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29 Jan 2003 : Column 944—continued
Mr. Rendel: And one or two Liberal Democrats.
Mr. Bacon: Yes, even one or two Liberals are sceptical about it. If there is a bandwagon going, I guarantee that a Liberal Democrat Member will jump on to it. With that kind of spectrum, who could possibly go wrong?
If the Treasury wants to persuade people of the merits of the private finance initiative, it has to do at least two things. First, it should be much more open and transparent. Secondly, it needs to do much more to allow competition, by which I mean that it needs to allow PFI and conventional procurements to compete with one another on similar projects and to run side by side in the long term.
Let me take those two points in turn. First, the Treasury simply needs to open up more. If it is right about the PFI, what has it got to be afraid of? It can only gain from greater public understanding of the arguments. It should be open about professional fees, about which I shall say more in a moment, and explain more about how an assessment is made, openly acknowledging the other factors that are involved. If it involves using a balanced score card, it should say so, and explain how that works. People understand that value for money does not always involve buying the cheapest—that is why we are not all driving around in Reliant Robins.
An area in which we need complete transparency is that of professional fees. The National Audit Office's report on the PFI contract for the development of West Middlesex hospital states that the cost of the advisers was made up of £967,000 for financial advisers, £803,000 for legal fees, £204,000 for project management, £128,000 for the quantity surveyor, and £237,000 for "Others", making a total of £2,339,000. What it does not say is that those are not the total fees for the project, but only the fees paid by the Department of Health. The professional fees paid by Bywest Ltd., the PFI contractor for the hospital, are separate. When the witnesses appeared before our Committee, I asked them to supply more details about the other fees, and I await their answers with interest.
PFI contractors are in a position to pay their side of the professional fees only because they know that they have a contract with the Government that in the end will entitle them to receive annual unitary payments from the Government. The taxpayer is therefore financing those fees. Hon. Members have a right to know on behalf of taxpayers how much is being spent in that way. The Treasury explicitly acknowledges that in relation to its building in Great George street. I tabled several parliamentary questions about that PFI project. The Economic Secretary is fortunate that he did not hold that position at that time; the current Financial Secretary had the burden or pleasure of answering them.
The answer to my parliamentary questions was that the fees on the Treasury's side were £3.223 million, and that Exchequer Partnership, the PFI contractor for the Treasury building, paid £22.08 million. The total at 27 June 2002 was therefore £25,303,000 in professional fees. Given that the building cost only £118 million to
construct, according to Treasury figures, it is odd that the professional fees should constitute such a high proportion of the total. Common sense suggests that if one pays £118,000 for a house, one would not expect to pay professional fees of £25,000 to the solicitor and the bank. Even allowing for the higher fees that one would expect for a complex project such as the Treasury building, it is odd that the professional fees should be more than one fifth of the total construction cost.Sir Kevin Tebbit, who is permanent secretary at the Ministry of Defence, said in evidence last year that the fees in relation to the financing of a typical PFI project should be approximately 1.2 per cent. of its net present cost. The net present cost of the Treasury project is £170 million. Under my preferred COTD—cash out the door—measure, the expected payments for the building in the 35-year life of the contract, including the project's inflation assumption, total £838 million. Again, the former Economic Secretary provided the figures in an answer last year.
If we use Sir Kevin's rule of thumb of 1.2 per cent. for financing costs, one would expect that the total fees for the Treasury building, with a net present cost of £170 million, would be around £2,040,000. However, the actual fees relating to the bond issue for the Treasury building are £6,968,000 for Exchequer Partnership and £2,637,000 for the Treasury. Again, the Treasury provided the figures. That is a total of just over £9.6 million, which is 5.65 per cent. of the net present cost. That is nearly five times more expensive than the figure that one would assume using Sir Kevin Tebbit's rule of thumb.
I asked Sir Kevin whether he knew why the fees for the Treasury building were so high. He assumed a somewhat Delphic appearance and replied that it was perhaps not a good idea for him to tell the Treasury how to do its job. However, I should like Ministers to explain why they appear to be spending so much taxpayers' money all over the City. I wonder whether the Treasury has decided that, after three years of falling stock markets and a rather light deal flow, short of bidding for Safeway it is time to help the City of London through some old-fashioned pump-priming. However, if that is so, hon. Members should know about it.
Will the Financial Secretary explain why I received two replies from her to the same parliamentary question on fees? Both answers were received on 27 January. The code numbers for both are the same. Every reference number is identical, but one answer states:
- "I refer the hon. Gentleman to the reply I gave him on 27th June 2002".—[Official Report, 27 January 2003; Vol. 398, c. 619W.],
- "I shall let the hon. Member have a reply as soon as possible."
