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Mr. Michael Fallon (Sevenoaks): When there were previous caps that could be increased--for example, in the nationalised industries--in each case the increase had to be made by a specific Bill. Throughout the 1970s and 1980s, the House was presented with measures for borrowing-power increases and so on for the nationalised industries. If the cap is to be increased, surely it would be far better if it were done by primary legislation, which would be properly considered by the House.
Mr. Flight: I thank my hon. Friend for that sensible and pointed suggestion based on his prior experience. I agree that, for a cap to be meaningful, it would be better if any increase were made under primary legislation.
Will the Minister say a little more about how the Government expect that money to be spent? Ministers have stated that Partnerships UK will have a balance sheet of £1 billion. A balance sheet implies the taking of deposits. Is that £1 billion target only to be the total net assets? The Government are supposed to be putting up 49 per cent., with 51 per cent. from the private sector. A £1 billion target certainly implies about £490 million from the Government.
Will the Minister clarify the meaning of subsection (2)(d) of the new clause, which contains some rather strange wording? It refers to
The crucial issue relates to what PUK will do. In that regard, I come to amendments Nos. 8 to 15, which were tabled by my hon. Friend the Member for Bury St. Edmunds (Mr. Ruffley) and me. Amendments Nos. 8 and 9 are designed to limit the purposes and activities of PUK to those which the Government have described to date and which the industry, lawyers advising on such matters and the PFI team in the Treasury have defined as reasonable activities that would not cause major conflicts of interest.
There is also an issue of European law. The process of procurement for private finance initiative projects is required under European law to be fair and to ensure a level playing field. If, as appears to be the Government's present intention, PUK is to have a privileged position in investing in PFI projects, that is likely to contravene European law.
Amendment No. 14 defines the specific territory of upstream public-private sector activities. We have subsequently defined the term "upstream", and I shall come to that in due course; it is well understood in the PFI industry and contrasts with the concept of downstream activities, which involves the management of equity investment after the financial closing of PFI deals.
Although the Government do not seem to have resolved what they want PUK to do and how they want it to develop its business, there has been substantial debate about it across the industry. The conclusion has been that upstream activities make sense in the provision of support and assistance to the public sector prior to financial close. It is unclear how the key features that have been outlined will be implemented, however. The aims of PUK appear--on the face of it, at least--to involve idealistic but clashing objectives: making money as a private sector entity and helping the public sector.
As described, PUK will be there to advise the public sector and to hold equity interests in projects. It will act as co-sponsor with Government Departments, but, at the same time, have a private sector business and culture. It will develop a revenue stream to finance its activities, but it is not supposed to compete with the private sector. How will those fundamental conflicts be reconciled? What do the Government expect PUK to do?
The role of Partnerships UK as we believe the Government originally intended was to assist with deal flow. On 20 September 1999, the Chief Secretary to the Treasury confirmed in a speech to launch the Institute for Public Policy Research that Partnerships UK would act as a project manager for PFI deals, providing public sector organisations with expert advisory and implementation skills. He said that it would help get more PFI deals done better and more quickly. Helping deal flow and providing upstream support to public sector bodies is welcome and the Chief Secretary's approach is generally supported. It has been said that there will be a pump-priming role, in putting up finance for local authority PFI feasibility studies--to be repaid when PFI deals are signed off.
Partnerships UK will encourage the public sector not to impose unnecessary risks on the private sector, and it will promote stability and intelligent standardisation. That is welcome in all parts of the House and throughout industry.
In the early days of PFI, many deals were undeveloped owing to a lack of funds, to funds being misspent or to delayed decisions. If Partnerships UK can be a mechanism for the commercial testing of projects, that also makes sense.
Historically, the key private sector concern has been that the public sector is not sufficiently incentivised to close deals efficiently. Partnerships UK will incur its own costs during negotiations. That is a positive factor and
should encourage a deal-doing mentality. It is important that PUK seeks to streamline the bid process, to create a greater flow of deals.
In developing the skills base, it is important to acknowledge the difficulties involved in attracting and retaining staff for Partnerships UK. The existing pool of experienced PFI professionals is relatively small, and demand for them is high. Partnerships UK should not be staffed with project and corporate finance executives with limited or no PFI experience, as that would undermine the logic of establishing PUK. The standard of public sector project managers varies. It is key to the successful development of the PFI that each spending Department should be able to develop its own skills base.
How will PUK continue successfully with the two key existing roles of the Treasury team? Will it potentially serve as the negotiator with Departments for all PFI deals, or only for those in which it becomes involved? Will it play the same role in negotiating with the Treasury? How can it reasonably combine those roles with commercial roles, if it is to have them?
