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Mr. Jim Cousins (Newcastle upon Tyne, Central): I want to raise the issue of the recall of accounting officers, which struck me as important when it was mentioned by the right hon. Member for Haltemprice and Howden (Mr. Davis). My right hon. Friend will of course realise that the tradition of Select Committees is that one does not bypass the current officers and go to their predecessors, even to deal with a historic matter in a Department. It is, therefore, an interesting innovation. Will my right hon. Friend take that point on board and consider whether scrutiny in Select Committees and in Parliament more generally might go beyond the current officers and lead to the recalling of former departmental officers who are now retired to give an account of their behaviour? I am referring not just to people who have accounting officer responsibilities, but speaking more generally.
Mr. Williams: I am grateful to my hon. Friend for that intervention. In so far as it is a tradition, it is a silly one that is best disposed of. Those who most support it tend to be the permanent secretaries who sometimes encourage their Ministers to intervene. We have had Ministers write to us objecting to the fact that former accounting officers may be called before the Public Accounts Committee and we regard that as extreme impudence. We decide who the relevant witnesses are. I hope that all Select Committees will consider whether the current incumbent is the most appropriate witness to enable them to fulfil their obligations to the House. If Select Committees do not fulfil their obligations to the House, the House will be incapable of carrying out proper scrutiny of the Executive.
May I echo what the Chairman of the Committee said in relation to the Chinook crash? What impressed the Committee unanimously was the fact that pilot error has to be proved without any doubt whatever. We could see nothing in the evidence that was put before us to prove that the pilots were responsible. On the basis of the evidence that we had, they were blamed because no one was willing to admit that anything else could have caused the incident.
One of the flaws in the inquiry system within the armed services is that the final decision about the cause of something going wrong, such as the tragedy involving the Chinook, passes to someone who inevitably has a conflict of interest. It passes to the person who is responsible for keeping his military assets serviceable and available. Therefore there must be a strong temptation to give the benefit of the doubt to the equipment rather than the people manning it. We all felt that the case had not been proved against the officers concerned.
May I now concentrate on just one issue? Before anyone gets too optimistic, let me say that I can speak at great length on single issues when so driven, so I do not want to build up too many hopes, nor a premature appetite. I should like to discuss the private finance initiative. We have considered numerous reports dealing with PFI projects over the past couple of years and I should like to review and put before the Minister in a way that I hope is constructively critical--where it is critical--some of the lessons that need to be learned, as the PFI will clearly be a major part of Government practice in future.
Let me make it quite clear that I have no personal opposition to the concept of applying a mortgage to national assets. Although there may be one or two exceptions, would most of own our houses today if we had not been able to buy them through a mortgage? How many of us would be in a house that we could say was ours if we had to wait until we had enough money to buy it outright? It is the same with cars, but I do not see any problem; most taxpayers and most of my constituents would prefer 20 hospitals to be up and running in the next two years than to have to wait for them to come one after another over 20 years, even if we have to pay a mortgage premium.
I do not, therefore, start from a position of opposition. Ministers seem unable to grasp the fact that I do not oppose the passing of risk. Indeed, as a member of the Public Accounts Committee, I can say that no one could be more in favour than I am of passing risk from the public to the private. Again, there is a personal, domestic parallel. Why do we all take out insurance on our houses? We pay a premium against a risk that could be too big if we were unfortunate enough to be struck by it, as has happened recently because of the floods.
I see nothing wrong with passing risk by paying a premium for it to be borne by someone else. That is highly desirable--indeed, it is doubly desirable in respect of high-tech projects that are at the frontier of technology. Over the years, the Public Accounts Committee has seen time and again that Departments get it wrong. Often, they point out why problems arose and provide understandable reasons, but the same risks and errors are nevertheless repeated. In areas of high technology especially, there is enormous benefit to the taxpayer in trying to pass the risk across and I have no objection to that. Where the objection lies is not a PAC issue, but one of political opposition both within and outside the House from people who are concerned about the privatisation of work forces and the effects on conditions of employment and so on.
I should like to consider several problems. As I said, I am in favour of passing risk, but it has become clear during the PAC hearings that we all too often pay the premium without the risk moving. The average PFI rate
of return is 16 per cent. It can vary considerably, as I shall go on to explain, but it is usually between 15 and 17 per cent. and we have been told on several occasions that 16 per cent. is the average. One of the witnesses at a recent PAC hearing spoke about assessing the required rate of return and about making it 50 per cent. higher than would usually be expected on a normal contract. The evidence was given by an excellent witness from the private sector, with regard to the Fazakerley prison unit.The Committee criticised what happened in the Passport Agency, not because we were opposed to the PFI but because the witnesses told us that the Department had incurred about £12.5 million of the cost. We then asked how much of that cost was borne by Siemens. The answer was £2.5 million. The passing of risk was not successful if the taxpayer picked up £4 out of £5 on all the damage costs that were created for the Department.
