Thursday 23 June 2011
[Mrs Anne Main in the Chair]
Private Finance Initiative
Motion made, and Question proposed, That the sitting be now adjourned.—(Stephen Crabb)
I am grateful for the opportunity to discuss the important issue of the private finance initiative under your chairmanship, Mrs Main. I thank the Minister, the Backbench Business Committee, which allowed us to hold this debate, and my many colleagues in the Chamber today.
Since its inception in the early 1990s, the private finance initiative has resulted in more than £200 billion of public debt, the cost of which will hang over the British taxpayer for decades. It has created great private fortunes and fundamentally shaped the nature of our public services. It has generated huge public outrage, as we will hear in this debate. It has raised profound issues of fairness between this generation and the next and it has affected virtually every constituency in the land and the lives of millions of people.
For reasons that I will explain, the extraordinary fact is that until now there has never been a full three-hour debate on the PFI in this House. There has never been a comprehensive assessment by the Government of the cost and benefits of the PFI or a successful attempt to collect all the relevant data about the PFI into one place. None the less, the topic of this debate could hardly be more relevant. We need to ask three questions. How did we get here? How can we make savings from the PFI for the taxpayer? How can we design a better system for the future?
I am grateful to my hon. Friend for bringing this debate to the House. One thing I have stumbled across is that the Prison Service does not own a computer because of the PFI. It rents them all at the cost of £160 a month, which most people would think was a ludicrous state of affairs. To prevent such a thing happening again, does he not agree that the people who negotiate the contracts within Government should be surcharged if the National Audit Office or some other similar body judges that the contract that they entered into was negligent to the taxpayer?
That is an extremely interesting suggestion. I am not sure how the details would work, but I will make specific proposals for improvement to public procurement later on in my speech. I thank my hon. Friend for his intervention.
Like many colleagues, I first understood the impact of the private finance initiative through my local hospital. Starting in 1999, Hereford hospital was one of the earliest PFI projects. It was built and is currently owned and managed under a 30-year contract through a special purpose company, which is three-quarters owned by Semperian, a large PFI firm based in the City of London, and one-quarter owned by the French industrial services giant, Sodexo. Non-clinical services are contracted out to Sodexo, WS Atkins and to others.
Car parking charges at the hospital have been the source of huge local anger because they penalise patients at a very vulnerable time in their lives. They particularly hit frequent users such as those visiting in-patients and those suffering from cancer. They are socially regressive, falling relatively harder on the poor than on the rich. As I investigated further, I found that that was only the tip of the iceberg. The reason why the charges were so high was down to the PFI itself, because car parking was contracted out not once but twice—first to Sodexo and then to CP Plus, and each had its own mark-up.
Is my hon. Friend aware that fewer than a quarter of England’s 168 NHS hospital trusts have significant PFI hospitals within them, but that those trusts account for almost two-thirds of A and E closures or proposed closures? I know from my own observation of the South London Healthcare NHS Trust how extreme the operational constraints are that face managers who have PFI hospitals within their trusts and how those hospitals force them to take decisions on operational grounds that might not be in the best interests of patients.
It seems to be true that many decisions were made from a desire to fit the financial cloth to the pocket rather than from the actual clinical needs of the patients. It is certainly true that the squeeze that these inflation-adjusted costs exert on hospitals is heavily responsible for the closure of A and E units.
Let me return now to the situation at Hereford hospital. Later PFI contracts have contained financial safeguards for the NHS, including automatic efficiency savings of 3% a year and the right for a hospital to put services out to public tender periodically. However, the Hereford contract contains neither of those safeguards. There are no automatic efficiency savings, and the contract cannot be retendered until 2029. The hospital trust is doing a valiant job, but it has little influence, legal scope or access to underlying costs which might help it to negotiate changes to the contract. Worse still, no mechanism exists by which the hospital can group together with other PFI hospitals to exercise collective influence over the PFI contractors. By contrast, Semperian has 106 PFI contracts. The imbalance in power is obvious, yet the NHS seems to have done nothing to remedy that.
For almost a year now, I have been campaigning for a voluntary rebate for taxpayers on the PFI of £500 million to £1 billion. Those are large numbers, but that goal is not unrealistic.
I hope that my hon. Friend does not think that I am sitting on the other side of the Chamber because I do not support his proposal; I do support it. May I ask that those who read his words as well as those who listen to them pay some attention to the old Ryrie rules, which were supposed to limit Ministers using private finance when it was not appropriate? May I also ask my hon. Friend if he would direct the Chamber’s attention to the design, build, finance and operate Dartford crossing, which was a proper use of the private sector? There was a limit to the amount of time that the project could be charged and it had an income stream, so there was no powerful debt either.
I shall be talking about the early history of the PFI shortly. As my hon. Friend implies, the Ryrie rules were an important part of the fiscal stringency that surrounded that project. What the issue of the Dartford crossing brings out is that PFI is often successful on these economic infrastructure projects and less effective on social infrastructure projects.
While my hon. Friend is on the subject of a voluntary rebate, is he aware of the research from the university of Adelaide showing that the average profit made when PFI equity on hospital projects is sold on was more than 66%. Is it not the case that we should be looking at something more than voluntary?
At this point, I want to keep the rebate voluntary because we are making good progress, but many Members feel that something more stringent would be appropriate. In the assessment of the profits on these equity stakes, I would caution that in some cases those equity stakes have been built up over a considerable period and one should not necessarily look at just the headline number if it is the result of a 10 or 15-year investment.
I have spoken about the campaign that we have run so far. An important feature of the rebate campaign is that at least part of any savings would remain with the public service involved. The result, therefore, would be a win not merely for the taxpayer but for local communities, which could potentially benefit from many millions of pounds in savings over the next two decades.
Let me make it clear that I am not for one moment suggesting that existing PFI contracts should be torn up, but contracts are routinely renegotiated in the private sector. The rebate would be a voluntary one, and not a haircut imposed by Government. There is a valid precedent in the code of conduct that was signed in 2002, by which the contractors agreed to share windfall refinancing gains with the taxpayer. It may be that that code of conduct needs to be further extended to the secondary market trading of equities.
What I did not expect was the level of support that I and colleagues have received from key players in the PFI industry itself. They know that something is wrong. They are aware of public concern, and they want to participate in the next generation of economic infrastructure. Having started as a solo mission, the campaign has become a cross-party movement of more than 70 Members of Parliament. We have sat down with many large PFI companies and talked in detail about the scope for savings.
Parliamentary concern about the costs of the PFI has resulted in an inquiry by the Treasury Committee and, to their huge credit, the Government are taking the idea of a rebate very seriously indeed. Ministers at every level have made clear their desire to see savings. The Cabinet Office has been looking closely at the PFI in its quest for greater efficiency across the public sector; the Ministry of Defence has announced that it is reopening three major contracts as part of its own renegotiation strategy; and the Treasury has opened discussions with the PFI industry about a new code of conduct and it has recently concluded a “deep dive” investigation of the PFI contract at the Queen’s hospital in Romford. That is the first time in 15 years that a Government have taken a forensic look at a specific PFI contract, and it sends out a clear signal of intent to dozens of other PFI projects. So we are making progress. That is the context for this debate—the first Parliamentary debate on the PFI—and I hope that colleagues from all parties will make their support loud and clear for these actions for better public services and real savings for the taxpayer.
However, to understand the present we must understand the past. How did we get to such a sorry state of affairs with the PFI? The history is surprising and damning by turns. It can be divided into three phrases: experiment; ramp-up; and standstill. The PFI was introduced in 1992 from Australia by the Major Government, which was interested in how private capital and expertise could be used to support the public services. Labour Members often deride the Conservatives for introducing the PFI, but the facts tell a very different story. The Major Government could not make the PFI work. They insisted on judging each deal on its merits, having inherited a structure from the Ryrie rules, and the merits were sometimes very thin indeed. By 1996, barely £6 billion worth of PFIs had been approved and no PFI hospitals had been approved, let alone built.
Meanwhile, Labour was split. Old Labourites denounced the PFI in traditional terms as “creeping privatisation”, but it is often forgotten that the new Labour position was the exact opposite of that. New Labour thought that the PFI was a good thing and that the problem was that the Tories had not gone ahead with it fast enough. In a speech in Parliament on 28 November 1995, Tony Blair rammed that point home repeatedly. His position was perfectly clear:
“The PFI is right in principle. We have supported it, and in many ways we have been advocating it.”
At that point, John Prescott, who is now Lord Prescott, helpfully intervened with, “We initiated it.” Blair continued:
“It should not be manipulated to cook the books of public finance.”—[Official Report, 28 November 1995; Vol. 267, c. 1077.]
On that point at least, the future Prime Minister and his Chancellor, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), were agreed, since the right hon. Gentleman also remarked in the early 1990s that
“PFI is a cynical distortion of the public accounts.”
How are the mighty fallen, and in what disgrace. We are accustomed to make fun of Lord Prescott—rightly so—but at that point he spoke truer than he knew. In many ways, Labour was in fact the real originator of the PFI in its current form. In 1997, the new Chancellor, the right hon. Member for Kirkcaldy and Cowdenbeath, and his then adviser, the right hon. Member for Morley and Outwood (Ed Balls), were tied down by the promise that Labour had made to stick to Conservative spending plans for two years. They had committed to keep public sector net debt below 40% of GDP, according to their sustainable investment rule, but they were desperate to leave a legacy by building a huge amount of public infrastructure. They quickly spotted that PFI projects offered a way out of that quandary, because PFI liabilities could be treated as off-balance sheet and so they would never appear formally within the net debt numbers. Of course, as we now know, they later fudged the sustainable investment rule by redefining the economic cycle and then the rule was blown apart as the financial crisis took hold.
After the 1997 election, the new Paymaster General, the hon. Member for Coventry North West (Mr Robinson), summarily fired Alastair Ross Goobey, the chair of the PFI panel and a man with an impeccable record of protecting shareholder value, and ramped up the PFI dramatically. Over time, an unholy alliance developed between the Labour Government and the PFI companies. PFI became the “only game in town”, as more and more projects were pushed in its direction by Government Departments that were desperate for capital spend but prevented by central Government from looking at alternatives.
That ramp-up was aided by the introduction of PFI credits, which allowed Departments to avoid running local authority PFI spend through their own budgets, thus evading responsibility for them; it was also aided by the use of high official project discount rates, which artificially privileged the PFI over other forms of procurement; and it was also aided by the unwillingness of both the Blair and Brown Governments to permit debate on the issue, conduct any overall analysis of the PFI’s cost-effectiveness or gather the full data on primary and secondary transactions, which would have allowed proper transparency and proper public accountability. Frankly, that was disgraceful behaviour.
Fast forward to today and what do we find? More than 800 PFI projects are now in place, covering every imaginable form of public infrastructure from hospitals and schools to roads and military hardware. Nearly £70 billion—not £6 billion, as was the case in 1997—of capital commitments have been made, with a total liability to the taxpayer of well over £200 billion. And—irony of ironies—new accountancy rules are in place that require PFI debt to appear in the national accounts after all. The Balls-Brown attempt to fix the books has proven to be a failure, and a costly failure to boot.
It is important to say that many PFI projects have been completed on time and within budget. There is a mixed picture. Contractors such as Jarvis have gone bust when projects failed, or taken huge financial hits. Also, conventional procurement itself has not always covered itself in glory, as demonstrated by the Eurofighter, Wembley stadium and British Library projects.
In response, it is easy to highlight the many PFI projects that have been horrendously overpriced. They range from huge deals, such as the Airtanker contract, which is now estimated to cost £1.5 billion too much, and the M25 widening, which is now estimated to cost £1 billion too much, to tiny but telling details about smaller schemes, such as the kennels at the Defence Animal Centre in Melton Mowbray, which cost more per night than rooms at the London Hilton.
An even more telling criticism emerges if we look at the overall record on the PFI. We now know that there is no general evidence that the PFI is cost-effective, or that the PFI improves the quality of buildings. Average annual maintenance costs are higher in PFI hospitals than in non-PFI hospitals. The most detailed study of PFI hospitals demonstrates that there is a large element of excess return to both debt and equity holders. Indeed, for equity holders the financial returns have been on occasion up to six times higher than the risk would justify.
There have been important secondary effects. The ramp-up of PFI projects helped to create an artificial boom in construction, which pushed up costs and over-extended the construction industry. Within the NHS, it has resulted in a huge and inflexibly designed Maginot line of hospitals, each one on inflation-adjusted contracts lasting decades, at a time when health care is moving towards more flexible models that combine specialist institutions with health and social care nearer to the home.
First and foremost, I congratulate my hon. Friend on securing such an important debate. It is a testament to his tenacity, research and expertise in this field that this debate has been attended by so many Members. I concur with his view that the PFI picture is mixed—
I will attempt to be brief. Does my hon. Friend concur with my view that, although the picture is mixed, the fundamental issue is that the PFIs are often short-term solutions to the long-term problems that we face in government? That is illustrated exactly by the issue with Southern Cross, which has often used sale and leaseback to finance its own businesses.
I thank my hon. Friend for that intervention. I absolutely share his view that there is an interaction between inflation-adjusted costs and budgets, which of necessity are less able to rise, and that that interaction creates tremendous tension within these institutions. In many ways, Southern Cross is rather similar to the PFI, as the Chairman of the Health Committee, my right hon. Friend the Member for Charnwood (Mr Dorrell), reminded me this morning. The PFI costs for hospitals that I have been describing are not under the hospitals’ control, so the effect of escalating payments will be to suck up free cash flow within hospital trusts, to reduce flexibility and to impede innovation, just when those things are most needed.
We are in an unhappy mess, which is the true legacy of Messrs Brown and Balls. We shall better see the financial extent of that mess in July, when the Office for Budget Responsibility reports on the whole of Government accounts. However, the key point is that, although PFI was expensive before 2008, since 2008 it has become exorbitant. As a result of the financial crisis, PFI credit margins over gilts have risen from an average of around 0.75% to between 2.5% and 3%. Specific projects have even worse financial profiles. For example, the outline business case for the £244 million Royal Liverpool and Broadgreen University hospital projects a weighted return to investors of 8.58%. That is more than double the rate on long-term Government gilts, which is 4%. The extra cost is such that there is now a strong case for a one-year moratorium on that project, as on others, to allow proper consideration of alternatives, and I encourage the Government to consider that suggestion closely.
I shall sum up. A new settlement is needed on the PFI, and I offer three recommendations. The first is that the Government should take steps to improve their database on PFI deals, and their collection of new data. The quality and quantity of PFI data are surprisingly bad. On primary deals, that is due to inconsistencies in collection, and on secondary market deals it results from a hands-off methodology, which regards trades in PFI debt and equity as purely private transactions, outside the scope of government. All aspects of data collection should be reviewed and improved.
