Local Government Finance (England) Special Grant Report (No.90) (HC611)

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Mr. Foster: I, too, am delighted to serve under your chairmanship, Mr. Gale.

The hon. Member for North-East Cambridgeshire said on a couple of occasions that PFI was a Conservative party invention. He is correct, but it is worth remembering that little use had been made of it by the time the Conservatives lost office in 1997. Despite much talk about the benefits that it would bring to hospital building projects, for example, very little had taken place during their tenure in office. That is because their PFI scheme was extremely cumbersome, did not have a great risk transfer element associated with it and put several other obstacles in the way of councils, other organisations and the private sector coming together.

I welcome the changes that the Government have made to the PFI scheme. They have removed some obstacles and simplified the mechanisms for calculating the funding that will flow from it, and I acknowledge that those improvements have led to a greater uptake. The Minister rightly said that evidence available from the projects that are now on stream shows that organisations find the route helpful for several reasons. I note with interest—although I knew it before it appeared in the annex—that Bath and North East Somerset council, my local authority, is among the beneficiaries in this round. That is interesting in view of the remarks by the hon. Member for North-East Cambridgeshire about the fire service, because the money is provided for work that the council is doing for my local fire service.

I have expressed my worries about PFI on several occasions. Although PFI may be an appropriate route for local authorities and others in some circumstances, we must move toward a level playing field to give local authorities a range of options from which they may choose PFI if that is deemed to be the most appropriate option for reasons of value for money, efficiency and the genuine transfer of risk—I am glad that the hon. Gentleman mentioned that.

When transfer of risk was raised last year, the Minister then responsible, the hon. Member for Stretford and Urmston (Beverley Hughes), made great play of the importance of the transfer of risk. Indeed, she said clearly that it was a crucial element of PFI. She said:

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''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.''

She went on to say:

    ''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.''—[Official Report, Second Standing Committee on Delegated Legislation, 6 March 2001; c. 10.]

The hon. Lady made it clear that transfer of risk is crucial. A growing number of people worry that the Government's pushing of the PFI route shows that there are increasing examples—public-private partnership of the London tube is perhaps the prime example—in which there is not necessarily a full transfer of risk. If there is no transfer of risk, that raises the question whether PFI is the best method for councils and others to follow. I would welcome the Minister's comments on that. Is he confident that there is a genuine full risk transfer in all the details of the schemes that we are approving today, and that there are no get-out clauses that may make life easier and less risky for the private sector?

The Minister, when he appropriately echoed what his predecessor said last year, said that a major review of local government finance is under way. Councils will be desperate for assurances that they will not be in greater difficulty, whatever the outcome of that review.

Paragraph 11 of the Minister's helpful note says:

    ''Whatever proposals may emerge from the local government finance review, any new system is likely to continue to encourage the use of PFI and other forms of public-private partnership where they will achieve best value. Authorities may also expect their existing PFI commitments to be taken fully into account when future levels of revenue support are determined.''

I am sure that he means that, whatever the new arrangements might be, they will not make local councils financially worse off than they would be under PFI. The phrase ''taken fully into account'' is a rather different formulation. Will he assure us that, whatever the outcome of the local government financial review, the financial support that authorities that have decided on or are considering PFI receive from the Government will not be reduced from the current and anticipated levels already agreed as a result of that review?

5.10 pm

Dr. Whitehead: The hon. Member for North-East Cambridgeshire asked several questions about the report, the central one of which suggests that he has not entirely grasped the central arrangement of a PFI scheme. If a local authority wants to procure a capital programme by PFI, it will be required to apply for the pool of available PFI credits. In doing so, it will have to submit a proposal that has been appraised against other methods of procurement. If the appraisal finds in favour of the PFI proposal as better value for money,

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the PFI proposal will proceed. If the appraisal does not find in favour of it, it will not. Clearly, that is a choice for a local authority.

That point answers the questions that the hon. Member for North-East Cambridgeshire asked about why particular authorities appear on the list of those that have been endorsed and those that have not. Some local authorities may decide that particular projects that they have in mind produce better value for money and therefore either apply or are endorsed, and others do not. Several authorities have submitted proposals that have not yet been endorsed. The PFI schemes that appear in annex A have been endorsed. He has a valid point in that a PFI scheme is inevitably likely to appeal to larger authorities, especially because of the upfront costs of setting up a PFI deal and because larger capital projects may interest larger local authorities. If he reads the list, he will find that it is not true that there are no district councils in that list, although, as he correctly points out, they are not the majority of those on the list.

A PFI route for capital financing a project is a choice. It is one of the options available to local authorities. It is not the only show in town. Indeed, only some 15 per cent. of local authorities' capital commitments currently relate to PFI schemes. In fact, therefore, the vast majority of local authority capital projects and schemes are still being carried out under traditional arrangements relating to procurement by means of special capital approvals, for example.

The hon. Member for Bath asked whether the playing field will be genuinely level. A genuinely level playing field is underlined by the rigorous assessment that is carried out before a scheme receives PFI credit and after a proposal has been submitted. The scheme must show that the PFI method of procurement would present better value for the local authority, all things taken into account. The assessment is rigorous, and the PFI credit and the special grant that follows it are based on that approval only. If approval is not forthcoming, the scheme will not proceed. Therefore the choice is in the hands of the local authority at several levels—whether to consider that route, whether to procure by that route, and whether, having decided to procure by that route, it is prepared to take the consequences on the local authority.

Mr. Foster: I am grateful to the Minister for his helpful explanation. However, he will acknowledge that the available alternatives are still dependent on the Government being willing to make funding available under the current capital funding regimes, which, as he knows, are not satisfactory. As a result, it is the Government's intention to change them to the prudential framework, which will make further changes. Other options also need to be made available to local authorities, the most obvious of which would be to allow them to raise funding through a bond issue, which could be much cheaper than some of the existing routes, because the rate of return required would be rather different. I hope that the Government will consider giving that additional freedom to local authorities.

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Dr. Whitehead: The hon. Gentleman, who takes a great interest in these matters, proposes alternative methods of funding in the future. He anticipated what I was about to say by raising the important point that the local government White Paper published in December sets out a new framework for capital borrowing which, among other things, may be based on prudential guidelines for local authorities deciding for themselves, within reason, how they raise money for their capital projects. I anticipate that that will produce a further, wider series of options for local authorities regarding how they wish to proceed with capital programmes. The level playing field that he wants to achieve will be further secured by the way in which the new capital rules will operate.

Mr. Foster: I agree, and I promise faithfully not to pursue the issue. The Minister is absolutely right in saying that the prudential framework will provide greater choice to local authorities. However, recent research on various issues shows that the increased freedom will apply only to a relatively limited number of authorities and that the benefits will obtain only for one or two years. Thereafter, most local authorities will find themselves back in the trap. Thus the prudential framework being recommended, although by itself of benefit and a movement forward, will not give the full range of options that I would like local government to have. I suspect that we will have to agree to disagree in that respect.

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