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Mr. Geraint Davies: My hon. Friend has made his point accurately, and has rightly stressed the sensitivity of the question of value for money for the PFI. A critical element of that is often a discount rate in terms of the income stream, the value of the service and the assumed interest rate. Does my hon. Friend feel that we should make public the assumptions about interest rates and discount rates at the time that PFIs are agreed, or that we should simply look back in anger?

Mr. Love: I am always predisposed to make public such issues, but I agree that there may well be commercial sensitivities in some areas, and that needs to be considered carefully. But I certainly believe that we should ensure that the basis on which PFIs are arranged is robust and can be defended publicly.

Compensation is important in PFI schemes. If risk is not to be transferred back to the public sector, compensation must be commensurate with the additional costs that failure to deliver the project entails. It should reflect the cost of completion of the project, or, in extreme circumstances, the cost of redoing the whole project.

Measured against that must be the fact that any additional costs loaded on to the partner will inevitably mean an increase in the cost of the PFI scheme. That is obviously where subtle negotiations come in. The public sector started out not terribly experienced in this matter, but we are gaining experience in negotiating such

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contracts. However, we did not have such experience in the past, and the NIRS contract is a case in point. That contract contained up to £100 million in compensation, but to date--at least, when the report came before us--we had received only £3.1 million. We were told that there were contractual problems and legal difficulties, but the contract should have specifically covered such matters. There is also the question of whether £100 million will be adequate to meet the losses made on the project. We need a clear outline of the contractual relationship in a PFI to ensure that everyone knows who takes responsibility for a failure and where the costs will be distributed.

The reports before us, a number of which deal with PFIs, show that in some circumstances the PFI provides value for money for public procurement but, as has been said, it is not a catch-all. Not every project will be susceptible to PFI, and we must decide where it is appropriate and where it is not.

I remain sceptical of some of the areas into which the PFI now reaches, but as a member of the PAC I am prepared to wait and see how our experience moves us forward. We should ensure that it is available where appropriate. It is not a quick fix. Everyone seems to think of the short-term gain that we need not pay for the capital costs without thinking of the longer term.

It is critical that the PFI should work throughout a project's term. It does not solve the chronic shortage of capital funds in the public sector. We should say clearly that there must be value for money for a project to go ahead. But where private sector skills are available and can be used, and innovation can be introduced to a project, we should do so: as happened to some extent on the Jubilee line, a project which was completed on time, unlike previous projects which were delayed.

The Treasury Committee is considering the PFI at present, but the public sector's experience of what it means is growing. The Government Resources and Accounts Bill will include a new vehicle for developing the PFI, and we have seen the work being done by the National Audit Office, as well as the work done by the PAC on value for money. All that will show clearly that the PFI can work in a certain way and under certain conditions on behalf of the public sector.

5.55 pm

Mr. Geraint Davies (Croydon, Central): I want to cover a few points on information technology contracts, the private finance initiative and our views on accountancy methodology in Europe. The Public Accounts Committee is an enormously important institution in Parliament. The Government spend £5,000 on the average person in Britain--man, woman or child--and it is important that they get value for money. That is why we have 750 full-time staff considering those issues.

I want to comment on the advent of resource accounting, which I welcome because it gives the Government an understanding of asset management and cash flow analysis. I was leader of the biggest borough in London and our accounting methodology meant that we were already fully aware of our asset management and our cash flow. When Governments claim that they want best value, and that local authorities are no good at managing their funds, they should look in the mirror, because local authorities are well up on their accounting

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procedures. I echo some of the points about extending the powers of the NAO to include the sort of powers that the Audit Commission has and, indeed, those that exist in Europe.

In a given financial year, the Government will spend about £7 billion across the board on IT for the Inland Revenue and Departments such as defence, health and social security. It is crucial that any lessons about value for money that we learn in the PAC are acted upon. In the 1990s, 25 cases, which were characterised by delay, confusion, lost cash and bad service to the consumer, came before the Committee. Certain Departments failed to learn from their mistakes, but, more importantly, they failed to learn from other people's mistakes. Joined-up thinking must be applied across government and the PAC has drawn together many of the lessons in one report.

