.

"But these lads on the taskforce aren't the types who have done hundreds of deals – they've maybe done one each – and they do not have the experience to take over the whole PFI process." Another banker said: "Creating a public sector institution to act as ultimate client is philosophically very attractive to Labour, but it is five years too late.

"Getting the cheapest form of finance would not add value for money to the process, because most banks bid to fund projects already.

"Practically, it would be very difficult – and contractors would miss the creative tension of working closely with banks." Another banker said: "This is state interference in the private sector and goes back to the days of old Labour.

"Everyone has spent enough on the PFI already without having more onerous conditions rammed down their throats." A Treasury spokesperson said: "Sir Malcolm Bates is currently conducting a second review of the PFI. That report is not due until mid-February. Until we get that report with his recommendations, there are no proposals being discussed at present."