My second recommendation is that the Government should undertake a major consultation soon on the best means to procure and finance new infrastructure. This country badly needs new infrastructure, at a likely cost of hundreds of billions of pounds over the next few decades, and the private sector has a vital role to play. To finance that development, we need alternatives to the PFI, and several economic models are available. These include regulated asset base models developed from the utilities market, property-based models, strategic infrastructure partnerships and tax increment financing, as well as a reconsideration of conventional procurement methods. I have recently advocated the idea of a national asset trust fund as well, in a publication of my own. The consultation should also focus on how procurement is done. Should different models be used for different sectors? How can public sector institutions be made into better clients?
Thirdly, and finally, the Government should continue their current drive towards a taxpayer rebate and a new code of conduct on the PFI, if possible with every PFI company involved. Many have already engaged with the Treasury, but some—particularly some large banks, accountancy firms and legal advisers—have yet to do so. I have written to the head of every major PFI firm to put the question directly to them, and I plan to keep the House informed of their participation. The code of conduct would in due course lead to a matrix of all PFI transactions, which would show savings agreed with the private sector to ensure that they were fairly shared. That will require implementation over some months, so that the savings are genuinely realised. The Treasury could also set up a small team to advise individual hospitals and other public services on how to benefit most from the rebate process, with the team’s costs being met out of the savings generated. One thing, however, is vital. Most of any rebate should of course go back to the Treasury, and on to the taxpayer, but a portion should remain with the affected local public service, so that local people can be absolutely certain that their school, or hospital, has benefited.
I very much hope that all colleagues present—and there are many—will support these recommendations, and will join me in pressing the Government to ensure that savings are made and local people feel the benefit.
I join other hon. Members in congratulating my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) on his tremendous campaign. It has been a marvellous example of leadership, which is built on his expertise, and we are all in his debt.
I have been watching the private finance initiative from my position on the Public Accounts Committee for many years. I always had a sneaky suspicion about it, without being able to put my finger on what that was, until I met an investment banker at a private event in 2003. He was a securitisation expert and had been involved in many PFI projects. He said: “I like the PFI. It’s a good source of income and is good for the business, but as a taxpayer it really pisses me off.” That rather woke me up. This was not a trade unionist complaining about costs being cut by worsening the terms and conditions of his members; it was a City fat cat getting fatter on the proceeds.
As a member of the Public Accounts Committee, I used to get invited to conferences on the PFI, when it was in its earlier heyday under new Labour. At those events, I met a group of people whom one can only really describe as theologians for the PFI. Rather like some Marxists, or even some Roman Catholics, there was no question to which they would not have an answer. It was a sort of self-containing system, at the root of which was the idea that the PFI was a competitive bidding process and that there was no possibility of its not being all sorted out and being in the best possible interests of clients—the public authorities involved. After all, it was a competitive, open-market process in which anyone could bid, and certain things would already be in the price. It was almost as if they were talking about the market for foreign exchange, or another perfect market. We know, of course, that because of the huge costs involved in bidding for a large project, the PFI has far more of the characteristics of an oligopoly. The Royal Institute of British Architects estimated, many years ago, that the cost of bidding for a PFI hospital was more than £11 million—probably significantly higher now. All those costs end up getting passed on to the client.
The other thing that these theologians would suggest was that it would not be possible for anything to go wrong, because it would not be possible to have an ill-informed or inexperienced client. There would be no question of there not being the right experience on the client side, or the right capacity or resources to manage a project after a contract had been signed. It was as if all must be for the best in the best of all possible worlds, because it could not be any other way. I continued, however, to be suspicious, and I continued to go to the conferences, becoming ruder and ruder until, I am pleased to say, they stopped inviting me. Customers paid £1,000 to attend and all I got out of it was a slap in the face with a wet haddock and a one-way ticket to Great Yarmouth, so I am glad that I am no longer invited.
I must congratulate the National Audit Office on something that recently opened my eyes. The NAO has produced more than 60 reports on the PFI in the past decade, and I have been pleading with it for years to do more synthesis. We have had analysis after analysis after analysis, and project after project, and in the office’s recent report, published in late April, there is more synthesis of some PFI issues. I had a light-bulb moment when I read on page 7 of the report, in a section about the skills, capacity and experience used in negotiating
“high margins on the changes in asset usage which are likely to occur over a long contract.”
I realised that the providers know full well that it is not possible to write a contract that is flexible enough to last for 25 to 30 years, and so they do two things. One is that they insure themselves by tying down every conceivable cost that might arise—every conceivable risk with its attached price. That process is enormously expensive, and it is reflected in the figure of £11 million that the Royal Institute of British Architects came up with. Although it is true, as my hon. Friend the Member for Hereford and South Herefordshire has said, that in rare instances people have lost a packet on projects, such as Jarvis, the National Physical Laboratory and the Joint Services Command and Staff College in Shrivenham—Laing had to sell its construction business after that—the contractors have a lot of people involved, and they do it well, insuring themselves on the downside pretty effectively, to ensure that they make money whatever happens.
The other light-bulb moment in my reading of the NAO report was when I came to:
“as major contractors seek to develop their income from the project”.
I thought to myself, “Hang on a minute. How do you develop your income from the contract? Okay, you might index the contract to protect yourself from inflation, but basically you have a contract and you provide services. It is predictable, and that is why you know what you’ll get going forward.” No. They know full well when they sign up that it is not possible for the public authority, particularly those in education and health, to write a contract that is flexible enough to last for 25 to 35 years. They ensure that all their risks are covered and then develop their income from the contract over time, as changes occur. One can also see a sudden shift. Just as the flagship Norfolk and Norwich hospital in my constituency was finished, the mood music suddenly changed towards much more primary, locally based care.
The contractors also do fancy financial engineering. The Norfolk and Norwich hospital was perhaps the locus classicus of that. The contractors added about £100 million in extra debt to the contract at the time of refinancing, thus accelerating their return from the project. The NAO produced a report specifically on that hospital, which stated that not only was the repayment period for the hospital extended from 34 years to 39 years—it is hard to see how that was in the interests of taxpayers—but the rate of return for the investors was accelerated from 18.9% to more than 60%, more than tripling it. If they can get all their money out that quickly, it means that it is not nearly as important, and there is not nearly the same incentive, to carry on managing the contract in the same way as before.
My hon. Friend the Member for Hereford and South Herefordshire made another important point when he said that we should not kid ourselves that it has all been plain sailing in the conventional procurement world. He has mentioned the British Library. One might also mention the Scottish Parliament and the Jubilee line extension. I was told that the cost overrun for the windows of Portcullis House—which, again, was a conventional procurement that the Public Accounts Committee looked at when it first opened years ago—was so huge that it would have been cheaper to have clad the exterior of Portcullis House with BMW 7 series cars. We should not be under any illusion that the conventional method has worked as well as it should.
The attempt to find a way to get projects delivered on budget, on time had a certain merit. My hon. Friend was absolutely right to point out that the hon. Member for Coventry North West (Mr Robinson) took this and ran with it. I talked to Lord Lamont, the former Chancellor of the Exchequer, at a dinner a couple of years ago. He said that he had asked the hon. Member for Coventry North West before the 1997 election, “How on earth are you going to finance all these grand promises in your manifesto?” He replied, “Oh, it’s simple—we’ll take your idea of the PFI and run with it.” Lord Lamont said, “But the rules won’t let you,” to which the hon. Member for Coventry North West replied, “Oh, we’ll ignore your stupid rules.” He was very candid about it, in fairness to him.
One of the things that I have regretted about the past few years of the PFI is that, in areas such as health and education, where it would have been fairly easy to do this, the Government did not insist on developing, at the same time, identical or nearly identical clusters and baskets of projects, so that we would then have had a proper way of comparing, over a period of years—three, five, seven and 12 years out—what had actually proved to be greater value for money.
Yes, and of course, we cannot blame the private sector for protecting its downside and ensuring that it makes money rather than loses it. One of the most extraordinary things about all this is the naivety of many of the people in the civil service who have negotiated these projects over the years. They do not seem to understand that the private sector players are profit maximisers. If they have a chance to make money, they will, and if they have a chance to make more money, they will. A certain lack of commercial nous and capacity on the part of the public sector has coloured all this.
Turning to the proposals of my hon. Friend the Member for Hereford and South Herefordshire on steps to improve data, one of the things that have shocked me throughout is the difficulty in getting a view from 100,000 feet of what is going on. I have spent years on the PAC trying to get answers out of the Treasury and other authorities about what is going on, and only very recently has anything started to emerge that looks like a coherent picture. My hon. Friend is absolutely right that we need to think about a variety of different approaches to financing infrastructure. We need to make the PFI compete for business, if we are to use it at all in the future.
There is a paradox in relation to future proposals. The NAO report refers to the fact that there is a pipeline of £200 billion-worth of transport and energy infrastructure projects, and it is precisely for those sorts of enormous, long-term projects that a PFI-type structure might have more attractions to it. However, we have to be able to break down the different components. There is often absolutely no need to ascribe to the entire 35-year period of a project the risks that, in truth, only apply for the first few years, yet that is what many PFI lawyers have been able to get away with in many cases.
My hon. Friend’s campaign for a rebate is fascinating and has certainly caught the attention of the PFI industry. He has led the way on this. It is a remarkable testament to the fact that people in the industry know that things have been going wrong that so many of them have been prepared to co-operate. Interestingly, at the PAC hearing on the NAO report the other day, one of the witnesses, Graham Beazley-Long, from Innisfree, was asked whether it would be reasonable for equity gains to be shared with the taxpayer. He was perfectly prepared to discuss the matter. He said that the Treasury and Infrastructure UK
“would have a view on whether that pushed up the costs of capital”.
In other words, it was all just a negotiation and a certain return would be demanded by investors, and if the taxpayer wanted to pay that up in advance, they could get it back again. There is probably an element of truth in that, but my sense over the years is that the PFI industry, out of which a large number of people have made a great deal of money, has not been made to compete hard enough. There are a number of ways in which they could do that. We should have some conventional clusters that give us, as taxpayers, the ability to compare over the long term, and we should be much more innovative, as my hon. Friend has suggested—I hope that we hear more about his proposal for a national asset trust fund—in securing alternative methods for infrastructure finance, so that the PFI industry knows that it is not the only game in town.
I rise to speak as another member of the Public Accounts Committee, which lays claim to having had a number of debates about the PFI, as has the Treasury Committee. I congratulate the hon. Member for Hereford and South Herefordshire (Jesse Norman) on securing this interesting and important debate about the PFI, which has been a key part of investment in this country for more than a decade, and how we make the way in which we invest in our infrastructure as a country work. I have a lot of sympathy with his concerns about whether the contracts have been done to the best of their availability and what we can do to improve them. There have been a number of debates and efforts to improve them, and I welcome the fact that he is saying that there is mixed picture on the PFI in terms of where it has delivered and that perhaps we can learn from where it has not delivered.
I want to set out some of my concerns about the hon. Gentleman’s proposals for the future. What really matters, given that a record 61 projects are currently being negotiated under the PFI, is how we can learn from what has happened. That has certainly been one of our key messages on the PAC, and I am sure that my fellow Committee members agree that we need to look at what we can learn and where we can make progress. One of the things that has surprised us on the PAC, as the hon. Member for South Norfolk (Mr Bacon) has mentioned, is the way in which negotiations on the PFI have taken place and the revelation from one of the major PFI companies that it has not been talking to the Government about the possibility of a rebate, which is an issue that the hon. Member for Hereford and South Herefordshire has raised, or about where contracts might be renegotiated.
Mr Metter from the industry used the colourful phrase that he would not ask his investors to take a haircut, by which he meant that he did not feel that it was possible to look at a voluntary scheme. I would be interested to hear more from the hon. Gentleman about his negotiations with other contractors and whether he thinks there is more interest in some kind of voluntary scheme.
We all recognise that it is difficult to ask the private sector to renegotiate a contract that it has signed up to in good faith. That therefore calls into question some of the ways in which we might deal with some of the problems with PFI, particularly the way in which the initial decision to move to PFI was made, which is something that I want to address. We must also consider what it would mean if those contracts were renegotiated. I hope that the hon. Gentleman agrees that there is a real concern that, if any contract is renegotiated, especially if capital parts of a project have been completed, it is services that will actually get renegotiated. Many of us are concerned that the renegotiation of services could mean fewer services, particularly in public institutions such as hospitals. Renegotiating services could have a negative impact on many of our constituents.
More fundamentally, on the hon. Gentleman’s concerns about PFI, I hope that I can convince him that, rather than pursue a voluntary rebate—as I have said, it has transpired from our discussions with the industry that that is not what the Treasury has been doing and that the industry is not aware of such conversations—we should look at the tax status of these companies. I am sorry that he was not able to sit through the second half of our hearing, where we heard some frankly shocking evidence from Treasury officials about their approach to the situation. The issue is of particular importance to the PFI, because when a decision to go to the PFI is made, one of the value-for-money constructs is an assessment of the amount of tax that will be returned to the Exchequer through working with a private company in the UK over the course of the contract. It is set out clearly in the Green Book that the Government make an assessment not of the specific company’s tax take, but of the general tax take that can be expected from working with the private sector in the UK in order to build a project.
One of the genuine delights about serving on the Public Accounts Committee with the hon. Gentleman is that he has such a wealth of knowledge and anecdotes that clearly illustrate the challenges that we are dealing with. He took part in the Committee’s session, so he will know that I have grave concerns that moving assets overseas to offshore tax havens has substantial consequences for our assessment of the value for money of PFIs. When the decision to go for a PFI project is taken, an assessment is made of the tax that we will get in return, but there is widespread evidence that many companies then move their assets overseas to offshore tax havens. In fact, the Treasury Committee took evidence showing that 91 PFI projects were owned by secondary market infrastructure funds, so we are losing money. One of the best examples of that problem is a body set up by HSBC. The HSBC Infrastructure Company Ltd, which manages a number of hospitals in this country, has made £38 million in profit from 33 PFI schemes, but it has paid just £100,000 in tax in the UK in the past six months.
Just to clarify, is the hon. Lady suggesting that, as part of the negotiation of a PFI contract for, say, an NHS hospital, a calculation is done on the basis of what corporation tax would be paid? Were NHS trusts doing that? I am a bit surprised to hear that.
No, let me be clear. The Treasury uses the Green Book to assess whether a PFI is an appropriate model. An assessment is made specifically of the Exchequer’s tax take over the life of the contract. It is precisely because that is part of the value-for-money assessment that I have great concerns about the fact that we are not getting the tax we expected, which would make the PFI a reasonable model to use.
