Local Government Finance (England) Special Grant Report (No. 76)

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Mr. Don Foster (Bath): I entirely endorse the hon. Gentleman's remarks. I want to draw the Committee's attention to appendix 3, which is totally impenetrable.

Mr. Clifton-Brown: I am sure that the Minister can understand it, even if the hon. Gentleman cannot; perhaps she will explain it to us.

The private sector should bear an element of risk. Otherwise, there is no point in their financing such projects because the Government, as the largest borrower, can always raise finance more cheaply than any part of the private sector. If there is to be a differential in the rate of borrowing, there must be a quid pro quo, which should be the element of risk.

Can the Minister tell us about the range of projects that are available for PFI? The explanatory note discusses vehicles, roads and buildings. Although I understand that roads and buildings are precisely the type of items that ought to be included in PFI, I cannot see how vehicles would qualify; they have a relatively short write-off period, whereas that of roads and buildings is much longer.

Given that the budget is capped, can the Minister say a little more about the criteria that the interdepartmental group undertakes when it considers the projects. Does the group consider the projects themselves or how they fit into a local authority's programme? Can a local authority have more than one PFI project? At what stage will the interdepartmental group come into effect? Will it be at the feasibility and preparation stage, or the contract stage? Are the feasibility and preparation costs that are not included in the actual costs to the PFI payable under the special grant, or must the local authority bear them? That mechanism could put off local authorities because I imagine that the feasibility and preparation costs for big PFI projects would be substantial. Local authorities may be put off going down the PFI route and instead choose the support route.

In summary, can the Minister tell us how local authority capital projects will be financed? Is there to be a significant shift to PFI? Will the Government encourage, or indeed force, local authorities down that route? I am aware that I have asked her several questions, some of which she may be able to answer today, but I shall understand if she cannot do so. The Opposition fully approve of the measure and shall not vote against it.

Mr. Cash: I would like to ask the Minister some helpful questions. I also welcome the proposal, but I seek clarification. My hon. Friend the Member for Cotswold (Mr. Clifton-Brown) referred to our need to know a little more about the kind of projects for which PFI will be available. As 74 authorities are involved, we must have greater clarification of the amount of money involved; will it be £3 billion or £4 billion? How will that be allocated and which type of schemes will be involved?

PFI obviously has enormous potential, so I do not want to ruffle the Minister's feathers by linking my questions to the standard spending assessment. However, I see the hon. Member for Staffordshire, Moorlands (Charlotte Atkins) in Committee, and she knows that we have genuine concerns in Staffordshire about the way in which the SSA operates. I hope that the Minister will not consider the following questions as hostile, but as an attempt to find a means to help out Staffordshire, which is included in the list. Indeed, I suspect that the hon. Member for Staffordshire, Moorlands will sympathise with some of the following points.

Will ``appropriate schemes'' include highway matters? I see from the rather terrifying appendix X, to which the hon. Member for Bath referred, that revenue support for design, build, finance, operate, or DBFO, schemes is subject to unbelievably complicated formulae, which I shall not attempt to read out, although they are rather funny. However, I hope that they will lead to some useful money. There are references to bridges, tunnels and road schemes. Obviously, that is a matter of great importance where, for example, a given authority does not have much in the way of expenditure per head of population allocated under its existing highway arrangements; that may trigger a few memories for the hon. Member for Staffordshire, Moorlands.

We have severe problems with respect to railway crossings in my constituency. I shall not explore the full detail of the proposal to run 125 mph trains through Staffordshire, but it is important because safety and traffic congestion problems have arisen. In 1997, Railtrack said that it proposed to get rid of most of the railway crossings in my constituency. Perhaps as a result of the slashing of Railtrack's investment programme and the restrictions arising from events such as the Hatfield rail crash, the railway crossings will not be replaced by bridges, unfortunately.

The grant would be an extremely fruitful channel through which to sort out the railway crossings issue. I shall not discuss the crossings in detail because I shall have another opportunity to do so in the near future, but I should be grateful if the Minister confirmed whether the local authority would in principle be able to attract PFI and the grant, irrespective of whether Railtrack wanted to take up the money. If Staffordshire county council were to make an application in respect of the railway crossings, would the money be available in principle, and would the Minister regard ours as a suitable case?

I have nothing more to add, other than to note that the maximum grant available will be £160 million. I can assure the Minister that the railway crossings in my constituency are potentially very dangerous. The problem is serious and there have been several deaths; at Colwich, where there was a mega-disaster some years ago, and at Hixon. According to Staffordshire county council and Railtrack, the total cost of implementing the initiative in my constituency would be only £8.7 million. It would bring enormous benefits, and I hope that the Minister can say whether moneys for railway crossings, safety improvements and dealing with traffic congestion would in principle be available through such a scheme.

I am grateful to the Minister for the superb way in which she put forward her arguments—

Mr. Don Foster: Grovel, grovel.

Mr. Cash: When one is looking for money for one's constituents, one is inclined to take an extremely emollient approach, and I did not want to ruffle the Minister's feathers.

Sir Sydney Chapman (Chipping Barnet): I shall detain both you and the Committee as little as possible, Mr. Cummings. I want to ask one or two brief questions, but I want sincerely to thank the Minister not only for the way in which she introduced the report, but for her courtesy in sending us the informal guide, which consists of 13 paragraphs that I found extremely helpful. By the time I have asked my questions, she will realise that I am on a steep learning curve in respect of this issue.