For those who doubt the PAC, let me point out that its value was further demonstrated by an answer to a subsequent question. I asked when Siemens agreed to pay the £2.5 million, and was told that it did so two weeks previously, shortly before its representatives attended the hearing. One had the feeling that the company paid the money in order to buy peace and quiet, rather than to settle any perceived legal obligation.
There are reasons for that, which I should like to draw to the Financial Secretary's attention. He is probably aware of them, but I should like to get them off my chest. The first reason is sloppy contracts. In some cases, we have found contracts in which only proveable damage imposes any cost on the contractor. In the case of the Passport Agency, most of the cost lies in inconvenience to the public and is not reclaimable. It is essential that it should be, if risk is to be passed.
Siemens is interesting in this respect. It carried out the computer installation for the immigration service, in which a backlog of 165,000 cases built up. The company also installed the Passport Agency computer systems, which led me to chide it because the British could not get out and the foreigners could not get in.
The third Siemens case that came before the Committee, to which the right hon. Member for Haltemprice and Howden referred, was that of National Savings. The contract had 56 performance targets built in, which ensured that, regardless of proveable damage or damage to the Department concerned, failure to meet performance targets that mattered to the public as well as the Department would trigger penalties. That is a lesson that Departments are learning. One understands that there is a learning process involved with innovative contracts, but it is important that the Government ensure that officials are held responsible for allowing any sloppy contracts to be drawn up.
Another reason for not taking action was a fear of legal costs. Some companies might say that they are going to dispute a matter and take it to court. Those companies might have deep purses. Some of the Departments might also have deep purses, but their money is already allocated for use during the year and they could be frightened off by the prospect of the legal costs.
A further reason was a fear that taking legal action could sour the atmosphere for further PFI contracts. Firms in the process of negotiating with the Government over a whole range of potential PFI contracts could be frightened off if they saw one of their predecessors taken to court.
I hope that some of this information will show that, properly approached, the PFI is so akin to Christmas for companies that they should be queueing up to take part in it.We have identified the problem of risk not transferring, and given some reasons why it does not do so--either contractually or in practice because of a lack of follow-up legal action. A further problem is abnormally high rates of return. If all companies work on the basis we have discussed, an average of 50 per cent. above the normal rate of contract is a very high rate of premium to pay, especially when one considers that PFI contracts worth £17.3 billion are already in place. That was the figure at the time of our hearing--it is higher now.
A newer phenomenon is the missed opportunity that arises from the fact that refinancing of contracts is possible. One of the reports concerns the company that undertook the Dartford and Gravesham hospitals PFI and the Fazakerley prison PFI. It intended the return to be 16 to 17 per cent. It was going for about the average, having originally aimed slightly lower. Then, after a relatively short time, it refinanced. Much of its finance was debt--I am not saying that in any critical sense; that is how business works. As a result of refinancing that debt, it turned the 16 to 17 per cent. rate of return into a 39 per cent. rate of return. I asked the witness, "Are you saying that this means you will get a 100 per cent. pay off in two and a half years?" He said yes, and reiterated in subsequent evidence that he agreed with my proposition.
The 39 per cent. rate of return and a two and a half year payback--on a 25-year contract, incidentally--does not include the profit that had been made on the project's construction fees, nor the profit that the company's partner, Group 4, makes in supplying services to the prison. So there was a 39 per cent. rate of return on a £247 million project, with no clawback facility.
The Department eventually got £1 million--that is all. The company threw the odd million in the Department's direction because--eyes glistening--it was already using its mobilised capital, as was said in evidence by a subsequent witness. The money released after the two and a half years was being used to earn profit again, because it was used to go after more PFI projects.
That is why I say that the PFI offer to tender is like Christmas for companies. They should get in while they can, because people are making an enormous amount of money. I do not mind people making money, but I object to taxpayers not getting their fair share of any unforeseen windfall profits.
I have great respect for the young man who gave evidence--he clearly knew his field very well. However, given that most of the PFI contracts could be subject to refunding and there is almost £17 billion worth of them, we can see how much extra windfall profit companies stand to make if clawback is not built into the contract.
In fairness, knowing that the Department was coming before us, the accounting officer said that he would issue to his officials advice that wherever possible they had to build in a 50:50 clawback agreement on refinancing. We are delighted about that. If people make mistakes and then learn from them, at least taxpayers get some benefit out of it because the first mistake alerts people to opportunities. However, the civil servants in the Department said that they could not anticipate that happening. With respect,
that argument is difficult to sustain when we bear in mind that, surprisingly, a much earlier contract related to the channel tunnel had clawback arrangements.It was not a question of such arrangements not being known within Government. Indeed, it was particularly worrying that the Department's advisers, Lazards, said that it was none of the Department's business. It said that it was not up to the Department, but to the company and the contractor. After all, that is the reward for risk. There is already a 50 per cent. premium for taking the risk, so we do not have to give out windfall profits on top of the insurance premiums that we are paying. I have a strong suspicion that Lazards' response was such because it realised that if the response had been anything else, Lazards would have been in the firing line for not having spotted the potential when advising the Department. I am angry about the way in which it failed in its obligations to its customer to provide the best quality of advice.