It is therefore fair to ask what we can do. If the Government are proceeding with the PFI—that is an interesting issue for Government Back Benchers who are concerned about this issue—what action are they taking to learn from the way in which previous contracts were negotiated? One thing that is clear to those of us on the PAC is that there is a better understanding of the skills needed to negotiate these contracts. The hon. Member for South Norfolk was clear about the skills needed in the public sector to negotiate with the private sector and to improve the way in which contracts are negotiated. We must also appreciate that we in the public sector have tried to renegotiate contracts after the fact by asking for increased provision in our hospitals, for example, or by looking at different services. That, of course, has consequences for the response from the private sector.
The fundamental question as regards continuing with the PFI—the Government certainly seem content to do so—is what action Ministers are taking on tax and tax havens. The hon. Member for Hereford and South Herefordshire is right that we need better data on tax assessments, and those of us on the PAC were certainly unable to get information about assessments of the tax that various PFI projects were expected to generate when they were commissioned and about what would happen next. What concerned us was that, although Treasury officials accepted that an initial assessment would be made, they were clear that no assessment would be made further down the line of whether that initial assessment had been reasonable.
Indeed, there has been no learning about the way in which tax is assessed in decisions to go for the PFI, even though that could be used in future contracts. Specifically, officials were clear that there is no commitment from the Government to look at the tax status of funds or even to explore what action might be taken, for example, to require a company bidding for a PFI contract to show in its books that it has been operating in the UK for the past five years, so that we can be confident that the bulk of its work is done in this country and therefore that we would get the tax back. We would then have a reasonable expectation that the Treasury would recoup the general sum that was part of the calculation. This is not a new concern or a new idea; in fact, a previous Labour Member tabled a private Member’s Bill on precisely this point, but it did not receive support from the then Opposition, and I hope that that will change if we can all agree that we want to improve the way in which the PFI operates, if it continues to be taken forward.
The hon. Member for Hereford and South Herefordshire has said that the PFI might be a better model for some types of infrastructure projects than others, but the list of the 61 projects that the Treasury is developing includes a wide range of projects, including hospitals, schools, fire buildings, roads and police stations, so this is a live issue. We could be making progress on challenging the costs to the Exchequer and the value for money of projects, but there is no commitment from the Treasury to look at these issues.
Those are the main concerns that I wanted to put on the record about the hon. Gentleman’s campaign. First, were we to push for a rebate, it would be difficult to get the private sector to renegotiate, although I wish him well in looking for haircuts from people such as David Metter. Secondly, there might be very real consequences for the renegotiation of the cost of the services that are delivered, although I am sure that they would be unintended consequences as far as the hon. Gentleman is concerned.
Thirdly, it is a real concern that we may leave untouched the tax status of these companies and the money that the Exchequer might lose, but which was part of the original decision to go for a PFI project. In putting as much pressure as possible on the Government to talk to companies—the briefing says Ministers have, but the reality revealed in the PAC is that they have not—I hope the hon. Gentleman will also put pressure on them to look at companies’ tax status. I hope he will put pressure on them to look at how we can close the present loophole, so that we can be sure that where an assessment is made of the money that will be returned to the Exchequer over 30 years or whatever term is chosen for the 61 projects, the Exchequer will actually recoup that money. We all agree that value for money should be at the top of the agenda, and we should be thinking about the best way to get the infrastructure buildings that our country will need in the future. If so, how do we make sure, not only when the contract is committed to but in the years ahead, that we are securing that value for money?
I congratulate the hon. Member for Hereford and South Herefordshire on securing the debate, and I urge him to think about his target. I look forward to hearing what he has to say later.
The PFI is one of those incredibly important, but unutterably dull subjects, that make an awful lot of people’s eyes glaze over. It is rather astonishing that the hon. Member for Walthamstow (Stella Creasy) is the only person, other than the shadow Minister, who is representing the Labour party here. I do not know whether that is because Labour Members are embarrassed about their hand in the mass of PFI projects that have cost the taxpayer so dearly, but it is interesting that only the hon. Lady and the shadow Minister are here from the Opposition, while so many Government Members are present.
I am a bit of a stuck record on this issue, but we have a complete lack of competition in the PFI world. Like others, I congratulate my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) on being so diligent and tenacious in putting forward the taxpayer’s interests in the PFI debate. He and I have met a number of PFI providers together, and it was apparent that there was complete denial of the fact that there was anything resembling a lack of competition or that there might have been oligopolistic profits.
In his campaign, my hon. Friend has been careful to suggest a voluntary rebate—there is no compulsion. The hon. Member for Walthamstow would need to think carefully about trying retrospectively to change taxation rules or doing anything that smacked of changing the game for existing PFI deals, notwithstanding the need to ensure that we get better value for the taxpayer in deals going forward.
In my home county of Northamptonshire, we have what is believed to be the biggest schools PFI project in Europe, which incorporates 74 schools. At the time that the project was entered into, it really was the only game in town. However, it is incredibly important, albeit rather dull, to understand why PFI has been such a contentious subject and why it has resulted in unintended consequences, such as charges of £1,000 to change a power point.
The important thing to understand, which many taxpayers do not really understand, is why PFI contracts are so inflexible and expensive, and I want to take a moment to explain that very simply. PFI may involve a local education authority deciding to build a new school. The LEA will invite one of what turns out to be a fairly small group of builders to bid for the project. The building firm will go to a group of banks, which will look at what they can fund over perhaps 25 years. The banks will come back to the builder with a specific contract for delivery of the school and offer funding for the project, with the expectation that the LEA will start repaying the debt incurred in building the school only once the school is delivered and inhabited by children. Effectively, a special purpose company has been set up to build the school. The bank funds it, the building company organises it and the LEA takes it over on day one and starts repaying the debt. Inevitably, without a specific debt on the general obligations of the local education authority or on the UK, the beauty of the project was that it did not consolidate into our national debt picture. Of course, bearing in mind the dreadful mess of our economic situation left by the previous Government, there is no chance that we could now begin to consider only normal, conventional procurement. The potential for making loans against such projects, secured on the project itself, must remain—so we must get much cleverer about it.
Can the hon. Lady perhaps help with something that I have never understood about Labour’s obsession with the PFI? In general the Government can get lower rates for borrowing than private companies can, or than are available elsewhere, so what is the advantage in not just proceeding by Government borrowing at the cheaper rate?
I was coming to exactly that point. The point is that funding the project through a special purpose vehicle means that it is not consolidated into the national debt picture. In other words, it is an off-balance sheet form of financing. Therefore, for a Government who want to spend a lot of money on capital projects without blowing up their national debt picture, it is the perfect opportunity.
Further to the point made by the hon. Member for Cambridge (Dr Huppert), is it not a central claim made by the industry that part of the advantage is the management of construction risk? One of the issues, however, which my hon. Friend the Member for Hereford and South Herefordshire referred to, is the bundling of contracts. The construction risk and the design are bundled with the management service charge, and that drives some of the complexity, which drives some of the cost.
I think that my hon. Friends are reading my speech, because that was to be my next point. They have obviously been given advance notice. That is exactly the point: the builder, in theory, takes the risk on a project such as building a school, and the LEA only ever starts to repay the debt when the school is built and everything is in place. Theoretically, the builder takes the project risk. However, as my hon. Friend the Member for North East Cambridgeshire (Stephen Barclay) says, in reality there is bundling, and because there are sometimes unique risks to a project, often those revert to the LEA. The perceived advantages from the fact that the builder takes the project risk are therefore not always as clear cut as they might appear. In the end the major advantage has been that of not consolidating the debt on the national balance sheet.
On that point, is my hon. Friend aware that, as well as being poor value for money for the taxpayer, PFI contracts have caused problems with the restructuring of certain elements of the public sector? For instance, several schools that have become academies have had all sorts of problems with their PFI contracts, causing tensions between them and the local authority. Sometimes those problems have been a block to a school’s moving to academy status.
Again, my hon. Friend takes me to my next point: the other side of the equation is the very apparent disadvantages of PFI, the primary and key one being the lack of flexibility. The reason for it is that often a special purpose vehicle sets up the project, and therefore the project is inexorably linked to its financing. For example, you may build a school and decide you want an extra classroom or two. A PFI school in the constituency of a member of the Treasury Committee built its hockey pitch 2 feet too short for internationals, so it tried to extend it by 2 feet, but therein lay a can of worms. It was impossible to do it other than at exorbitant cost, because the contract and its financing are inextricably tied together within the special purpose company. What happens, and the reason hon. Members have spoken of money being made out of the contract as it proceeds, is precisely that if you want to change the spec—which of course you do—
I am sure that, privately, you might be interested Mrs Main, but thank you for keeping me in order.
What you—[Hon. Members: “One!”]—or rather not you, Mrs Main, but an LEA wanting to build a school, would need would be to have the entire specification for the school for the subsequent 25 years up front. That is clearly impossible, and the banks make their money by charging enormous arrangement fees and ongoing charges as schools change their requirements. That is how the money continues to come in from those projects.
The point that I believe is at issue is procurement failure. To take the example of the hockey pitch, if it is built 2 feet too short, that is a procurement failure. It is not necessarily a specification issue—there are such words as “fit for purpose”. The real issue with all the stuff we are talking about is that the public sector is incapable of procuring projects of such complexity. That is what happens, and that is why so much money is made in change requests. It is not principally to do with financing.
My hon. Friend makes a good point, and many of the problems arising from PFI have happened because the private sector saw the public sector coming. There have been all sorts of issues with poor public procurement, and where two PCTs in neighbouring counties have both commissioned a hospital, one has not learned the lessons of the other. Everyone comes at the thing afresh, and they all have the same problems and run into the same weaknesses. Nevertheless, there is an inherent lack of flexibility built into the projects, which cannot be overcome. It is therefore incredibly important to consider that the PFI on its own, even if it were the cheapest option, and even though it does not at the moment have an impact on our national debt picture, has an inherent weakness in its structure.
The other massive weakness in the structure, which has been exacerbated since the financial crisis, is the cost. As my hon. Friend the Member for Hereford and South Herefordshire said, the reality now, with Government gilts at about 3% to 4% long term, is that direct Government procurement would be much cheaper than a bank trying to fund a project itself over five to 25 years and make a profit, where the net cost to the taxpayer ends up at 8% or 9%. There is an enormous difference between the costs of direct procurement and PFI procurement. That is exacerbated by the financial crisis, and makes things almost unaffordable. We must begin to look at alternatives.
I want to float an idea that I have been trying to put to Ministers—and will be doing in the near future. That is the possibility that the green investment bank could provide some necessary competition to the PFI market. As I said earlier, there is a serious lack of competition. The Treasury Committee heard from PFI providers that often they bid only for perhaps one in three deals. Since there are only six or seven major PFI providers, that means there are probably only two, or at most three, serious bidders for any deal; that suggests an enormous lack of competition.
However, we are now thinking about the green investment bank—a brand new idea for this country, whose time has come. That bank will be looking to fund many of the low-carbon, high-tech and potentially economic infrastructure projects of the future, such as offshore wind farms—I shall not talk about railways, but others might; hon. Members will appreciate my personal sensitivity there. Offshore wind farms, roads and all the rest require long-term financing. That is a big challenge, and the green investment bank could address it.
I totally agree with the hon. Lady about the green investment bank. Does she think that that could prove to be a model for types of investment other than green infrastructure—things more along the lines of some of the PFI issues that are causing a problem at the moment?
Yes, I think that that is right. The green investment bank will have the specific remit of promoting green investments, and that is right and proper; but alternatives could be talked about.
What I propose is specific: it is that the green investment bank should be a bank in its own right. It should be listed on the London stock exchange and the Government should have perhaps a 10% shareholding in it. The UK high street banks should have the offer to purchase up to a 15% shareholding each, and the final 15% to 20% shareholding should be offered at a highly discounted rate to the British taxpayer. We would therefore have a bank with an undoubted triple A credit rating that would be able to fund itself extraordinarily cheaply—somewhere between Government gilts and triple A bank finance—and access the international capital markets, including very long-term funding.
That would kill many birds with one stone because there would be instant competition in the PFI market, which is something we desperately need, and an instant and huge threatening competition to the UK banking sector, about which we on the Treasury Committee are extremely worried. With its green remit, there would also potentially be a big competitor in the small and medium-sized enterprise market, about which I think all colleagues are concerned. I strongly ask my hon. Friend the Minister to consider the prospect that the green investment bank could provide a realistic alternative to PFI.
I congratulate not only the hon. Member for Hereford and South Herefordshire (Jesse Norman), but everyone who has spoken today. We are having an absolutely first-class debate with some very innovative thinking.
When the PFI was first introduced, I was deeply concerned about it in the west midlands, which is where I am from. I felt that clever companies were running rings around the inexperienced procurers of a lot of our public services. I was worried about it then and I am still worried about it, because everything I have feared has come to fruition. Today, £67 billion-worth of PFI contracts have been signed, and the total payment has been £210 billion, which says it all. In the NHS, the BBC found that £11.3 billion of investment in hospitals will have a total lifetime cost of £65 billion. The average NHS PFI profit is a return of 66%. If we compare that with the 2.8% figure for major construction companies, there is a shocking contrast.
A number of speakers have talked about PFI being the only game in town, the lack of access to capital finance and the need for off-balance-sheet funding. The problems have been very apparent. There are long, inflexible arrangements that are often unresponsive to change. Again, I shall give a health-related example. Hospitals currently do not have the money to keep pumping into these inflexible contracts. Hospitals change their functions and have a need for physical alterations, but PFI contracts are not responsive enough to help. Of course, there are also policy changes. We now have a situation whereby we are trying to conduct as much care as possible within the community. It is very interesting to speculate about what that will mean for the PFI. At the moment, we are facing the spectre of closing beds and sacking staff to balance the books and satisfy the contracts that were drawn up with inexperience a long, long time ago.
The distribution of risk concerns me greatly. Who really takes the risk if something goes badly wrong? Given the statistics that I have quoted, it must be difficult to fail with such profits built in. There is also the issue of the trading of contracts. Once a company has acquired a contract, it goes out into the market and, as the hon. Member for Hereford and South Herefordshire has said, there is sub-contracting and different people take their profit and a cut. The European services strategy unit found that the Treasury’s poor monitoring of the trading of PFI debt was giving companies a licence to print money. It is a very concerning and problematic picture.
What are the Government doing about the issue? Since we have been in government, we have forced Departments to bear the revenue cost of PFI contracts—I bet that has made one or two people think again about further investment. We are also reopening three major contracts as part of a renegotiation strategy and—I hope that this will be a warning to many PFI holders—as mentioned, we are doing a deep-dive investigation into Queen’s hospital, Romford. That will be the first forensic look at the operation of a PFI in 15 years.