Treasury Ministers will know that the bond issue by Exchequer Partnership for the financing of the Treasury project was for £127,790,000, and that, with some mezzanine debt and other shares and stock, the total capital involved was £140, 965,000. What interests me is whether the bond that was issued the other day, on 16 January 2003, by Exchequer Partnership (No. 2) plc for £165,145,000 means that there is now a whole new tranche of fees to be paid on top. If so, how much is
involved? Are all the numbers that I am talking about in relation to the Treasury building only half the picture? Does Exchequer Partnership (No. 2), which covers only the eastern end of the building, mean that all these fees should be roughly doubled?Why in the new Exchequer Partnership (No. 2) bond issue, in the many crates of documents relating to the new bond that are available for inspection at Allen and Overy, or indeed at the Financial Services Authority, is the financial model not disclosed, contrary to previous practice?
Incidentally, what precisely were the benefits to the public purse in breaking the PFI project for the Treasury building into two parts? Members of the Committee went round the building. I walked all the way round it, and it definitely looked like one building to me.
While on the subject of openness, may I say that when I asked the Ministry of Defence about fees it gave me figures only in relation to its side, and not in relation to the PFI contractor, Modus Services? The Treasury has been admirable in answering these parliamentary questions in relation to both sides, and rightly so, because ultimately it is the taxpayer who bears the cost.
The Treasury professional fees are just over 10 per cent. of the total. On the same basis, given that the MOD is paying out in relation to its PFI building fees of £11,190,000, one might expect roughly another £107 million of fees for Modus Services Ltd., the PFI contractor for the MOD building. I do not know whether that is too high or too low. It is certainly plausible. The fees for the London underground are already around £400 million, although how much has been achieved for that is a subject for another day and a separate debate.
The point is that the taxpayer has a right to know. If the Treasury seriously expects people to come on side in relation to the PFI, we must know the facts. It is no good saying, as the MOD did in its answer to me, that the fees paid by the MOD are available but that the fees for the PFI contractor are not.
Geraint Davies : As the hon. Gentleman is focusing on the PFI, may I ask him what he thinks will be the impact of the change of the Treasury's discount rate on the present value of PFIs from 6 per cent. to 3 per cent. and on the number of PFIs coming forward and their relative value to public sector comparators?
Mr. Bacon: I shall come on to the public sector comparator in a minute. Answers I have received from the Treasury, although how much credence one can attach to them is a moot point, show that the Treasury view would be that the discount rate cannot be seen in isolation. I talked to the National Audit Office about the discount rate. Its view is—and this is a point that I shall come to when I talk about the public sector comparator—that, although one clearly needs to take note of the discount rate, even more important is the question of the risk factor, the way in which capital risk costs and risk factors for a variety of different items that go into the calculation are assessed. I was going to say "manipulated", but I shall leave out such a tendentious word.
If we are to get the public on side, the Treasury must be more open about this matter. As I have said, it is no good the MOD's saying that its professional fees are
available but that the fees paid by the contractor, Modus Services plc, are a matter for Modus Services plc, as if that is that. We need to make fair comparisons if we are to understand the PFI and weigh it in the balance. The Government have more work to do in selling the PFI. Inadequate and unhelpful replies do not assist their case. Such replies only make one think, rightly or wrongly, that there is something to hide.The second area I want to address is the question of the Treasury's allowing more competition, by which I mean competing types of procurement. It is all very well saying that the investment programme through PFI is only around 10 per cent. of current Government investment. I attended the seminar held at the Treasury last year, which was very helpful. The then Chief Secretary quoted that figure. I think that he said that £3.5 billion was going through the PFI and about £35 billion was going through conventional routes, but if we look at the current building programmes in our constituencies—schools, hospitals or prisons—it certainly does not seem like that. If one asks my local education authority in Norfolk how much choice it has as to which kind of procurement to adopt, it will reply that the answer is zero choice. It is told "You want some money? This is how you get it." That is hardly the best way to assure ourselves that taxpayers' money is being spent in the most efficient, effective and economical way.
The best test would be a live ongoing test. Procurements could run side by side for different projects in similar areas. For example, one could allow some school contracts to be let under the private finance initiative and others by conventional methods. That would give a better basis for assessing whether the PFI was delivering the claimed benefits and whether mistakes from earlier contracts had been learned. At the moment, we are just assured that that is the case. The fundamental point is that we should subject the PFI to ongoing competitive pressure from other forms of procurement. At the moment, Ministers reassure us that everything is rosy because the project has been compared with the public sector comparator. We are supposed to take that at face value.
On the public sector comparator, which the hon. Member for Croydon, Central (Geraint Davies) mentioned, the Ministry of Defence building report "Redevelopment of MOD Main Building" has an interesting chart on page 24. It shows the public sector comparator broken down by different categories. The left-hand column has a figure of base costs for capital expenditure, replacements, operating costs, legislative change and so on. There is also a risk factor. The middle column has a number and the right-hand column has a percentage. For example, the base cost for capital expenditure is £208.6 million. The risk, as a percentage of the base cost, is 29.5 per cent., making a further £61.5 million. At the bottom of the chart is a total base cost of £643.3 million. If all the risks are added up as a percentage of the base costs, they amount to a further £102.9 million. Miracle of miracles, the total is £746.2 million, which is the public sector comparator. Guess what? The PFI came in at £746.1 million.
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