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Session 1999-2000
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Delegated Legislation Committee Debates

Local Government Finance (England) Special Grant Report (No. 62) on Private Finance Initiative

First Standing Committee on Delegated Legislation

Monday 12 June 2000

[Mr Bowen Wells in the Chair]

Private Finance Initiative

Local Government Finance (England) Special Grant

Report (No. 62) on Private Finance Initiative

4.30 p.m.

The Parliamentary Under-Secretary of State for the Environment, Transport and the Regions (Ms Beverley Hughes): I beg to move,

    That the Committee has considered the Local Government Finance (England) Special Grant Report (No. 62) on Private Finance Initiative (HC No. 458).

Hon. Members who have read the report over the weekend will have seen that it is a highly technical, if not impenetrable, document. That is why I took the liberty of sending you, Mr. Wells, an informal guide that explains in ordinary language what the special grant seeks to achieve and the private finance initiative scheme that results in the special grant needing to paid. I copied the guide to all Committee members, and I hope that that was helpful.

As hon. Members will know, the Government are committed to the concept of using public-private partnerships in a variety of forms wherever that promotes best value in the delivery of services to the public.

The report is a demonstration of our continuing support for those partnerships and it will allow us to pay revenue grant to local authorities that have satisfied us that their private finance initiative projects will improve local services and offer better value than other options.

Since taking office, we have been encouraging local authorities to explore PFI in a growing range of service areas. We have made extensive changes to legislation and have removed some technical obstacles that had stood in the way of PFI deals. We now believe that we have achieved our overall aim of establishing PFI as one of the mainstream procurement options for local government.

That success is due not only to legislative changes but to the availability of revenue support for PFI schemes and to the arrangements that we have set up to oversee the allocation of resources. A key feature is an interdepartmental body called the project review group, which meets several times a year thoroughly to assess projects that have requested support.

Projects endorsed by the group are issued with what are called PFI credits—part of the formula for calculating the special grant. The credits offer the authority the assurance that it will receive revenue grant and provide the private sector with greater certainty that when it bids for a contract it will prove affordable for the local authority.

We have committed significant resources to supporting PFI schemes. More than £3 billion worth of PFI credits were made available between 1997-98 and 2001-02, of which more than £2.5 billion has now been allocated. Members will be aware, both from their own areas and more generally, that this support is leading to some high-quality schemes, which in turn are attracting much-needed new investment to local areas and helping to make PFI a familiar way in which local authorities can improve local services.

We endorsed the ninth group of local government PFI projects in April, bringing the number of schemes endorsed to 126, covering all types of authorities and different parts of the country. The latest group of schemes that we are considering includes four housing pathfinder schemes to boost social housing in Camden, Islington, Newham and Reading, four schools projects, three health schemes for the elderly and people with learning disabilities, two integrated waste management schemes and a street lighting scheme. The range shows the adaptability of the PFI approach and the energy, initiative and ideas with which local authorities are seizing the opportunities that it presents.

I shall explain in more detail why two years ago we started delivering support for PFI through the special grant system. Authorities that acquire capital assets in the traditional way—by borrowing and buying—normally receive Government revenue support grant towards their loan costs. However, authorities that opt instead for PFI face significant on-going revenue costs—the regular payments to the PFI contractor. Special grant is intended to cover the capital element of those continuing charges—usually about 70 or 80 per cent. of the overall amount.

In principle, support for PFI schemes could be paid through the same machinery that is used to deliver normal revenue support grant for traditional capital programmes funded by borrowing. There are, however, practical problems in that approach that are solved by the special grant arrangements. In particular, the use of special grant makes it easier to ensure that we do not start to pay grant before the authority begins to make payments to the contractor.

The report is an important element in our strategy on local authority PFI. It sets out which authorities are eligible to receive special grant in annexe A, the way in which the grant is calculated—I am sure that hon. Members will have tussled with this in annexes B and C—and the way in which the grant is claimed and the conditions attached to it in annexe D.