We have talked about solutions. The hon. Member for Hereford and South Herefordshire has campaigned brilliantly on the idea of trying to obtain a rebate, and a voluntary code was agreed in 2002 under the previous Government. After several PFI providers made windfalls in refinancing deals, it was negotiated that 30% of gains from existing projects should be returned to the taxpayer. I understand that today that figure is 50%. We need a proper rebate and a proper code of conduct. I am also attracted to the idea of a national asset trust fund and the possible extension of a Government bank, such as the green investment bank, to use the Government’s natural low-borrowing ability to obtain cheaper funding.
I have been very brief, Mrs Main. This gravy train has got to dry up. There is an issue with many, although not all, PFI companies. That point has been made. Some contracts have been well conducted, professionally done and are good value for money. However, a lot of PFI companies have taken advantage and have bled our public services dry. It is time to release the tourniquet before the patient who feeds it bleeds to death.
Thank you, Mrs Main, for allowing me to speak in an extremely important debate. I congratulate my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) and others on the Backbench Business Committee on securing this vital debate. It is a crucial issue that is of great interest to my constituents, and I shall focus on that constituency interest.
Hon. Members have given a very technical analysis of PFI, its failings and what we should possibly do about such arrangements. However, in very practical and tangible terms, I want to speak for my constituents and explain why this rebate for the PFI would be extremely beneficial to them. If I may put that into context, I will be talking about the huge PFI scheme at the University Hospitals Coventry and Warwickshire NHS Trust.
Let me give hon. Members the background. A large tertiary hospital on the edge of Coventry was built under the previous Government’s PFI regime. The hospital replaced the then Walsgrave hospital, where I was born in the early 1970s. The new incarnation of the Walsgrave, as we know it locally, is undoubtedly a great hospital. When I say that, I do not just mean great as in good, although it is an extremely good hospital, but great in terms of size, because it has 1,250 beds and 27 operating theatres. The hospital is a large fish in a small pond in terms of the Coventry and Warwickshire health economy.
Since the hospital started to operate in 2001, the cost of the PFI contract has been substantial, with more than 14% of the University Hospitals Coventry and Warwickshire NHS Trust budget now consumed by the PFI contract and the obligations under it. The main problem with the PFI contract is that the costs are pretty much fixed. Regardless of patient numbers, under the contract the trust must still pay over a long period for the buildings, repairs, cleaning and provision of support services. Should demand fall or patients decide to go to another hospital in the Coventry and Warwickshire health economy, inevitably those fixed costs remain and must be borne by the hospital.
My neighbour and colleague is making a strong case about the impact of the UHCW in the health economy of Warwickshire, but my interest is my local hospital of St Cross in Rugby, which is part of the same trust. One of our big concerns is that, with such a large proportion of the health economy going into the PFI hospital, in times of budget pressure such as now, the bias will always be towards the PFI contract, which must be fulfilled and maintained, but that might be to the detriment of other hospitals locally and, in particular, those in the same trust.
My hon. Friend, whose constituency neighbours mine, has hit the nail on the head.
In our situation, regardless of demand or whether the Coventry and Warwickshire PFI hospital wants to close a ward or to stop the activity associated with closing a ward, such as the cleaning or maintenance, the fixed costs must still be met. That is most detrimental, and it is a drain on the Warwickshire health economy.
Another concern relates to the primary care trust and the strategic health authority. That context is changing, but some of the people involved in those organisations were instrumental in the creation of the PFI hospital and, whatever happens, I suspect that they would not want to see the hospital—this landmark development in Coventry—fail. The concern is because, ever since the hospital was built—before the mortar between the bricks or the paint was dry—the local PCT, NHS Warwickshire, has been trying to reconfigure services. We immediately had an acute services review, which threatened services at my local district general hospital, the George Eliot, and to a greater extent at Rugby’s St Cross, as my hon. Friend the Member for Rugby has said. NHS Warwickshire paired St Cross up with the Coventry and Warwickshire trust which, really, subsumed it. Services were drained away from Rugby to the new PFI hospital in Coventry, regardless of whether people in Rugby wanted the choice of going to St Cross. If we do not get a grip on the situation soon, I fear that the same might happen in my constituency at the George Eliot.
That brings me to the crux of the argument made by my hon. Friend the Member for Hereford and South Herefordshire. I echo his concern about such huge beasts of projects, which are so expensive and we hear stories about, such as the £300 for changing a light bulb. They are real, tangible problems, and our constituents cannot understand why the previous Government signed the taxpayer up to such ridiculous commitments. Although the previous Government took on those contracts, I appreciate that the new Government cannot simply tear them up. Some difficulties might arise from how the contract was framed, in particular on the capital commitments. The companies that originally constructed and financed the hospitals have sold the debt on, and it might have been sold on again, so we would now find it difficult to pin down those people and to get some form of rebate.
I am interested in what the hon. Gentleman is saying. We have all talked about the difficulty of renegotiating the existing contracts, but 61 PFI projects are currently in train for which contracts have not yet been signed. Is the logic of what he and perhaps other Government Back-Bench MPs are saying that they want the Government to stop the negotiations and to look at another format? I do not understand. If there are so many concerns about PFI as a model—it never seems to work and is always too expensive—is the sum total that it should not happen at all?
I am not necessarily saying that PFI should not happen at all, but that contracts should be negotiated in the correct fashion to minimise the taxpayer’s exposure to situations such as those we have seen. Contracts must be right when ensuring that organisations are a suitable size, for example, to fit into the local health economy. With hindsight, we might question whether the PFI hospital at Coventry was too large for the wider Coventry and Warwickshire health economy.
The general point is that we must get the issue right in future. I accept the hon. Lady’s comments, but I am confident that Ministers are ensuring that any contract negotiations will be made properly, so that we do not over-commit the Government, as was done previously.
Does my hon. Friend share my view that there is a world of difference between Building Schools for the Future, a form of PFI that the Government could and did cancel, or specific projects which were inherited but which they were uncomfortable with, such as Hartlepool hospital, which they have also stopped, at least for the time being, and the vast preponderance of the 61 projects inherited from the previous Government? The toxic inheritance from the previous Government was an enormous sausage machine, with huge embedded costs, which we have had to deal with despite a difficult economic situation. There is something grossly wrong in comparing £200 billion of spending under the previous Government with the need to get the situation under control. Does he share my view?
I share my hon. Friend’s view, which he has expressed powerfully. We must also consider a point made by my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) that, thanks to the Labour party, the country is now so indebted that, to put in any new infrastructure, we have to look seriously at schemes such as the PFI, because without them the country simply does not have the money to finance any projects.
I will not give way, because I am mindful that other Members wish to speak.
In conclusion, my hon. Friend the Member for Hereford and South Herefordshire has done an excellent job in bringing the PFI to the fore. I sincerely hope that the Government and the Minister will look at the issue closely and carefully to see whether we can get some form of rebate from the providers of PFI projects—in particular, over the terms of the service contracts—not only because of the financial situation but to ensure that the quality of services such as cleaning and maintenance are preserved, but at a lower cost.
I hope that the Minister shows the same vigour and enthusiasm as my hon. Friend the Member for Hereford and South Herefordshire. If she takes the matter forward, which I am confident that she will, hopefully we will see a great day for the British taxpayer and for people in constituencies such as mine, who are suffering the cost of the frivolity of the previous Government, which is now affecting the Warwickshire health economy.
I congratulate my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) on securing this debate. Herford and Worcester have a long history of fruitful co-operation, and I hope that the debate will show that we can work together to deliver better value for our constituents and our country.
As we have heard, PFI has become a dirty word—almost a term of abuse—but it was not always so. Both Conservative and Labour Governments saw the benefits of working with private finance and, from the 1990s onwards, the opportunity to deliver better public service by using it. Rightly, many hon. Members have challenged the essence of the scheme, and I accept that it should be reviewed and that we should look at competition, as my hon. Friend the Member for South Norfolk (Mr Bacon) has suggested. However, Members should remember that some PFIs allowed valuable new public buildings to be delivered, which would not otherwise have been possible. That was often used to justify the scheme, even after some of the initial value-for-money problems became clear. That was certainly the case with the Worcestershire Royal hospital in my constituency, and I want to focus on matters close to home, in the same way that my hon. Friend the Member for Nuneaton (Mr Jones) did. Most of my comments today will be about that particular PFI.
Over time, it has become clear that value for money was not sufficiently protected, particularly in early PFIs, such as our hospital in Worcester. When the Labour Government came to power in 1997, they were determined to embark on a massive programme of public building, but with a commitment to remain within the spending plans of the previous Conservative Chancellor. The PFI provided a valuable get-out from that Catch-22 situation, because it allowed the Labour Government to borrow against the future—build today and pay tomorrow. That was not in itself a problem, as long as future costs were taken into account and rigorously controlled. Sadly, the political imperative overrode financial good sense, and projects were signed off without the rigorous checks that should have been made.
In the case of Worcestershire Royal hospital, I can state categorically that the decision to approve the structure of the PFI was political, that it was taken by a Labour Government and that it would not have been approved by a Conservative Government. The reason why I know that is peculiar. I happened to be working as a volunteer driver for my right hon. Friend the Member for Charnwood (Mr Dorrell), who was then Secretary of State for Health, during the 1997 general election campaign. We were both from Worcestershire originally, and we were both well aware of the clamour in the city for a new hospital, so the topic came up naturally during our travels around the country. I asked my right hon. Friend why he would not sign off the hospital that everyone wanted. He explained that, although it was absolutely right that the city should have a new hospital, the contract that had been put forward for it was too expensive and inflexible, and did not build in the extra capacity that the hospital would need over the next 30 years. He said that when the Conservatives were re-elected he would renegotiate that contract and ensure that we had a hospital to be proud of. Alas, that was not to be.
With the advent of a new Government impatient to get spending, the contract was signed off unchanged and the Worcestershire Royal hospital, a fine building in many ways, where a lot of fantastic work is done, lived up to the concerns of my right hon. Friend. The reply to my recent parliamentary question to the Department of Health in February on the costs of the PFI confirmed that over the life of its 30-year contract the Worcestershire Royal hospital will cost approximately 10 times the capital cost of the project—£852 million over 30 years, compared with its £82 million capital cost.
Hon. Members may point out that it is not reasonable to compare directly the capital figure of a project with the total cost of the PFI contract, because account must be taken of the cost of capital, the service elements, and the fact that a PFI project is maintained as new throughout its lifetime. However, it is reasonable to benchmark such figures against other, and especially more recent, hospital PFIs. In recent hospital PFIs, the lifetime costs have been more like four times the capital cost, which shows the vast gulf in value between early hospital deals, such as that at Worcestershire Royal hospital, and more recent PFIs.
Hon. Members do not have to accept my word for the poor value of that PFI. In 2006, Patricia Hewitt, who was then the right hon. Member for Leicester, West and Secretary of State for Health in the Labour Government, told the Select Committee on Health that the financing of the Worcestershire Royal had been “a disaster”, and that it had been much more expensive than other PFIs.
We have a problem not with cost alone but with capacity, and they are similar to those raised by my hon. Friend the Member for Nuneaton. The hospital in Worcester has to serve as both the acute hospital for the county and the community hospital for Worcester. It is now, and has been for some time operating at close to full capacity, and as more services have been centred there, it has become a headache for the management of our acute trust. With the opportunity to have more cancer services centred on the Royal, which my constituents warmly welcome and support, comes the challenge of deciding which services must go elsewhere in the county as a result of the capacity limits.
As my hon. Friend the Member for Hereford and South Herefordshire has pointed out so eloquently in this debate and others, one of the knock-on effects of poorly negotiated PFIs has been to raise the price of hospital parking, which is certainly true in Worcester. In fact, in the early life of the PFI, land that had originally been set aside for parking had to be sold to help the trust to meet the costs of paying for it. That has added to the difficulties of parking. The costs are of understandable concern to patients and visitors, and there is a knock-on effect of people parking in nearby residential estates to avoid those costs.
My hon. Friend’s powerful speech suggests that his hospital, the total cost of which is 10 times its capital cost versus an average of four times, leaves six times £80 million, or just under £500 million of excess cost, in that contract. Is that an appropriate calculation?
That is an appropriate point to raise, and a strong argument for the sort of rebate that my hon. Friend has been advocating.
It is regrettable for all those who are affected by high charges for parking or by cars cluttering their streets as a result that the previous Government did not take more time to negotiate, to think more about the long-term consequences of their hurried decisions and to get a better deal for taxpayers before signing off that PFI.
However, we are here not simply to point the finger of blame but to deliver solutions. I believe that there are solutions to these problems, which is why I have passionately supported my hon. Friend’s campaign for a significant PFI rebate. We need not let past mistakes for ever damn the idea of the PFI, but we should learn from them and ensure that we deliver better value for money, better planning and a stronger position for taxpayers in future.
I support my hon. Friend’s contention that a 0.5% rebate nationally would deliver enormous benefits for taxpayers and, in the case of the Worcestershire Royal hospital, it would deliver millions of pounds that are desperately needed in our local health economy. I also support the urgent measures that our Government are already taking to bring PFI companies to the table and to ensure that better value is delivered for taxpayers. I am delighted for that reason that the Worcestershire Royal hospital is one of those being reviewed by McKinsey, and I urge it to examine closely the details of the current agreements and to search for areas where value can be unlocked. In Worcestershire, as elsewhere, many of us believe that the long-term costs of the PFI are placing serious strain on the finances of our acute trust. Consequentially, they are a significant barrier to the vital short-term goal of achieving foundation trust status, not to mention the essential long-term aim of delivering the best possible care for everyone in Worcestershire, free at the point of need.
There is good news on that front, which shows that the light that my hon. Friend has shone on the PFI, and the determination of this coalition Government to deliver value for money, are already bearing fruit. I understand that the Worcestershire Acute NHS Trust is already finding significant savings that can be delivered from the soft services parts of their contract. As part of the trust’s strategy to deliver greater efficiency from its PFI provider, commercial discussions are currently under way with ISS to benchmark the provision of soft services every five years. ISS provides services such as cleaning, catering, portering, security and laundry to the Worcestershire Royal hospital site, and it has indicated that it is prepared to work with the trust to deliver savings over the next five years in line with national efficiency assumptions of 4% a year. That would be delivered while offering a guarantee that there will be no impact on quality. I understand that the trust’s board is due to consider a formal offer within the next month, and I welcome that.