The relationship with other Departments and public sector bodies needs considerably more thought. There will have to be a close working relationship with the Office of Government Commerce, and historically the British Government have not been particularly successful in developing relationships with non-governmental bodies. If PUK is launched without the full support of Departments most active in PFI, that will clearly put considerable risk in front of its success.
We argue strongly that PUK should not be involved in the downstream side and I repeat that that seems to be the collective view of businesses and the trade union movement. The Government have not made clear whether it will be involved downstream, although the Bill would enable that to happen. There are concerns about PUK's involvement with the management and equity investment of project companies after financial close--that being the definition of downstream activities--and major conflicts of interest could arise here. How could PUK advise a public sector client on achieving the best commercial deal if it also had a commercial interest in the reverse occurring? The competitive bidding process would become compromised as PUK would participate in choosing the preferred bidder, in which it would have a future investment.
PUK could, for example, recommend for selection the bidder that offered it the most favourable participation. As it will not pay the on-going tariff, it is also difficult to see how its interests in that regard would identify with those of its co-sponsor, the public sector purchaser. Confidential information gained as a shareholder or lender in one transaction could be used against the same private sector bidders in later transactions. As a participant in a project management company--either as a shareholder or a lender needing to make returns and reduce investment risks--how could it negotiate effectively against the public sector tariff payer, its co-sponsor, during the concession life on a refinancing or a variation required by the public sector?
PUK's exit criteria may be different from those of the rest of the shareholders or the lenders to the concession, particularly if it needs liquidity to pay its overheads.
The natural exit from a deal for PUK would be at a financial close, when it would be paid for its services in cash out of the proceeds of the project finance, in the same way as other advisers.
On European requirements, the procurement process for PFI projects is governed by European law. All projects need to be advertised in the Official Journal of the European Communities and to follow certain well- established rules to ensure that the process is fair and conducted on a level playing field. It involves moving through each selection stage on the basis of an evaluation that establishes technical competence to perform the project and, later, the best price. There are usually several stages. A number of potential bidders are chosen in pre-qualification and, following interviews, three or four are invited to tender. Further negotiations usually follow. After that, a preferred bidder is chosen, which takes the process through to financial close.
From advertisement in the Official Journal to financial close, the process takes between 18 months and two years to complete. Fundamental to that is the integrity of the process, which requires a clear separation between client and bidders. The client or its advisers must have no conflict of interest in the outcome, otherwise the process would be tainted and in breach of Official Journal rules and European Union law.
If PUK had the opportunity to invest in the equity of the winning bidder, and played a part in its selection, there would be a major risk that such conflict would arise and it would be accused by the losers of preferring certain bidders over others during the competition. In that case, the process would be tainted and the playing field uneven. That aspect has not been discussed adequately, and the Government have not fully focused on the integrity of the competitive process.
It has been argued that PUK should be a provider of last resort of equity in projects where the market is not willing to provide equity on sensible terms, and that PUK's investment guidelines might require it, on all transactions, to answer positively that the equity market had been approached and was unwilling to provide the required funding.
If such equity investment were limited to those situations, it could be argued that that practice would avoid PUK crowding out the private sector, but even that slant is inappropriate because PUK will be majority-owned by the private sector and there seems little logic in private sector shareholders wanting the business to invest long term in PFI projects that no one else will touch. Even though conceptually that argument might appear to make sense to the Government, I cannot see how it can work commercially.
Government amendments Nos. 27 and 28 remove references to financial assistance and grants and seek to make it clear that subscriptions to PUK will be for investments. I repeat: what sort of investments? Going back to the heart of the issue, is PUK to be essentially a skill advisory body or an investing body?
The amendments leave in the Bill the ability to provide finance by way of guarantee. The Minister wrote to me following the debate in Committee to make it clear that those guarantees would be provided on the same basis as other guarantees, but I note from her response that they will appear as contingent liabilities in the supplementary statements to the consolidated fund and national loans fund accounts.
The essence of our concerns about guarantees is that they are at the bottom of the page, on a contingent basis, and it will become ever more difficult to know what the real commitment is. Technically, one clearly cannot put guarantees in as capital expenditure to be depreciated, but we will stray into an area where, as Government guarantees mount, their real liabilities become more and more obscure.
arrangements for evaluating outstanding expenditure in respect of anything done under section 16(1)(b) or (c).
That means matters that are not covered by the definitions of assets, loans and guarantees in the preceding subsections. It is not clear what the Government will be required to do under that provision, nor is it clear to which type of situation it will relate--apart from those already prescribed. Will the Minister also tell us how the Government intend to account for their investments in PUK, both in the new format of the national accounts and in terms of prospective forecasts of Government spending?
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