In a simple business analysis one must acknowledge that mistakes can be made at certain stages when one commissions IT projects in the public or the private sector. One should start by having a clear concept of consumer requirements for the IT and what it is supposed to achieve. Often, there is no such clear concept. It is important to ensure that contracts are tight and clearly identify who is responsible for what. However, they should also include flexibility and provision for modernisation because the IT in use five years hence will be a quarter of the price and twice as effective as that of today. If we buy IT through the PFI, we may pay over the odds for in-built obsolescence in technology and service delivery that is out of date because the new user has different demands. We must bear that in mind.

My experience of implementation is that top management--for example, the permanent secretary--does not get its hands dirty and believes that a few junior managers can implement IT systems. When everything goes badly wrong, there is crisis management and all the managers have to rush in. A complete fiasco ensues, the service suffers and, often, there are no contingency plans. Delays on the IT side mean that conventional methods of providing services are not used either and chaos follows.

To illustrate my point, I shall refer first to the immigration and nationality directorate and Siemens and, secondly, to the national insurance recording system. On immigration, the number of asylum applications was approximately 35,000 a year when the previous Government drew up the contract with Siemens. That number has increased to 80,000 because of what has happened in Kosovo and the Balkans. It is easy to be clever in hindsight, but we should have a system that can cope with international turbulence such as war and massive increases in migration. The specifications in the contract did not allow for that; they could not cope and the concepts involved were not clear.

Siemens subcontracted to Perot, so it was obvious that Siemens could not do the job on its own. One wonders why we could not find a company that could do so. Perot was to provide a tailor-made system, but did a runner. We ended up with Siemens saying, "Okay, we'll produce something off the shelf." As it made the wrong assumptions--it was to have worked on the project with someone else, but ultimately had to work alone to produce something off the shelf, not tailor made--it was not surprising that things began to go badly wrong. Siemens

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had planned to run a paper-free management system alongside a computer system, but the computer system was delayed.

The immigration and nationality directorate moved offices and ended up in Croydon, which is my constituency. There was chaos and the legacy is that the Minister of State, Home Office, my hon. Friend the Member for Hornsey and Wood Green (Mrs. Roche), who was previously the Financial Secretary to the Treasury, is regularly in Croydon trying to sort out the mess. It is good to see her there, but there are lessons to be learned about project management.

Unfortunately, the mistakes have been repeated in other examples that have been considered by the Public Accounts Committee. Issues such as those surrounding NIRS2 take a long time to come to light; indeed, they go back to the time of the previous Government. The Andersen Consulting bid for the contract came in at about a third cheaper than that of its nearest competitor and offered a big-bang approach under which a whole system would be introduced to a complex area all at once. After being given the work, Andersen Consulting concluded that it could not do it all at once. It wanted to do the work bit by bit and renegotiated with the Government, so the public cost exposure was widened because the original contract was suddenly not intact. There have been various other problems, but I do not have time to go into them.

Intellectual property value is important when a company gets its product right. Even though there may have been all sorts of service delays and costs for us, a company might say to Argentina, for example, "We can do your national insurance. We know how this system works because we have done the experiments in Britain." If it sells that system for an enormous amount of money in the international marketplace, should not we, as the seed-corn investor, have a profit share in respect of it? If we are to think about entrepreneurial activity in government, why not consider not only windfall profit clawback, but profit share in terms of the marketability of products developed by us in the public sector?

I was pleased that my hon. Friend the Member for Edmonton (Mr. Love) referred to the private finance initiative; he made some excellent points. The PFI is big business. The Government expect to invest about £100 million over the next four years in capital expenditure overall and about 13 per cent. of that will be under the PFI. I understand that the payback on those projects over the next 27 years will be £80 billion. The figures are big and, as has been made clear, it is important that we are able to show that it is better to go down the PFI route than the traditional capital expenditure route in terms of value for money. Capital expenditure investment is increasing in itself, outside the PFI, from £18 million to about £25 million a year by 2001.