The trust is also due to commence negotiations with Siemens on the managed medical equipment deal, which is due to have a benchmarking review in 2012, in line with its 10-year anniversary. Those negotiations are entirely welcome and show that some private companies are already engaged in seeing how better value for money can be achieved for taxpayers. However, I am worried that, as yet, there has been no indication of similar negotiations with the main PFI contractor, Catalyst, a special-purpose vehicle. I take this opportunity to urge it to come to the table and, recognising the exceptionally good deal that it has had at the Worcestershire Royal hospital, to begin talking about how some of the value from that deal could be rebated to taxpayers and the local NHS.
The main shareholders in Catalyst when it was set up were Bovis Lend Lease and the British Linen bank. The latter, via HBOS and the ill-conceived merger that the previous Government forced through, has become part of the Lloyds banking group, in which UK taxpayers now have a significant stake. Surely such banks, publicly bailed out as they have been, should be doing everything in their power to ensure that they are giving good value to the public and the NHS? That should be the case whether or not they hope to win more business from the Government, but I have recently discovered that that same consortium has hopes of winning the contract to deliver a new radiotherapy unit for the Worcestershire Royal hospital.
That radiotherapy unit will be a vital addition to the suite of services that Worcester is able to offer to cancer patients, and I have been campaigning for that for many years. I welcomed the decision of our trust first to approve it and then to locate it in Worcester at the heart of our county. I have been asked whether I am worried that Catalyst is in the running to deliver it. I do not see it as a matter for concern so much as a golden opportunity. I hope that Catalyst can show in its bid for the radiotherapy unit that it is determined to offer taxpayers value for money and to share the benefits of the original PFI contract for the Worcestershire Royal hospital. It must have many advantages in terms of cost and synergies with its existing contracts, so I am sure that it will be as determined as I am that those advantages are shared fairly with taxpayers. I will be only too happy to support my acute trust in its negotiations with Catalyst to make sure the bid offers the excellent value for money that it should.
In particular, I am hopeful that the benefits of this project will be not only financial but will provide the opportunity to address the long-term parking problems at the hospital. I urge it to consider the need for a multi-storey car park at the Worcestershire Royal, and the golden opportunity to deliver that alongside the provision of a new radiotherapy unit. Indeed, more broadly, the Government should recognise that, as we strive to deliver value for money in all our public services, we must take a more aggressive approach in our purchasing and commissioning, negotiating hard to ensure that taxpayers receive good value. I was happy to hear of the hundreds of millions already saved by the Cabinet Office through negotiation with major suppliers, and I hope that the Minister can assure us that that approach will in future be taken to the PFI.
I congratulate my hon. Friend the Member for Hereford and South Herefordshire again on his campaign and exhort the Minister to take on board the many excellent points that have been made in this debate. Not only do we have a responsibility not to repeat the mistakes of the past but we have an opportunity to put things right for the future.
I will endeavour to make my contribution brief. This has been a very valuable and worthwhile debate on a number of issues. We need to consider the PFI as quite a complex challenge. Although my hon. Friend the Minister is here to help us with some of the financial issues, it is a challenge not just for her but for her Cabinet colleagues, because it is not just the finances that need to be reviewed. There are issues of complexity that we need to deal with in trying to find a way forward. Those issues are not just about the way in which the contracts are currently structured. There is also an issue about cultural change, because much of what has happened has changed the way in which decisions are made and outcomes are delivered for patients in hospitals and children in schools. That is why, although I support the argument for a rebate, it is only part of the solution. It deals with the existing, financial challenge, but it does not deal with other issues. It is right that we should be looking for a different way to do things, but it is a very complicated challenge.
The PFI was always well intentioned as a concept. It was to deliver quality and it was to deliver projects on time and on budget. In many ways, it achieved that. We have 700 schools, hospitals, prisons and other infrastructure projects that would not exist or would not be in the pipeline but for this initiative. We have £67 billion-worth of expenditure signed off.
The problems fall into at least four categories. First, the risk was overestimated, in part because of the public sector’s inability to deal with a very complex negotiation, as has been said. The consequence was that the taxpayer was lumbered with a very large part of the bill. As has been said, the amount of £210 billion is outstanding. By contrast, the investor is doing extraordinarily well. A number of figures have been cited, and I will add to that list. An EU think-tank tells me that 154 schemes are delivering a 50% return. That is huge. Clearly, therefore, one matter that we must consider is how we simplify not only future contracts, but the existing ones. I believe that we must consider renegotiating not just a chunk of money, but some of the terms.
Does my hon. Friend agree that a justification for a rebate arises from the effect of the spending review on those Departments whose budgets have been reduced? If the PFI element remains fixed within the budget, by definition the non-PFI element has to reduce by a greater proportion, so budgets that may have been reduced by 2% could end up being reduced by 4%. It is entirely appropriate that those who are making the sums of money that we have heard about should bear their share of the burden of getting our country’s finances into order.
I agree. My argument is that that is part of the problem, rather than the totality of the problem. My second request is that we find a way of delivering transparency and better management of the contracts. One hospital was charged £333 to change a light bulb. I dare say that that changes the hospital’s decision about whether it will change many light bulbs. One school was charged £300 just to install an electrical socket. How many times will the school install a socket on that basis? One Army official was charged £103 for a 1-inch Land Rover screw that actually cost just over £2. That is not the right way of doing things.
The three examples that my hon. Friend has cited are powerful, but they represent procurement failures by the public sector procurement people involved and structural failures in the nature of the contract, because the contract did not have to specify, for example, exactly how light bulbs would be maintained. We have examples of multiple procurement failures. PFI is being used as a proxy for that. Those procurement failures can happen with any technique or contract.
My hon. Friend makes a valid point, which is why the issue is far more complicated than a rebate.
The risk is overestimated. Projects are not monitored, partly because there is no transparency. As has been said, the size of the debt has been hidden because it is off balance sheet. If we looked at the real national debt figure, then rather than £910 billion, we would probably be looking at £1.12 trillion.
I can perhaps best illustrate the distortion in the way in which public services are used by explaining what is happening in my constituency. There is a wonderful new build hospital in Newton Abbot. It was the winner of the 2007 HealthInvestor PFI deal of the year award. But what has happened? In that hospital, we are finding considerable underuse of facilities. Beds and consulting rooms are not being used as they might be. Why? The reason, as I understand it from individuals who have come to me to raise this concern, is that it is just too expensive to use those facilities rather than the cheaper facilities in neighbouring hospitals. I am pleased to say that the primary care trust has taken the matter up and is considering how better use of the facilities at Newton Abbot hospital can be made. However, it is an example of how behaviour can be changed.
The challenge, therefore, is not only to get the cost down. Reference has been made to what the Government are already doing. I am pleased that we have a PFI hit squad, which has already taken £4 billion out of the project list. I am minded to look very favourably on the concept of a rebate, but as I said, a rebate will not be enough. There are two aspects to trying to sort out the financial mess. One is the issue of maintenance. Clearly, there are ways of reducing maintenance costs under the contracts, and whatever saving comes out of any renegotiation needs to be shared with the taxpayer and the local community. The second aspect is the payback rates. We have heard many examples of the payback rates in this context being well above the payback rates for similar risks in the market. Those two issues need to be considered.
To return to where I started, one issue that we need to consider is the impact on what happens in other parts of Government. We need to consider our health care reforms, because many of the PFI contracts are currently held by the primary care trusts. Those PCTs will cease to exist in the not-too-distant future. As and when we see their demise, what will happen to those contracts? Is that an opportunity or a threat? That is a serious issue, which my right hon. Friend the Secretary of State for Health will need to consider in conjunction with the Treasury. We have heard about the examples of schools and the challenges for some of negotiating academy status because of existing PFI contracts. To conclude, this is a complex issue. It is not something that the Treasury can deal with alone. Some joined-up thinking needs to be applied to it across a number of Departments.
It is a great pleasure to be operating under your chairmanship, Mrs Main. It is a great thing that my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) has done in securing this very important debate, because he has raised a number of issues that have been challenged or discussed and, often, supported in useful ways.
The idea of securing a rebate is a good one. I know that the Treasury, in the form of Lord Sassoon, the Commercial Secretary to the Treasury, is busily doing just that—he is attempting to negotiate a rebate. I am not sure how well the negotiation is going, but it is clearly under way. So the concept of making savings, with of course the proviso that standards and services are not threatened, is well established. My hon. Friend the Member for Hereford and South Herefordshire is absolutely right to push this issue further up the agenda. I salute that.
There is a question about off-balance sheet expenditure. It is right that that issue should be carefully considered. In the context of the green investment bank, we have already done that. The funding for that is now measured to about £3 billion. When our deficit is going down, that bank will be able to raise more capital. There is the same sort of issue, although obviously better controlled by the present Government than the previous one, in connection with the PFI.
I want you to cast your mind back to the time before PFIs got started in this country. Can you remember those schools that were designed poorly, built badly and maintained with no attention to longevity? I have buildings in my constituency that could have been much better designed and of much better quality. Indeed, a building that was literally knocked up in 1956—frankly, it was a disgrace—was recently knocked down. It was put up by a local authority as a technical college, and I could see when I first arrived in Stroud that it should have been knocked down years before. We must remember that PFI schemes have improved the quality of buildings, and in many cases that has improved the quality of services.
If my hon. Friend were to visit St Thomas Aquinas grammar school and Wellington college in Belfast, he might disagree. Wellington college was built under the PFI, and halfway through negotiations on what should have been a quality building the contractors suddenly said, “Sorry, these are off. Here is your L-shaped school.” St Thomas Aquinas school was procured conventionally. The schools were the same size, the same capital was available for both, and they had the same number of pupils and were of the same socio-economic background, but St Thomas Aquinas school ended up a much better quality school. I have spent a lot of time in both schools and have seen the difference for myself.
I thank my hon. Friend for making a good point; I shall answer it later in some detail.
I turn next to the history of the PFI. It goes back much further than 1992. The United States has been using PFI schemes for decades because it wanted private money to be used to provide public utilities, roads and so on. The PFI has a history in the US, in many parts of Europe and in most regions of the world. We have plenty of experience of it. There is much activity in that sector that we can draw upon in order to improve the way in which it works. That is the key point.
PFI schemes have recently become far too complicated. As was pointed out earlier, in many of the original schemes things were simply designed, built and then maintained. More recently, however, we have been throwing in services and all sorts of extras. As a result, the process has become complicated; indeed, many of us have used that word today. That is largely because we have confused the original concept of the PFI by adding on services and so on. There is nothing wrong with that, but it brings me to the fact that we must get the procurement systems right. To do that, we must specify much more clearly what is wanted. Local authorities have to learn to do that, as must the health service; it is a question of commissioning. My hon. Friend, who represents a beautiful Cornish seat—it is in Cornwall, is it not?
Devon: it gets better! My hon. Friend made that point rather well. It certainly needs to be considered, as specifying and procurement are critical.
We also need to understand value for money. Most PFI schemes under the previous Government did not seem to do so. The next big task is to define value for money. That will be helped if we get the data right and if we understand the systems in each project. Many people talk about the difficulties of PFI schemes in hospitals. I am not surprised, given that many hospitals cannot even tell you the cost of an operation. We need more data. If we have much more information about what is happening, it will inform the debate about value for money.
Another big problem is the lack of accountability in the decision-making process. I said that it is important to specify and procure properly, but if we do not hold those who do the specifying or procuring properly to account we will have only ourselves to blame. We need systems to ensure that specifications are clear and all-inclusive and produce the right procurement. We then need to ensure the right attitude to procurement, a point made by my hon. Friend the Member for Warrington South (David Mowat).
I hope that my hon. Friend will forgive me telling a small anecdote. I remember being told a story by one of the famous bomber command air officers. When talking about procurement, he said, “The thing to do is not to make a small mistake, because if you do they can pursue you for it. The thing to do is to make an enormous mistake.” Is that not part of the problem? Enormous mistakes are being made, and we cannot possibly hold individual officials or politicians to account for such giant sums.
It is about accountability and procurement. Much of what has been said this afternoon is about procurement failures rather than the failure of the PFI technique. I do not agree that people cannot be held to account for big procurement errors. Many organisations succeed in holding others to account, but the Government do not. I would be interested to know whether people in any of the procuring organisations involved in these awful contracts have been held to account—how many jobs have been lost and how many promotions have been missed—but my guess is not many on either count.
Thank you for being so understanding, Mrs Main. This is such a complex subject that you have to marshal your thoughts clearly.
The discussion of procurement leads me to the next big issue—the competitiveness of the tendering process. One of the difficulties is that there are not often enough bidders. That is not surprising, because the bidding costs are sometimes far too high. We therefore need to think about the competitive process and the bidding issue together. I believe that the answer is to make the contractual arrangements and the contracts simpler and more adaptable. You cannot alter a system as complicated as this by looking at one part of it and making some changes, because that will have consequences further down the line, but I think that bidding costs are indeed too high, largely because contracts are too rigid and too few organisations are looking into that as a mechanism.
One or two Members have mentioned income streams. That is a really good point. Most schemes with strong income streams have worked rather well. Those with no proper measure of income or service have not worked so well. We need to divide the concept of the private finance initiative into those schemes with strong and reliable income streams and those mainly to do with service and operation. The difficulty is that we apply the strict definition of the private finance initiative to virtually everything, when we have a much more flexible phrase—public-private partnership. That is what we should be thinking about, so that we do not get ourselves tied up in knots.
I have tried to resist intervening on my hon. Friend to ask him whether he realises that he is talking unutterable rubbish. First, if you have more specifying, you are obviously going to increase the costs hugely. As for public-private partnerships, I would encourage him to look at the London Underground PPP, where the finance costs were £500 million higher because of the complexity of the scheme, and because the Chancellor of the day detested Ken Livingstone, the professional fees added another £500 million. You—one, Mrs Main—must be careful to distinguish between the different facets. My hon. Friend said that clinical operations cost more in some hospitals than others. Of course he is right, but that has absolutely nothing to do with the PFI.
Thank you very much. [Laughter.] You know, it is always great when someone makes a point in opposition that proves the point that is being made. If you keep changing the specifications, you will increase the complexity, making it harder for those who are procuring to understand, and the bidding process just goes awry. The real problem is that various organisations have not specified clearly enough and have not stuck to the specifications as first announced. Therefore, there have been far too many changes, sometimes as late as just before contract signing. That is what I am getting at. It is totally unacceptable. It wastes huge amounts of money—millions of pounds—and it puts off other bidders because, of course, they think to themselves, “Where are we in this? It’s a movable feast.” That is not what we want. We need to bolt it down, and that is why I emphasised the importance of specification. It is a really important point, and my hon. Friend has just proved it. If you keep changing the specification, you will always end up having a problem with a contract of any description. That is where I stand on that issue.