Of course, I understand and support the principle of PFI. Paragraph 2 of the informal guide was music to my ears; the Opposition have espoused such principles for a little longer than the Minister's colleagues on the Labour Benches. To put the matter in a nutshell—the Minister will correct me if I am wrong—the special grant is intended to cover capital costs, not the on-going maintenance costs of the PFI arrangement. In a sense, the PFI credits are the equivalent of the traditional method, which still applies, of providing revenue support grant for servicing debts associated with procuring capital assets.

It is clear that on completing a project, the private sector will able to charge annually those who use or enjoy particular facilities in order to recoup not only the cost of the scheme, but the maintenance costs. I do not expect the Minister to deal today with the example that I am about to give, but I should be grateful if she would write to me and provide the information that I have been unable to extract from any other Minister. The example concerns the phase 1b redevelopment of Barnet general hospital, which is occurring under the PFI. Phase 1a was undertaken some years ago and was completed just before the general election. The previous Government gave the go-ahead, in principle, to the phase 1b scheme. The new Government looked at all PFI schemes and also gave the go-ahead to phase 1b. Hopefully, it will be completed by April 2002.

What interest will be paid to the private sector per annum to cover the scheme? It will depend on two component parts; the maintenance of the hospital and the provider's services, and the interest accrued on the capital cost. Is there a maximum interest that can be charged to recoup the capital cost, or is it entirely a matter for the client and the contractor to decide? If it is the latter—I suspect that it might be negotiable—the following situation needs to be resolved. If the contract has been drawn up before the project starts but repayments do not begin until the project is completed, what will happen if the project turns out to be more expensive than was thought when the contract was signed? Perhaps the traditional method, where the contractor must negotiate with the user of the building—in this case, Barnet health authority—would apply. Will the Minister explain what would happen if a health authority found that, through no fault of its own, its project cost significantly more?

Those issues are important. Is there a maximum? I do not suggest that the private company would be guilty of usury and could charge any figure; clearly it must be negotiated. However, will there be a maximum interest that the Government say that a private sector company can charge? I realise that the Minister can relate my second question only to the PFI credits that have been paid under the report, but what are the arrangements relating to that?

Ms Hughes: I shall try to deal with all the questions that hon. Members asked. In his opening gambit, the hon. Member for Cotswold made constructive comments, so I do not want to be overly political in my response. However, the state of PFI development meant that PFI was almost unusable when we came to power. I was interested that he used the example of the hospital programme because it had hardly got off the ground by 1997—despite grand ambitions—due to the fact that the terms and conditions of operation were unattractive to all sides and needed to be completely revamped. The Government spent some time at the start our term doing just that. Because of our clarification of the system—by making conditions clearer and removing obstacles—the use of PFI has accelerated.

I am sorry if I was confusing about the various sums of money allocated. In the first three-year period, over £3 billion credits were allocated. An allocation of £4 billion is provided for the following three years, which is covered by the next spending review. In the financial year so far, we have allocated about £830 million of credits.

The hon. Member for Cotswold asked whether we envisage more and more local authorities reverting to PFI. We see it as a useful way of enabling local authorities and other parts of the public sector to get capital projects off the ground. The more important point, which is germane to the questions raised by the hon. Gentleman, is to find the best mechanism for a project in terms of value for money, efficiency and where the risk best lies on that project. These are the key criteria, which will determine whether one goes through a traditional route or PFI.

Transfer of risk is one of the key changes that we have made in the current arrangements to ensure that there is a higher borrowing charge than there would be to the local authority. If an authority wants to go down the PFI route, it is imperative that there is a return on higher borrowing, which must be demonstrated in terms of greater efficiency, better quality and—crucially—the transfer of risk. That relates to the second point made by the hon. Member for Chipping Barnet. Once a deal has been finalised and the finance, terms and conditions have been agreed, clearly any changes, whether unforeseen or otherwise, must be carried by the private sector because the risk is being transferred to the private sector. Otherwise, there would be no advantage to the public sector of entering into PFI arrangements.

The range of projects was another issue raised, and the hon. Member for Cotswold questioned the inclusion of vehicles. Few schemes now include vehicles. There are a couple in the report, but the hon. Gentleman will notice that it is when a new depot—a whole new service—is being provided that some vehicles are included.

With regard to the process for approval, there are two stages. The schemes first have to go through the individual Department where the policy relating to the proposal is located and the Department has to approve the scheme as being one of the priorities in policy terms. It then goes to the project review group. The authority has to provide a full options appraisal for that process, demonstrating why PFI is the preferred option in terms of value for money, efficiency and transfer of risk.

I assure the hon. Member for Stone that I was not ruffled by his questions on local government finance; I just did not want to become side-tracked on another set of issues. With regard to his point about railway crossings, I cannot give a definitive answer, but I shall write to him. I do not know whether it would be ultra vires for a local authority to try to raise finance for something such as a railway crossing, which I should have thought was the responsibility of another body. Clearly local authorities can only use this or any other finance-raising mechanism on projects that they can spend money on in law. However, I shall investigate that further and write to the hon. Gentleman.

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