Value for money is a big question. Underneath it--if we are to have the PFI as opposed to traditional investment--are other questions: whether there is genuine risk transfer and how that is measured; whether there is genuine innovation that is producing added value and how that is measured; whether added value will be available from the business because there will be new products that can be marketed outside the normal scope of government; and whether specialist management is available that we do not have at our disposal. We must also ask whether all those together compensate for the extra cost of capital.

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In the Skye bridge example, which has been referred to, the extra cost of capital was about a seventh of the total, but we should compare that with the Jubilee line extension, to which a more conventional approach was taken. Although it was thought that it would cost £2.1 billion, the total cost was £3.2 billion. An extra£1 billion was spent and the project was delayed for a year. Under the PFI, risk is transferred because a company has to complete a task with a certain amount of money and in a certain time. If it fails, it has to pay for that. As long as we can button such conditions down contractually and if the company does not liquidate itself so that we end up bearing the cost--such a big "if" needs to be checked out through credit ratings--such a system makes a lot of sense.

The questions that we need to ask ourselves when we assess the PFI at Treasury level--and, thereafter, in the Public Accounts Committee--concern risk transfer and added value and whether they are measurable and transparent. We must also ask whether we have a negotiating team--in-house or at arm's length--that is sufficiently capable to negotiate the best deal for the public sector. The private sector will always come in and bid for more than the real cost to maximise its profits. That culture is often not relevant within government at the moment. Is modernisation built into contracts in relation to technology and service profiles?

As my hon. Friend the Member for Edmonton asked earlier, what discount rates will apply to project, and what assumptions will be made on interest rates? How sensitive will value-for-money decisions be to those rates? On confidentiality, I am an advocate of being as open as possible about discussions on the realism of rates.

Provision should be made for compensation if there are service delays or disruptions, and to claw back excess profits. However, we shall be able to apply the lessons learned from other PFI projects, and the Public Accounts Committee will increasingly be examining the increasing sums provided by the Government for PFI projects.

I should like to make a few comments about the Committee's visit to mainland Europe--which occurred in the aftermath of the European Commission's resignation. Hon. Members will recall that, after the group of wise people investigated irregularities at the Commission, and the European Parliament refused to accept the Union's 1996 accounts, the Commission was forced to resign en masse.

The Committee was able to make various suggestions for improvements to financial accounting practices in mainland Europe. The European Union has a £55 billion budget, with irregularity--some caused by mistake, but other by fraud--running at 5 per cent. However, to put that into context, irregularity in the United Kingdom social security budget amounts to 8 per cent.

I should like the European Union to divide its budget into various categories, so that some sub-budgets may be passed while others receive further scrutiny. Such an arrangement would enable us to focus on real weaknesses, rather than making it necessary to invoke the collegiate system of collective responsibility, in which the stakes are all or nothing and which places the onus on the European Parliament to pass the budget, warts and all.

The Public Accounts Committee is supported by the National Audit Office and interrogates a permanent secretary, who is an accounting officer. The situation is much less clear in the European scenario.

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The Court of Auditors--which should act as the equivalent of our National Audit Office, supporting the Committee on Budgetary Control--should interview Commission Directors. In practice, however, the Committee on Budgetary Control spends perhaps 10 minutes examining the report of the Court of Auditors, which is located 115 miles from the Parliament.

The Court of Auditors works very closely with the Commission--which is allowed to vet some of the Court's reports before they are sent to the Committee on Budgetary Control. Moreover, there is no single accounting officer, as the person authorising the money and the person spending the money are different people in different parts of the organisation. It is therefore no surprise that the system in the United Kingdom, and in northern Europe generally, may not bring a lot of added value to the Commission itself.

In my two years on the Public Accounts Committee--

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