Finally, I want to mention the ridiculous business about light bulbs, car parking at hospitals and so on—the sort of things that we must get away from. That is really important. It is what the Treasury and indeed any organisation involved in such a situation should be moving away from. It is not acceptable; it causes a huge number of problems. It is nonsense to argue that an income stream for a hospital will be the car park for the patients who turn up to it. That needs to be stated. We need to get a grip on what the hospital is actually for and apply the logic of the contract to that. That is the answer to the second point made by my hon. Friend.
In summary, PFI has a role to play, but we must be imaginative about making sure that it works better. If we are going to be spending more than £200 billion on our infrastructure alone in the next decade or so, we will have to appeal more effectively to the private sector to dip into its pocket. Properly modified, PFI can do that. That does not mean that we should not be looking at rebates, and it does not mean that we should not be concerned about what is on or off the balance sheet and so on. It does mean that we must apply value for money on the scheme and ensure that it works for those who need it.
Thank you, Mrs Main. I appreciate your candour in admitting that you have had very little to do with PFI.
I thank my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) for securing the debate. I commend his initiative and his ongoing campaign. I am not sure whether he has been nominated, but he is certainly my Back Bencher of the year for the work that he has done on PFI. It is a great scandal, Mrs Main, that this debate is being held in Westminster Hall. It is always good to debate PFI, but I feel that something of such importance—an emerging scandal that people are only just waking up to—should have been debated in the Chamber, with the full prominence that would be given there.
I was also concerned to hear earlier that evaluation of PFI projects is not being undertaken by the Treasury. Will the Minister tell us whether that can be reversed? Before I talk about some of the challenges of PFI, I want to assure people that I am not fundamentally opposed to PFI in principle; my concern is the legacy. We have heard many stories about that. The legacy has been a disaster and has tarnished the name of PFI, which could have been a force for good. It is a classic case of off-balance sheet financing. Not only will our generation pay for it, but future generations will continue to pay for that, as well as all the other debt accumulated by the previous, profligate Government.
On early memories and anecdotes that hon. Members were relating, I will not go on about light bulbs costing God knows what. However, I remember the first meeting of the all-party group on rural services when we heard from the deputy chief fire officer of a particular authority. His very last comment was, “For God’s sake, never allow me to sign another PFI contract again, because I didn’t have a clue what I was doing. In hindsight, I recognise that I made a huge problem for my fire authority. Because of that, I shouldn’t be here.” But he then went on to use the usual defence: “I didn’t know what I was doing. My accountant said it was fine, so I just signed the contract.” He was embarrassed, and it was good of him to say that, but that story is not unique. I am sure other hon. Members have heard such stories.
Indeed, we all received a briefing from the NHS Confederation: a wringing-their-hands exercise about “It was early in the ’90s; we didn’t know what we were doing; we’ve learned the practices now.” I wonder whether they have. I sent a message back to the confederation to ask what advice it gave to its member hospitals and trusts. It said, “It wasn’t our role to do so. It was the role of the Treasury and the Department of Health.” So I feel that a lot of buck-passing is going on. I know that that is in the past, but we are living with the costs today and will do so in future.
I logged on to the Partnerships UK database to see what PFI projects were awarded to Suffolk. There were only four listed, which surprised me, because I know of at least two others. The most recent PFI contract is a 30-year contract to be shared with Norfolk, and it is for six new police investigation centres, as they are called. Basically, they will be the new police cells. This contract dwarfs all the others: the East Anglia courts; the Wattisham married quarters; the hospital trust’s Garrett Anderson treatment and critical care centre in Ipswich; and indeed the fire and rescue service serviced accommodation PFI project.
We are spending £61.3 million on six centres that will be the new places where people are detained. I challenged that before I was elected. I was told that we had to have the new centres because of the recommendations of the National Policing Improvement Agency. The cost over 30 years for the contract, including the servicing, is £294 million. The budget goes from about £6.7 million spread across the two authorities to more than £11 million. My hon. Friend the Member for Rugby (Mark Pawsey) alluded to that. In the days of decreasing budgets, when we are trying to tighten our belts, we face the enormous cost of a brand-new building, which, frankly, is going to be used by prisoners. I am sure many people in Suffolk will be disappointed to hear that we will probably be losing front-line police officers to pay for what I see as a rather gold-plated building.
I genuinely hope that other savings will be found. I hope that we will improve our detection rates so extraordinarily that we will make the savings. I hope that people will not feel that they have got the bobby in the car driving people hundreds of miles back and forth between the detention centres, homes and courts instead of having the bobby on the beat. I hope that we will not be regretting this in the next few years.
Other projects have caught my eye. Apparently, the M1-A1 link road is a shadow toll road. As part of the PFI contract, the Government pay a fee—a toll—to the company. The numbers of journeys are more than double what was originally estimated, so the Government are happily paying through the nose for that. To be fair, as has already been suggested, I do not believe that we should condemn the private sector for how it has made significant amounts of money. Much of the fault lies with us as clients. People should look themselves in the mirror when they recognise the profits that they make from PFI. I have a wealthy constituent who stopped speaking to his brother because he was so ashamed of how much money he was knowingly making out of some of the contracts. He recognised that he did not have a sophisticated client.
Just a few weeks ago, the Government released their construction strategy in which they recognised that 80% of the challenges have been within internal processes. Change orders, which were mentioned earlier, classically add so much to the cost of a project, as does the lack of sophisticated negotiating. The Government are trying to change that, which is to be welcomed. The last piece will be for the construction team, along with financing, to come together and ensure that we have a simpler, focused contract that is flexible and appropriate for future needs.
As for the way ahead, I wish my hon. Friend the Member for Hereford and South Herefordshire would name and shame those institutions that have thus far not consented to voluntary repayments. I would also like to hear the results of Lord Sassoon’s review on the renegotiation of contracts, which was initiated in February.
I am delighted to hear that PFI is no longer the default place in which to look for capital; there are other sources available. Unlike under the previous Administration, it is not the only game in town. I am glad to see that we have a more balanced potential source of capital funding for the future. I shall conclude, because I recognise that others wish to speak. PFI will be one of the greatest scandals, so I congratulate my hon. Friend on bringing it to the attention of the House. Let us keep up the volume to ensure that this scandal is not repeated.
It is a great pleasure to speak under one’s chairmanship, Mrs Main. [Laughter.] I also add my name to the chorus of congratulations for my near neighbour and hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman), who has not only secured this debate but worked so hard on the thorny issue of the PFI. His work includes his PFI rebate campaign, which I have enthusiastically signed up to. He has also managed to secure a Treasury Committee investigation into the future of PFI. It is good to see that four members of the Select Committee have come along this afternoon.
The PFI does not directly affect my constituency—there is only a magistrates court there under a PFI contract. However, it indirectly affects my constituents because they are served by the Worcestershire Royal hospital. Famously, Kidderminster hospital was downscaled to help pay for it. When my constituents hear that we have overspent on those contracts to the tune of half a billion pounds, they will be rightly even more furious than they were when the Government wound down Kidderminster hospital.
The PFI is something that we all love to hate. It has come to signify the inability of the public sector to write proper contracts and it is a symbol of trying to hide capital investments on the country’s balance sheet. However, is that a fair summary of what is a reasonably legitimate way of financing part of the supply side of the economy? I have certainly argued in the past that the public sector will always negotiate bad contracts for the simple reason that there is an asymmetry in negotiating skills. I am certainly not here to criticise the knowledge of public sector employees in terms of how to go about writing a contract. However, when it comes to a contract between the public sector and the private sector, we have, on one side of the table, a well-read and well-intentioned civil servant who is doing his best and possibly looking forward to his retirement, while on the other side we have a hardened businessman who is motivated by profit and return on equity and quite probably incentivised by direct equity in his business and a bonus for concessions won. A civil servant will certainly be very well educated in negotiating, but the hardened PFI negotiator from the private sector will have the concept of return on equity, risk evaluation and profitability etched into his DNA. There is no doubt that there is plenty of money to be made out of PFI for the astute negotiator.
Dexter Whitfield, director of the European services strategy unit, in his submission to the recent Treasury Committee investigation, highlighted the profitability of PFI equity sales—that is where a PFI contract is sold and the profit made is in addition to the profit that is gained on an ongoing basis. He pointed out that although there is little readily available information on PFI sales, the ESSU database holds 63 transactions covering 154 PFI projects, and he has looked at how much they have made. Average equity profit has been 50.6% on the 63 transactions. What is interesting is how they fare by sector. Health has been given a profit of 66%, housing 80% and leisure 86%. However, the truly eye-watering winner by miles goes to the defence sector, which has been giving PFI providers a whopping 134% profit on their equity sales. The Treasury Committee inquiry was lucky enough to have a representative from the PFI industry, one of the directors of Balfour Beatty, and he was surprisingly evasive in his reply to my questions, implying that that profit may have included the annual premium returns and therefore was not a fair judgment. But my interpretation is that PFI providers that have sold their investments have already made an annual return on the projects—that is perfectly reasonable, given the way that the projects are structured—but that the sale profit is in addition to that annual return.
What does that mean in terms of the contracts that have been negotiated? It seems that the valuation of risk, which is a key part of a contract, has been miscalculated in favour of the provider and it is that premium, in favour of the provider, that gives the opportunity for the sizeable equity sale profit. Indeed, the fact that there is someone out there to buy the equity stake with their own measure of risk and expectation of return means that there is still more to be made by the subsequent buyer, implying even further mispricing of risk.
That is the point. PFI projects do two things: first, they provide a so-called off-balance sheet way of financing a vital piece of investment; and secondly, they devolve the risk element of any project to the private sector. But the private sector will evaluate that risk and charge for it, and the evidence put forward by Mr Whitfield suggests that the PFI provider is making a great deal of that opportunity.
I have been listening very closely this afternoon to the points that have been made about the super-profits, the 180% margins and all the rest of it. I have also tried to hear the names of the companies that are making those profits and the only two that I have heard are Balfour Beatty and Bovis. My understanding is that neither of those organisations has a particularly high return on capital employed. So I am a little bit mystified as to where the money is going and I genuinely would like somebody to help me with that point.
I thank my hon. Friend for that intervention—what a perfect opportunity for me to do so. These are the profits of equity sales by the companies concerned: 41% for Carillion; 59.1% for John Laing; 53.9% for Interserve; 78% for Lend Lease Corporation, so well done to that company; 42.9% for Costain Group; 20% for Serco Group, which was perhaps not the best investment for someone’s money; 71% for Balfour Beatty; and 59% for Kajima Partnership.
It is very important to distinguish two things. One is the internal rate of return, or IRR, of an investment, which is the annual amount by which it gets upgraded; the second is the value that a provider gets when it sells a share. We do not know the answer to this question, but those values are perhaps what they are in part because of the period of time that they have been held. If someone held a share in the London stock market for 10 years, they would see a certain uplift in its value. I do not know what the number is, but it might be 20%, 30% or 40%. It is that kind of thing. The contrast is with the returns that were being made, for example, with the Norfolk and Norwich university hospital, where the refinancing, which loaded up the hospital with £100 million of additional debt, realised an IRR—an annual upgrade in the return to the investors—of 60%. So what my hon. Friend is talking about might be, in fact, a 7% or 8% return each year. We just do not know, and that in itself is a great embarrassment for the previous Government, because we do not have the numbers.
My hon. Friend makes an incredibly important point. I suspect that what these numbers are telling us is that the annual returns are being treated rather like the dividends on an equity investment in the stock market and these capital returns—the sales of equities—are the capital return that the company gets. So they are already getting their annual rate of return and this money is in addition to what they would expect to receive if they ran the contract to the end. But we need to clarify that, because these are incredibly important points.
The Government are committed to the PFI and, as we have already heard, they have 61 new projects being procured as of earlier this year, with a value of £7 billion. That is not necessarily a bad thing because money is being invested into the supply side of the economy, and we need that investment to support our expectations of economic growth and to sort out the financial mess that the coalition Government have inherited. The PFI allows that investment to happen without any immediate impact on measures of public sector capital expenditure or borrowing. However, the efficiency case for the PFI rests on the model’s ability to allocate risk more effectively than regular procurement. To date, there seems to be no empirical evidence to support any claims that the higher price of PFI finance has offset any reduction in costs.
The efficiency case looks even more fallacious in the light of falling interest rates, as we heard earlier in the debate. The Government can borrow directly at around 3.3% and yet the IRR on a PFI contract is now 4% higher than that. That is a significant risk premium to be paid by the Government, especially when the PFI investor frequently offloads risks on to subcontractors. We have heard that before. Given that we have very low interest rates and can issue gilts on a 25-year basis, should that not be one way to look at financing some of the supply side of the economy?
Coming away from the financial side, I am not sure that some of the users of PFI facilities are always that happy. Wyre Forest was one of the areas that suffered under the cancellation of the Building Schools for the Future programme. I am continuing to work hard to get rebuilding finance for up to 11 of my local schools. We are waiting for the James review on that.
Wyre Forest secondary schools were to be built under PFI contracts. In private chats that I had with various head teachers and governors, they were concerned that a PFI contract would tie their hands financially, limiting their ability to determine their budgets and, therefore, investment in teaching and teachers. We all want new schools, but at what cost to education? PFI has a place in the future in terms of funding investment, but it has to be done at the right price. A lot more work needs to be done on ensuring that we get the end product at the right price. That is why I am incredibly grateful to my hon. Friend the Member for Hereford and South Herefordshire, for taking the initiative to question this important area so closely, and to work so hard for the future of PFI.
I, too, would like to congratulate my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) on securing the debate, and to pay tribute to his leadership, his courage and his intellect. As I listened to the debate, I noticed a strange thing: Conservatives verging on sounding like anti-capitalists.
And indeed Liberals seem to have spoken as anti-liberals. I am perplexed by that. I would like to develop one point: how PFI fits into the nature of our society. I am reminded of something that Churchill said, which I think speaks to the third way. He said:
“Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk.”
I will come back to how he finished the quote at the end. It strikes me that the third way seems to have turned private enterprise into a vampire squid to be suckered on to the faces of people on normal and low incomes.
I am pleased that my hon. Friend wishes to respect contract. Given that the world contains imperfect self-interested people, and given that we have imperfect knowledge of the world, it is important that we are secure in the institutions that we create and in which we operate. Therefore, I am delighted that my hon. Friend emphasised the need to respect contract and to seek voluntary renegotiation. I was particularly impressed that my hon. Friend the Member for Suffolk Coastal (Dr Coffey) hinted at the need for a moral basis on which to operate in capitalism and society. It is necessary that people do not simply blame procurement processes—much as they are an institutional factor—but look to themselves to behave decently.