As I said, what is worrying about the PFI, in terms of finance and recycling, is the fact that there are more than £17 billion--the figure will soon be up to £20 billion--worth of PFI contracts. Therefore, scope for a massive recycling windfall must exist. I took an unusual step, but it was in search of information: I thought I would try to alert Ministers by tabling to every Department a question about clawback in relation to PFI contracts. I had answers relating to 105 contracts.
I provided all the information to the National Audit Office, which kindly assessed my replies from Ministers. It said that, with the exception of the channel tunnel, which was an early one-off, by value only 29 per cent. of existing PFI contracts were covered by a clawback arrangement. Credit for that goes to two of our most frequent customers and visitors, the national health service executive and the Ministry of Defence. Both of them have learned a lesson and are building it into more of their contracts.
Unfortunately, some Departments have not been so aware of the situation. Last year, the Department of the Environment, Transport and the Regions--strangely, as it contains the Department that was involved in the channel tunnel--entered into three projects that had no clawback facility, including London Underground Connect. The NAO drew up for me a table of large projects of more than £50 million in capital value without clawback refinancing gains. It showed that there were six road contracts worth £1,078 million, four London Underground projects worth £1,009 million, seven PFI hospitals worth £690 million, five defence projects worth £568 million, and information technology partnership contracts--the responsibility of the Department for Education and Employment--worth £116 million. None had clawback facilities. The A5 in Wales, a much needed arterial road, was worth £110 million, and the Berlin embassy--the responsibility of the Foreign Office--was worth £50 million, but there was no clawback facility for either.
I have enormous regard for the Minister, who does a tremendous job; I do not say that to many Ministers or officials. I hope that he will take on board anything new or of positive value that I have said. There probably was nothing new, because his officials probably report diligently to him on what they hear in the Public Accounts Committee, when we are not berating them--a little side-sport when hearing evidence from witnesses seems singularly dull.
May I be slightly wicked, and observe what seems to be a paradox in prudence? It seems interesting that we concentrate on paying off national debt--I am all for that--to save about 8 per cent. interest a year, and at the same time encourage the spending Departments to enter into PFI debt with rates of return of 16 per cent. a year. That seems slightly inconsistent. I feel that I could make a profit if I were in that situation, by adjusting those figures. The Government would make £22 billion from selling air traffic control--I know what I would have done with the money, which I am afraid is why the Government did not receive my support on that.
Having been an Industry Minister and in economic Departments in the 1960s and 1970s, I understand the advantages to Government and the attraction for Ministers of reducing the public sector borrowing requirement and getting public expenditure off the balance sheet. As someone who is pro-European--although I am not queueing to exchange my money for the euro--I am forced to observe that getting public expenditure off the balance sheet would seem to help us meet the criteria to enter the euro. I am sure that has never crossed anyone's mind in the Government at all.
I do not want to rehearse all the points that I made last year, so I shall be brief in talking about parliamentary accountability, a matter lightly touched on by the Public Accounts Committee Chairman. As the Minister knows from our exchanges last year and from the discussions in the Sharman committee, which was set up as a result of them, the PFI is a source of great anger to the Committee and frustration to the National Audit Office. The National Audit Office has been kept out of the monitoring process.
I have concentrated on the PFI today, perhaps over-dramatically, to highlight some of the shortcomings. I hope that I can persuade the Minister that the NAO, like our Chairman and me, has no problem with passing a risk to the private sector, and that the investigations that it has carried out already--limited as they have had to be, owing to limits imposed on it--have enabled us to pinpoint the factors to which I have alluded today. If it had not been for the NAO, I suspect that most Departments would still not be aware of the problems and opportunities that refinancing makes available.
On the occasion of the valedictory visit of the accounting officer for the Ministry of Agriculture, Fisheries and Food, we had a fascinating exchange. The Ministry has been one of the worst Departments in terms of deliberately precluding the National Audit Office from almost every petty little quango that it has ever set up. There have been all manner of fallacious and often unexplained arguments. As the accounting officer was retiring and after he had finished his questioning in relation to the hearing of the day--he had no further need to get on the right side of the Public Accounts Committee--I told him that I knew that the most senior of permanent secretaries and many of his colleagues were dubious about the PAC, and that I had even heard that past Ministers were aware that the Committee was regarded with less than favour in some circles in the Executive. I am not saying which Departments are involved or trying to play politics.
When I put it to the accounting officer that the PAC had been criticised for being an obstacle--both the right hon. Member for Haltemprice and Howden and the hon.
Member for Hertsmere (Mr. Clappison) were present, I think--he said that, on the contrary, the discipline that the PAC and NAO imposed was invaluable. In that case, I asked, why did his Department exclude so many of its silly little quangos from PAC scrutiny. He said that he would have no objection to every quango being subject to PAC inquiry. We have gone 99 per cent. of the way, and all we need is for my hon. Friend the Minister to say that he too sees no reason why every little quango should not be subject to scrutiny by the Public Accounts Committee.
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