I appreciate that the report is drafted in technical language. I apologise for that, but it is a legal requirement and, as so often with grant regimes, the need for financial rigour means that the underlying method of calculation is inevitably complex. Rather than attempt to go into more detail now, I shall leave it to hon. Members to raise any points and hope that I can answer them. I have considerable expertise in mathematics from my previous life, but I am not sure that that will be helpful on this occasion.

We have provided substantial extra resources for local authority projects so that the benefits of PFI can be spread more widely around the country. Approval of the report will be welcomed, not only by the authorities listed but by many others working on PFI projects to improve the range of local authority services. I therefore commend the report to the Committee.

The Chairman: I thank the Minister for circulating the Committee with her guide and remind the Committee that this is a specialist debate. I shall be expect hon. Members to keep strictly to the subject and not wander far from the technicalities.

4.37 pm

Mr. Tim Loughton (East Worthing and Shoreham): Thank you, Mr. Wells, for that useful warning, which might serve to help the Minister rather more than Opposition Members, who are asking technical questions.

I am grateful to the Minister for circulating the brief a few days ago. I am not sure that it made the matter much clearer because, as she said, it is a highly technical document and coping with X, Y, Z, MRP and RSG factors and the like does not come easily, with or without a mathematics degree.

The Minister said that the grants are the subject of regular inter-departmental meetings between members of the project review group. What is the split between the departments for the grants awarded? I am trying to deduce whether greater emphasis is placed on, for example, educational projects, police project funding or housing projects. The Minister gave a few examples. It would be useful to know the Government's thinking on the sort of qualifying projects for PFI that they favour now and will favour in the future, and how, and to what extent, the criteria have changed over the past three years.

What are the criteria for those qualifying authorities to which grants are awarded, how did the list that is included in the report come into being and how might it change in future years? What are the constraints on the expansion of PFI grant funding, and what discussions are being held with the Treasury about the comprehensive spending review debate, the figures for which will be announced later this year? Does the Minister anticipate that we will have a much longer list and a much larger amount to deal with in future?

What assessment of value for money has the Minister's Department made of the grants awarded thus far, and how much has that coloured the Minister's judgment of the merit of certain projects that might have come before the project review group?

Finally, what calculations have been made of what the implications for the public sector borrowing requirement would be if the PFI projects were not counted as off-balance-sheet financing?

4.40 pm

Mr. Edward Davey (Kingston and Surbiton): I shall make my remarks in the same spirit as the hon. Member for East Worthing and Shoreham (Mr. Loughton) and pick up one point that he made about the relationship between the project review group and the normal schemes for local government capital finance.

Our concern is whether the Government are increasingly viewing PFI as the route of first preference for funding capital bids in local authorities. Will the Minister comment on that?

In providing the grants for local authorities, are the Government considering the way in which they provide support not just for undertaking the bids but for assessing whether a PFI route is the only route for local authority capital bids. Through the Treasury task force on the PFI and the new body that is taking over from the task force, are the Government sharing the lessons of procurement on PFI that are being learned in Whitehall with our colleagues in local authorities so that they can best improve the way in which they procure—not just via PFI but via ordinary local authority capital finance arrangements?

My hon. Friend the Member for Bath (Mr. Foster) was going to intervene to ask about factor Y in paragraph 5(c) of annexe C, but he realised that as he has not yet read paragraph 4.30 of the PFI booklet he ought not to do so. He intends to go away and study that paragraph and have discussions with the Minister outside this Committee—I am sure that she will look forward to those.

We have reservations about some of the ways in which the PFI is being used, and especially about whether it does constitute best value for money. We acknowledge, however, that for individual schemes it has that merit. That is why we are happy to support this type of grant. We have reservations about special grants per se, but for PFI they are a sensible way forward because of the complications that have already been alluded to.

It is very rare for a Committee to have the chance to analyse the way in which £88.493 million is being spent. This place does not scrutinise well the way in which public money is spent. It is welcome, therefore, that this debate has been held. I hope that the Minister will satisfy me on the questions that I have put to her.

4.43 pm


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