There are many questions that we could discuss: who provides, who pays, where risk lies. However, I would just like to develop one point made by my hon. Friend the Member for South Norfolk (Mr Bacon), who said that fat cats are getting fatter at public expense. I believe that is broadly his remark. That reminded me of an old picture of the ancien régime in France, where the bureaucrats and princelings were riding on the backs of the poor. From what we have heard from Members of all parties, it seems that today we have a regime where the state and the clients of the state ride on the backs of everybody else.
It is strange that so much money is being funnelled to firms whose commercial risks are being underwritten by the power to tax. Far from protecting the poor, the state now seems to be an institution for protecting the rich from the risks they take with their own investments. I am a capitalist, and I believe that capitalism requires entrepreneurs and investors to bear their own risks. Somehow, through all this mire and mess that we find ourselves in, we need to recover the principles of a free society and a vision of a capitalism that works, and works for everybody.
The state has become an enormous player in society. It spends about half of national income, and we have ended up with far too many investors and companies looking to the state for its decisions. Where will it spend? What will it spend that money on? Whose risks will it underwrite? And so on and so on. It really is no good. If we wish to call this a free society—one in which people make their own way and flourish—we really do have to end the notion of the state as a giant player in society. My right hon. Friend the Prime Minister, at different times, has declared that the era of big government is over. I think that he is absolutely right, and I am delighted that that is the thrust of the Government’s direction of travel.
I think that the British public have a fantastic sense of fair play—that is one reason why Private Eye sells so well. I would like to share with the Government the final line of Churchill’s quote:
“Not enough people see it”—
“as a healthy horse, pulling a sturdy wagon”.
I congratulate the Government on bringing forward their paper, “Making Savings in Operational PFI Contracts”, but I urge them to go further, to try to recover that sense of fair play and regenerate those institutions of a free and fair society which support capitalism and support human flourishing, but above all, pass that Private Eye test.
I am conscious that my hon. Friend the Member for Warrington South (David Mowat) wants to speak, so I shall try to limit my speech to half the time remaining.
In this debate and as a member of the Public Accounts Committee, I have heard about many of the things that have gone wrong in PFI, but I want to focus not on the past but on the future. I shall do so by discussing three areas: first, contract design, because 61 PFIs are being planned; secondly, contract management, because there is a big disparity between private sector and public sector expertise, and I do not get a sense that it is being addressed, so it will continue to lead to poor value for money; and thirdly, if time allows I would like to touch on the secondary market, in particular the greater role that insurers and pension funds could play in certain elements of PFI and the regulatory task force that the Treasury has set up. It will be interesting to see how that will interplay and report back to the House.
First, on contract design, my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) mentioned bundling. We had rather disturbing evidence from a Treasury official at the PAC last week, who suggested that bundling remained necessary because without it the design and construction would not take on board maintenance costs in future. I suggest that they can be decoupled. It is possible to design and put out to tender in such a way that the construction risk is assumed through the PFI if required, by buying in management expertise from the private sector. However, the tail, where there is certainty of revenue, which is particularly attractive to other forms of finance companies, can be decoupled. That will also avoid some of the complexity of contracts, which is where the opaque pricing structures often lie and the legal costs come in. I would welcome clarity on the extent to which the 61 pending PFIs will be bundled.
My hon. Friend is absolutely right. It is helpful for the Minister to look at that example as a benchmark.
Secondly, although I am conscious of time, I want to cover the public sector comparator. Hon. Members have touched on the fact that it has often been flawed, because the PFI was a way of taking deals off the balance sheet and it was the only show in town, but there have been other imperatives. There was a regulatory imperative—not to mention, with a lot of marginal seats in the north-west, a political imperative—to go ahead with the Manchester incinerator, even though it was, at 350 base points, over and above the 300 threshold that the Treasury had at the time. Likewise, there was a defence imperative to go ahead with the air tanker contract, which was appalling value. The existing fleet was falling apart and there was no fall-back position, so there was a defence need for that contract to go ahead. It would be interesting to get from the Minister a sense of the extent to which guidance has changed to guard against some of those risks, and how we as a House get visibility of whether a viable fall-back position has been developed for some of those 61 contracts.
Thirdly, specifically on defence, the response in the Treasury minute of December 2010 is a little ambiguous. It says:
“The Government does not agree with the Committee’s conclusion…on the applicability of PFI to Defence, but agrees with the Committee’s recommendation.”
It will be interesting to see how guidance on defence PFIs will be refined.
I welcome the appointment of David Pitchford in connection with the major projects defence review. That will be useful in addressing some of the problems we see with these contracts, such as their long-term nature and the increased costs.
I was just coming on to that exact point. Clarity would be welcome as to what falls under his remit.
Turning to management, my hon. Friend the Member for Warrington South made a point about disparities. One disparity is that, to take as an example Innisfree, that firm has consolidated 24 hospital PFIs with one provider, while 36% of hospitals have fewer than one full-time equivalent person managing PFI contracts, and 12% have no one managing them at all. There is disparity in how contracts are being negotiated and managed, and even a good contract will be ineffective and poor value for money if it is not effectively managed.
In the Treasury minute it says that the Romford pilot, which health officials set great store by, will “hopefully” provide data that trusts can use, but there is no scope to enforce that and no requirement for an increase in the amount of data being asked for. Again, we hear that there is a potential solution, but that solution is not enforceable, the amount of data required will not be increased and there is no transparency in the expertise at the centre. The Department of Health has only four people providing PFI expertise, and the Public Accounts Committee will hopefully get a note from Treasury officials clarifying that.
Finally, in the secondary market there is a problem with regulatory arbitrage, with different treatment of insurers and banks in their access to the market. It is important that the Treasury arm that deals with regulation is joined up with the arm that deals with finance. On the refinancing taskforce, the acknowledgment that life insurance and pension funds are important alternative sources of finance is not clear in the February 2011 minute. It also states that
“the refinancing task force will act on this recommendation”.
That is very welcome, but how will it do it, and by what date? How will the House get scrutiny of that?
Perhaps the Minister can touch on these areas in her closing remarks. I commend my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) for the work that he has done in this campaign and for the formidable way in which he has taken it forward.
I thank my hon. Friend the Member for North East Cambridgeshire (Stephen Barclay) for shortening his speech to let me in—I hope it was worth it. Along with other hon. Members, I commend the hon. Member for Hereford and South Herefordshire (Jesse Norman) for his important initiative.
It seems to me that the PFI is a procurement technique that has been used over the past decade or so—perhaps for longer. Like any technique, it can be used wisely or poorly. There are certain instances, when a project has certain characteristics, when it is probably a good technique to use—for example, when there is a significant construction phase that is difficult. The private sector is able to do that, and we want to transfer the risk. I heard about the Edinburgh tram system on the radio this morning. That system is an appalling failure, and I do not think that it is a PFI project. PFI is a technique that also works when trying to minimise life-cycle costs, because there are some advantages in looking at the overall operability of a scheme as well as its construction.
The technique works best when the procurement contract is written in such a way that, over its period, it properly aligns the profits of the contractor with the interests of the client, and that is where contracts have gone wrong so frequently. It is a technique that also works best when the market is reasonably deep, so that value for money is achievable, and some of the points about how weak the market is are right. The PFI technique also works when there is reasonable certainty as to the nature of the contract that is needed, which is to say that multiple changes will not be made over a 20 or 30-year period. Again, one issue is that, in certain instances, we have been locked into hospital contracts, which, as health care changes come through, we are unable to alter.
Those reasons are why the PFI technique may be valid. There are instances, however, where we should not use PFI, and the overall reason why it has been a bad thing is that it has the characteristic of off-balance-sheet finance. It is a way of constructing a load of activity and projects without putting it on the public debt. I am sorry to say that—without being too political—the previous Government built many schools and hospitals in that way, and, frankly, those schools and hospitals will be paid for over a long time. That is a poor thing.
PFI also does not work if there are asymmetric negotiating skills, and we have heard much about that this afternoon. Unfortunately, that is the case in the example that my hon. Friend the Member for Wyre Forest (Mark Garnier) gave about the contractor’s interest and expertise. All that is true. It strikes me that the issue is also one of accountability. In an earlier intervention, I made the point that I see no accountability in public sector procurement, which is disappointing.
The consequence of all that is that we get the multiple messes that have been mentioned. I was interested in the example that was given by my hon. Friend the Member for Nuneaton (Mr Jones) of a hospital that is under pressure because work has had to be transferred to a PFI hospital, because exactly the same thing is happening to Warrington hospital due to a large PFI hospital being built just up the road and needing patients to satisfy the contract. That is an example of terrible failure.
I am delighted that the review of contracts is going on, but I want to raise several points that I do not fully understand. We have to be careful about opening up contracts that have been entered into in good faith, and we must be careful about bandying about profit figures. In my previous life, I had some contracts where I made a lot of profit, and I had some where I made so much loss that it could not be counted. It is only reasonable that all such activity is looked at in the round, so we must be careful. Regarding the list of organisations that was read out earlier, I reiterate that, as far as I am aware, none of those companies is making excessive profits in terms of return on capital employed or share price. We need to think through what is happening between the extraordinary profits that everyone is talking about and the fact that those publicly quoted organisations do not seem to making them.
It is worth trying to get some of the money back in the same way that the Cabinet Office has been doing for large consultancy and IT projects. However, what carrot are we giving to such people, who in many instances entered into contracts in good faith? From their point of view, they have carried out the contracts to the best of their ability. In the case of the Cabinet Office initiative, the bribe being used is the threat of not getting further contracts unless they play this game. That is a valid thing, and the directors, who have a fiduciary responsibility to their shareholders, can go back to their boards and say that they have a choice to make: they can either knock some money off or do no more work for the Government. That is their choice. In our discussions in this area, we must enable ourselves to create that choice for such organisations. I am not sure that characterising them all as money-grabbing private sector rogues is necessarily the way forward. I have heard a bit of that this afternoon.
I shall sit down now but, before I do, I again congratulate my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) on initiating the debate. The issue is very important and could have significant impacts on all our communities.
I, too, congratulate the hon. Member for Hereford and South Herefordshire (Jesse Norman) on securing the debate. It has been a very interesting two-and-a-half hours so far, and I am sure that it will have been a very interesting three hours by the end of the debate. There has been an unusually high turnout for a Thursday afternoon debate, for which we are normally on a one-line Whip. During the afternoon, I gather that we have moved from a one-line Whip to a three-line Whip and back again to a one-line Whip, so hon. Members are free to go at 5.30 pm, if they really want to.
The hon. Member for Hereford and South Herefordshire is right—or he at least makes a valid point for discussion—about a number of issues. He is right in saying that there has not been enough debate and scrutiny about the PFI issue in that past. That is partly because, as the debate has reflected, it often comes down to the devil being in the detail of individual contracts. It is hard to extrapolate from that general point whether the PFI is a bad thing or a good thing, or whether there are particular flaws in some of the contractual processes. I will come on to that in a moment, because it is a valid issue to thrash out.
The hon. Gentleman is also right in saying that not enough data are available on PFI schemes. I shall touch on some of the difficulties with the PFI. As I have said—I do not think he used this phrase—the devil is in the detail. We have heard some micro-detail about issues such as car parking, and the hon. Member for South Northamptonshire (Andrea Leadsom) discussed a hockey pitch that was slightly too short and the difficulty in rectifying that situation. The hon. Member for Newton Abbot (Anne Marie Morris) touched on some local issues. The hon. Member for South Norfolk (Mr Bacon) and others mentioned the naivety of the civil servants who negotiated the deals and that perhaps a lack of commercial nous meant that they did not realise the private sector would seek to maximise profits over the contractual term. Other hon. Members then developed that point, and the hon. Member for Warrington South (David Mowat) talked about multiple procurement failures.
There was then a bit of a debate between the hon. Member for Stroud (Neil Carmichael) and the hon. Member for South Norfolk, who made an intervention, about specifications in contracts. I am talking about this as someone who was once involved in negotiating PFI contracts when I worked for a City law firm at a very junior level—although I was pretty much photocopying the documents and proofreading, rather than doing the heavy duty negotiations. There is an issue about whether the process should be about over-specifying everything in advance—crossing the t’s and dotting the i’s—so that those involved do not get into complicated negotiations throughout the term of the contract. That is a laborious process. Perhaps there is some way of creating a PFI contract that is flexible enough not to get into such situations.
Let me give an example of a school in my constituency. An issue arose when new keys were needed for the room where the sports equipment was kept. Because that was not in the contract, the school was not allowed to get its own keys copied and had to get the contractor to copy the keys. It became a huge thing with huge costs attached, which is obviously ridiculous. However, it would also be ridiculous to have a contract—having photocopied them, I know how huge they are—that specified who was to get the keys copied, if another bunch of keys were needed. Those are certainly valid points, and I do not have the answers on how we can resolve that.
The wider point is whether such a situation is specific to the negotiation of PFI contracts or whether it is an issue with public procurement contracts generally. The hon. Member for Wyre Forest (Mark Garnier) mentioned the asymmetry in negotiating skills between civil servants in the public sector or people in local government and hard-headed business people. That is an issue, but it also occurs in other public procurement realms as well as in relation to PFI schemes. The hon. Member for Wycombe (Steve Baker) developed that into a philosophical discussion on the role of the private sector. Whether the conversation that we are having this afternoon is going down slightly too anti-capitalist a route for him is something that we could explore at greater length on another day.
In the limited time that I have left, I want to focus on a few questions for the Minister, who will respond in a moment. The Government have confirmed that they remain committed to the PFI model that was used by the Labour party. In their technical update last year, they said that they remain committed to public-private partnerships, including those delivered by the PFI, and that such arrangements will continue to play an important part in delivering Britain’s infrastructure.
As we have heard, PFI schemes are still expanding at a significant rate. In March, 61 new PFIs were procured with a total capital value of £6.9 billion, which represents an expansion of more than 10% in the total capital currently committed under PFI. The Government’s support is somewhat surprising given the criticisms that have been aired. Liberal Democrat Members were scathing about the PFI model before the general election. The Deputy Prime Minister described it as
“a bit of dodgy accounting—a way in which the Government can pretend they’re not borrowing when they are, and we’ll all be picking up the tab in 30 years.”
The Liberal Democrats called for a UK infrastructure bank that would reduce the cost of long-term funding compared with the PFI.
Before the election, the then shadow Chancellor said:
“The government’s use of PFI has become totally discredited…Labour’s PFI model is flawed and must be replaced.”
In 2009, he said that
“we are working on reforms to the discredited PFI model that are transparently accounted for and genuinely shift risk to the private sector.”
As I have said, a significant number of PFI projects are in the pipeline, so the work is still continuing. Will the Minister explain where the Government are on reviewing the PFI model? Have any changes been made to the PFI model since the Government were elected last year? Are further issues under consideration? Have the Government managed to save any money from the PFI?
