City voices unease as PFI comes in for flak

The government's much vaunted Private Finance Initiative is under fire again. The latest furore follows revelations that the new National Insurance computer system has run into difficulties.

Andersen Consulting is to pay the Government millions of pounds in compensation because it is unable to meet deadline commitments it made when it won the development contract under PFI tendering.

The incident has provided critics of PFI with a stick to beat the Government which has faced accusations that procedures governing the initiative are, at best, ill-thought out, and at worst, sloppy.

But one senior partner at a leading City law firm pointed out: "It could be argued that the Andersens affair illustrates that PFI is working. It is a perfect example of risk transfer to the private sector."

Others are less sure, arguing that PFI needs to be better policed if serious fault lines are not to open up.

In particular, banks will be reluctant to lend to companies seeking to become involved in PFI if the perception is of a scheme which, more often than not, fails to deliver.

Law firms are anxious for the Government to improve the tendering process and to issue clearer terms of reference to competing consortia. Paperwork needs to be standardised and better lines of communication established with the Government.

A project finance expert at a City law firm, said: "The trouble with many projects is that the brief is unclear and we are left to battle with a bureaucracy that does not know its own mind. This makes it difficult to establish typical project structures."

Lawyers are also becoming uneasy about the time and money that can be spent on tendering for a contract which is ultimately awarded to competitors. For major projects, bills can easily exceed £500,000.

Firms are already pressing for a proportion of the costs to be refundable to ensure that enthusiasm for PFI is maintained.

Labour is stepping up its campaign for a new partnership to be struck between public and private sectors. It wants clearer strategic priorities to be set by ministers so that the private sector can better gauge what it is expected to bid.

Labour claimed: "The Government has failed to cut red tape and has failed to set criteria for success."

City law firms McKenna and Clifford Chance are advising British Aerospace and French company Matra on the £1 billion merger of their missile businesses.

McKennas' Robert Price led a team of lawyers who are acting for BAe while Kate Howles and Jim Wheaton supported a contingent from Cliffords.

Once the deal is completed, the two groups will own Europe's largest missile operation.

Price said: "We had to undertake legal due diligence on missile development contracts and tax work, deal with foreign governments and handle intellectual property issues."

The new joint venture company, to be known as Matra BAe Dynamics, employs 6,000 people on both sides of the Channel and will have its HQ in the UK, with a UK chair and French chief executive.

The McKennas team, assisted by Philip Riley of British Aerospace, has also involved Mark Bartholomew, John Hammond, Simon Vere-Nicoll, Bill Carr and Charlotte West.