Jarvis on the brink

Its spectacular success has always been viewed with deep suspicion by its peers. And sure enough, as the company's problems continue to unravel, it has become clear that its glory has been built on underpriced bids and overclever accounting. And, let's face it, clients eager for bargain basement prices.

Construction has always been a risky business. Price a few contracts badly, or make a few blunders on site, and you kiss goodbye to the year or more's profits – as happened with Laing. That's why the City doesn't like the sector. The problems unfolding at Jarvis, however, have little to do with poor risk management but with an endemic culture that has systematically resulted in deals that generate returns well below expectations. This is a demise purely of its own making.

If Jarvis does collapse, it will validate the City's view that the industry can never be trusted. But for other contractors, the stormtroopers of the government's PFI initiative, the implications of Jarvis' problems are potentially far wider. This is not the first time a PFI contractor has hit the buffers. A year or so ago it was Amey – Jarvis' partner in the Tube Lines contract, and another firm that ran into problems with accounting procedures. To lose one PFI proponent may be regarded as a misfortune. To lose two suggests the system may be fatally flawed.

The difference with Amey, however, is that the problems were not seen as operational flaws, and it was able to find a buyer. At the time, Jarvis and Bechtel bought out its Tube Line stake, and a reciprocal arrangement with the new Amey is one of Jarvis' few remaining hopes. It's this interdependability that PFI experts say safeguards such projects against collapse and secures the taxpayers' interests. Other parties in consortiums, including the banks with their equity stakes, must keep the contracts running and the money coming in. That is the ultimate safeguard for clients, many of whom are bracing themselves for upheavals and delays. Against that, the opaque nature of PFI accounting can instil little confidence in the system, particularly from a public sector already weary of the funding tool. And without its confidence, how can anyone feel sure Jarvis won't be the last PFI contractor to risk imploding in this way.

The issue of capacity is pressing. If Jarvis goes, or is partially dismantled, there will be one less firm to carry out contracts. Yet there is one good reason why the PFI will continue, regardless of what happens to individual firms: the government has nowhere else to go. Its whole project to upgrade Britain's infrastructure, upon which its political future rests, is predicated on the off-balance-sheet funding that PFI provides. And, thank goodness, some PFI projects do actually deliver, as the Ministry of Defence project we profile this week demonstrates (page 16).