In a document published in January, the Treasury said:
“Value for money is a cornerstone of PFI and the key rationale for its use.”
But the Financial Times reported earlier this year that the Government are struggling to find PFI savings. I appreciate that the pilot project involving the Queen’s hospital, Romford was launched in February to identify where savings could be made. Will the Minister tell us what savings have been found to date? I gather that that hospital was chosen because it is representative of a typical PFI project, so should we presume that the savings that are identified by the Romford project could be used as an example to make similar savings from other projects?
The Government must also decide whether the PFI is right in every case. Much has been said about Labour’s use of the PFI when it was in government, but, unfortunately, I do not have time to go into that. Although the PFI played a major role in delivering the Building Schools for the Future programme, it is a good example of where Labour used the PFI where it would deliver savings to the taxpayer, but used conventional procurement where appropriate. Of the BSF capital allocated up to 2011, 41% was provided through the PFI, with the rest coming from conventional public funding. In the NHS, 118 new hospitals would not have been built without the PFI—88 were provided through the PFI, and 30 were provided through conventional procurement. What principles are the Government working to in assessing the viability of PFI projects? In how many cases have the Government decided to use a non-PFI approach, because the PFI is not seen as value for money?
As my hon. Friend the Member for Walthamstow (Stella Creasy) pointed out in the Public Accounts Committee today, 33 deals, which generated £38 million in profit last year, paid only £100,000 in tax. Treasury officials have confirmed that the tax consequence of the deal was part of the initial assessment of the contract, but subsequent changes, such as moving offshore, were not. Will the Minister confirm that she is looking into that issue? What steps will be taken in future PFI deals to prevent tax avoidance?
Finally, the PFI model allowed enormous investment to take place under the previous Government. It simply would not have been possible on that scale without the PFI, but we accept that the PFI should only be used responsibly and where it delivers the best value for money for the taxpayer. I accept that the issue deserves greater scrutiny, and I look forward to hearing what the Minister has to say about how the Government can take that forward.
I pay tribute to my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) for securing this debate. The topic is incredibly important, and he has done a brilliant job of raising it high up the agenda and rightly so.
We have heard from many Members today, but not from as many Opposition Members as we might have expected. Many Members feel that the PFI has, in their experience and their constituencies, let them down. Nevertheless, one of the qualities of today’s debate was the balance demonstrated by hon. Members. Not all PFI contracts have been bad. Many have delivered good contracts. There have been bad ones for the taxpayer and bad ones for the private sector. The one that is particularly close to my heart, as my hon. Friend the Member for South Norfolk (Mr Bacon) has mentioned, is the public-private partnership for the London underground. Investment in my stretch of the underground was significantly delayed, because of its bad structure and the ultimate failure of both of the private companies that participated in it due to the losses that they were making as a result of their poor contracting. The topic is important.
My observation as an incoming Treasury Minister was that the background to the issue was all part and parcel of a much broader lack of financial management shown by the previous Government across government. I might address that later, if I have time, but I intend to leave a couple of minutes at the end to my hon. Friend the Member for Hereford and South Herefordshire to have a final say.
As my hon. Friend the Member for Wycombe (Steve Baker) and a number of other colleagues have pointed out, the main attraction for the previous Government in turbo-charging the PFI process was the fact that they were able to spend not only taxpayers’ money that was being earned at the time, but taxpayers’ money that had not even been earned and that would be earned at some point in the future. The main appeal of PFI for them was that it was off balance sheet. It was also unfortunate that it came at a time when that Government thought that they had abolished boom and bust and were saying that we all lived in the land of milk and honey. The general ethos that was applied to the public sector was to spend, spend, spend, get on with things, and be less worried about whether it was good value and just get on with the job at hand. My hon. Friend the Member for Worcester (Mr Walker) pointed out how that impacted upon his local hospital.
We have some problems. I will discuss what the Treasury is doing to try to sort some of them out, but we seem to have three main issues. One is a lack of accountability, which is an inherent risk in these contracts, mainly because of their longevity and the fact that the people who set them up will not be there to manage them or be accountable for them throughout their duration. There is also an issue of transparency, and I will talk later about what we are doing in that regard. Underpinning all that is the need for value for money and for having contracts in place that deliver on behalf of taxpayers in the way in which they are meant to. My hon. Friend the Member for Warrington South (David Mowat) put it very well: PFI can work, but the challenge is making sure that, in structuring our contracts, we end up with a win-win situation for the private sector contractor, for the public sector and for taxpayers. We can do that, but the challenge that we saw over the past decade is that it just did not happen often enough.
The shadow Minister asked about the number of contracts that we have signed off. No PFI contracts have been approved yet by the new Government, and we have put in place much more stringent processes to ensure that any contracts that go ahead have a much better prospect of being good value for money.
My hon. Friend the Member for Nuneaton (Mr Jones) asked whether the Government are looking closely to see how we can ensure that we get value for money. We are doing that—he is absolutely right to say that we should do it—and we are doing it across the board.
Many hon. Members discussed transparency, which I will discuss shortly. My observation is that one of the reasons why we are debating the PFI is that, ironically, there is perhaps more transparency in the PFI in some respects than there is across the rest of Government spend. One of the projects that I am leading on behalf of the Treasury is to introduce common chartered accounts. Any hon. Member who has been in business will find it fantastical to learn that the Government do not have common chartered accounts, but that is indeed the case. Once that system is in place, once we are able to upgrade the combined online information system database and once we can drive central Government further in terms of the transparency agenda, we will go through a similar process of lifting up the stone on central Government spend as we have done in relation to PFI contracts. Transparency is absolutely critical in that regard.
I want to outline where there is room for improvement. We are all aware that we face tough economic conditions and that we must ensure that we get value for money. The Government have already taken a number of steps to address many of the concerns about the use of PFI in funding public infrastructure, concerns that have been expressed in this important debate. I will go on to talk briefly about what we are doing in relation to existing contracts, but first I will talk about what we are doing to ensure that we can achieve good value for the taxpayer for new projects.
With new projects, value for money is, of course, the primary driver for the choice of procurement route. We are very clear that private finance should be used only when it can be demonstrated that it offers better value for money than a publicly financed alternative. As I have said, my hon. Friend the Member for Worcester made a powerful case in relation to that. We have already taken measures to strengthen the value for money assessment of new projects.
As the hon. Member for Solihull (Lorely Burt) pointed out, we abolished PFI credits in the 2010 spending review. Previously, funding for local government projects was ring-fenced. That had become a genuine cause for concern, because what it actually meant was that Government Departments and local authorities could use the PFI as a means to increase their budgets, with the potential for diverting funds away from more beneficial areas—areas that could have offered taxpayers better value for money. Now, the economic case for PFI projects must be compared by Departments and local authorities on a like-for-like basis with the other calls that they have on their budgets.
I have huge respect for my hon. Friend the Member for South Norfolk. His experience on the Public Accounts Committee goes back many, many years. As he pointed out, too often there has been insufficient competition and an insufficient ability for firms to compete. I actually felt that he was violently agreeing with my hon. Friend the Member for Stroud (Neil Carmichael) on the point about specifying contracts. The key is to specify contracts smartly, in other words tying down the details that need to be tied down in areas where we have certainty, as my hon. Friend the Member for Warrington South pointed out, but leaving flexibility in other areas—the right areas.
I remember that that issue arose when I was serving on the Work and Pensions Committee when I first came into this House, which I very much enjoyed. We looked at the EDS contract in relation to the Department for Work and Pensions. That point—the importance of flexibility—was one of the key things that came out of that process. I am sure that EDS will not mind my putting this on the record, but one of the challenges that it faced was that it was dealing with a Government who wanted to specify absolutely everything and therefore the cost of the contract absolutely ballooned. In fact, what was needed for that system was to retain an element of flexibility for future demands as they evolved. The key to success in all these contracts is people understanding not only what needs to be tied down in terms of the contract but, critically, where flexibility must be left.
We have issued new guidance, which the shadow Minister, the hon. Member for Bristol East (Kerry McCarthy), asked about, to strengthen the approvals for PFI projects. As of 1 April this year, any centrally funded projects that are outside a Department’s delegated authority have to go through a rigorous three-stage scrutiny and approval process with the Treasury. To put that in context, previously the Treasury only reviewed PFI projects when they were at the outline business case stage. After that, it was only the risky ones that were further reviewed. We now have a three-stage scrutiny process, which means that projects are subject to far more scrutiny as they are being developed. In addition, the largest and most risky projects in Government will be subject to a review by the Major Projects Authority, which has just been established by the Minister for the Cabinet Office.
We have also published guidance to help public sector bodies identify savings in their PFI contracts. I will come on to the Romford case study in a second and provide hon. Members with an update. All the measures that I have outlined should mean that we are better placed to ensure that only those projects that offer the best value for money to taxpayers can go ahead, which is absolutely right.
As for operational savings, clearly we have a number of PFI projects that are in place and operating right now. Therefore, it is about looking at not only new projects but the existing stock of PFI projects. As many hon. Members are aware, we have taken a strong interest in the pilot savings project that is currently under way at the Queen’s hospital in Romford. As my hon. Friend the Member for Hereford and South Herefordshire said in a recent newspaper article, we have taken a deep dive to get under the skin of the project to see where we can save money. He raised the idea of a rebate. Although we want to drive savings, it is a challenge to do that with contracts that are already in place, as the hon. Member for Walthamstow (Stella Creasy) pointed out. Nevertheless, we want to try to save money.
The pilot is nearing its conclusion, and we will be passing on the lessons that we have learned to the wider PFI portfolio—of course, there will some lessons that are not applicable. Given the commercial sensitivity of the pilot, it is probably inappropriate for me to comment in more detail before it is completed. However, I assure hon. Members that the pilot has made good progress and that there will be lessons that we can take from it to help to achieve better value for money from existing contracts.
My hon. Friends the Members for Wycombe and for North East Cambridgeshire (Stephen Barclay) asked about guidance. We have been seeking industry agreement to a new voluntary code of conduct to support the idea of achieving operational savings from other PFI projects. That is important not only for getting better value for money but for driving better standards of transparency, so it is clearer to the outside world what contracts are delivering for the general public. We also issued some draft operational savings guidance in January 2011. Therefore, although the pilot in Romford is still ongoing, we have already issued some guidance on where further savings can be made.
As for the PFI rebate, the Chancellor and the Commercial Secretary have both met my hon. Friend the Member for Hereford and South Herefordshire. We fully support the principle of making savings in PFI contracts and we will look carefully at how we can do that over the coming weeks, months and years.
The Government want to improve the financial transparency of PFI projects. We currently collect and publish data on each PFI project twice a year. That includes information on the capital value, the equity owners and the full stream of payments over a project’s life. The Cabinet Office is now publishing tender documents and contracts for all future central Government projects over £25,000, and that will capture privately financed projects.
My hon. Friend the Member for Wyre Forest (Mark Garnier) mentioned the PFI equity issue and the trading in secondary markets. We agree that more can be done in that area and that there is not sufficient transparency around investor returns, particularly with regard to secondary market sales. The Treasury is now collaborating with the National Audit Office to look at PFI equity issues, including not only transparency, but equity risk issues and equity returns. We are currently working with it to ensure that we scope that work stream effectively to obtain output that will be of use to the Government. We are also engaging with PFI investors and contractors to reach agreement on the voluntary code of conduct, as I have said, and transparency will form a critical part of that.
Value for money, not the accounting treatment, should be the key determinant of whether a PFI scheme goes ahead. We have talked briefly about the fact that public-private partnerships have been left off Government balance sheets. The whole of Government accounts project, which will be completed in the coming months, is basically, in a nutshell, the Government’s first set of consolidated accounts. They will be done under international financial reporting standards—in other words, proper accounting standards—and they will put that liability on the balance sheet, so giving us a sense of what it is for the first time. That will show the massive liabilities that were run up by the previous Government not only for our generation but for future generations.
The Green Book covers offshore tax. I understand the point made by the hon. Member for Walthamstow. From my experience of having worked in business, of course we want to look at the bottom bottom line, but we also need to be pragmatic in understanding that companies will always look at their tax position. If they think that they are having to move onshore and are disadvantaged by doing so, there is always a sneaky suspicion that they will recoup that lost cost elsewhere. It is not quite as straightforward as simply saying that we should not use any company based offshore.
The key challenge for us all is to ensure that we have a more competitive tax system in the first place that does not drive companies offshore, which is why we are reducing corporation tax year on year. I very much hope that the hon. Lady will find time to support and vote for that when the Finance (No. 3) Bill finally goes through. The best way to tackle offshore tax is to have a competitive tax regime that makes companies want to stay in the UK and be based here for tax in the first place.
I am interested in what the Minister has said. Does that mean that the Treasury will rewrite the Green Book, so that it does not take account of the potential tax take under a PFI, if she is saying that offshore tax avoidance is unavoidable in some circumstances, given that it is part of the value-for-money decision on a PFI? There is a specific point about PFI and tax, so will the Green Book be rewritten, so that it is not part of the decision in future?
We are not going to rewrite the Green Book. My point is that there are a number of variables in any PFI contract. There are several variables in the overall propensity for it to be profitable for the taxpayer in relation to value for money or for the private sector firms considering engaging in it. Tax is one of those variables. Obviously, it can change, as can the costs, which the parties to the public-private partnership for the tube discovered once they became engaged in it. We need to tackle the underlying issue that, under the previous Government, Britain became uncompetitive in the corporation tax world. We have got to get back to being more competitive over the coming years, which is exactly what we plan to do.
We are working on the skills agenda across Government. I do not have time to go into that now, because I want to give a minute to my hon. Friend the Member for Hereford and South Herefordshire. I assure hon. Members that we recognise that, as does the civil service. There is currently a huge review of skills going on across government to ensure that we have the right skills in place. We have therefore taken a number of steps. I know that my hon. Friend wants to come in, so I will conclude my remarks.
I am grateful to you, Mrs Main, for permitting me to speak again. I want to thank everyone who has contributed today. It has been a fascinating and extraordinarily enriching debate. I thank the Minister and the shadow Minister. I especially thank the Minister, who is not formally responsible for PFI, for discharging that responsibility today.
I have three short comments. First, the claim that without the PFI projects would not have been built is not true. A cheaper PFI could have been devised under which they would have been built. Secondly, far from being difficult to negotiate, a rebate is under way as we speak, and that process will culminate in the code of conduct that the Minister mentioned. I welcome the support given to the code of conduct by the Minister and other Ministers all the way up to the Chancellor. Thirdly, we need a wider debate, and I hope that we will have it in the main Chamber soon.
Sitting adjourned without Question put (Standing Order No. 10(11)).