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29 Jan 2003 : Column 957—continued

Mr. Deputy Speaker (Sir Alan Haselhurst): Order. That is not a matter for the Chair, but I can repeat what has been said from the Chair on a number of occasions: it is one of the courtesies of the House that hon. Members should inform the Member representing a constituency if they are visiting it for a political purpose. Alas, that rule is not 100 per cent. observed, but it would certainly help cordial relations in the House if it were.

Mr. George Osborne: The work that the Committee did on tobacco fraud, which other hon. Members have mentioned, was also interesting. With the protection of parliamentary privilege, I should like to say that I think that the executives of Imperial Tobacco lied to us in saying that they exported billions of cigarettes to Kaliningrad, Latvia and other such countries in the belief that they would be smoked locally, as they clearly knew that they would be reimported into this country illegally. That is the reason why Regal and Superkings, two of that company's brands, account for 50 per cent. of all smuggled cigarettes in Britain.

I was also struck by our work on widening access to higher education and our discovery—it was not rocket science—that student debt is the single biggest deterrent to going university for people from less well-off backgrounds. I hope that that informs the debate in the next couple of years.

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Before I deal with the PFI, I should mention a report whose Treasury minute we have not received, but which is germane. In our work on the Saif Sareea 2 exercise conducted by the Ministry of Defence in Oman, we found that there were serious problems with the equipment used by the British Army in the desert. That included the tanks that would not work because their filters became clogged with sand; the guns that jammed; the boots that melted; and the clothing issued to soldiers that was designed for personnel stopping the Russians on the north German plain in the middle of winter rather than for fighting in the desert. The Ministry of Defence assured us at the time that those equipment problems were being addressed in short order. In the light of current international events, I hope that that has happened.

It is interesting that many hon. Members have picked up on the PFI theme. As usual, the speech of my hon. Friend the Member for South Norfolk (Mr. Bacon) was well informed and intelligent. He always puts me to shame when he turns up at PAC hearings with a mound of extra work and research. That knowledge reveals itself in the hearings, as it did in his speech.

From a different ideological angle, the speech of the hon. Member for Hemsworth (Jon Trickett) was also interesting. I seem to remember that, when I watched coverage of the Labour party conference, one of the rows about the PFI was based on the suggestion that the National Audit Office should conduct an independent study. The Labour leadership negotiated a compromise—this is the way in which it does these things—that involved its asking the NAO to conduct a study. However, it seems to have escaped the notice of the leadership that the NAO has been conducting loads of studies on the PFI and it continues to do so. While it waits for the Government to ask it to do what it is mandated to do by the Labour party conference, it should look at the studies that the PAC has done.

Many studies have been mentioned that deal with specific projects, such as those relating to the West Middlesex university hospital, the Royal Armouries Museum in Leeds and Treasury and MOD buildings, as well as earlier reports on Fazakerley prison and Dartford and Gravesham hospital. Our work on public-private partnerships—a sort of hybrid of PFI—includes our investigation of Airwave, National Air Traffic Services and other such shining successes of the PPP. I should point out for the sake of Hansard that I say that with some irony.

Of course, today the PFI is a major form of Government procurement, and has been adopted with all the zeal that only a convert can muster. For the first time ever, I take the Chancellor of the Exchequer at his word when he says that more than 400 PFI contracts are committing Government Departments to almost £100 billion of expenditure, that 500 of the 550 school buildings built since 1997 have been PFI projects, and that 90 of the 100 major hospital projects have been PFIs.

In theory—I stress, in theory—there is a strong case for PFIs. In theory, by specifying what service it wants rather than how it should be delivered, a public authority—be it a Department or a council—frees itself from the risks and responsibilities associated with the delivery of those services. Again in theory, risks are transferred from the public sector to the party best able

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to handle them. Again in theory, competitive bidding from the private sector discovers the best supplier and finds the best-value approach to delivery, while payment by results should incentivise innovation and excellence.

However, to judge by the work that we on the PAC have done, theory is not being matched by reality in PFI projects. That is partly because transferring risk, incentivising innovation and finding best value are not the principal reasons why public authorities choose the PFI route. The real reason, as any Treasury Minister knows, is that the PFI is often the only way that a Department or council can get the project that they want through the Treasury. Instead of the large up-front investment that would appear on the Government's balance sheets, one gets the projects now and pays later. In the words of Jeremy Colman, the NAO's guru on PFI, it is the "only show in town." So we find that with the PFI, the costs to the public purse are often the same in the long run—indeed, they are often greater—but the Treasury books look good in the short term.

Because that is the principal driving force behind PFI, the Government ignore many of its problems and drawbacks. The PAC surveyed 121 PFI contracts and looked at the lessons to be learned. Several common ones emerged. First, value for money is very hard to prove or disprove. As the previous two speakers pointed out, the public sector comparator is easy to manipulate and only spuriously precise; indeed, the Ministry of Defence building was a classic case of that.

The second lesson is that the innovation promised by the PFI rarely arises in practice. Innovation means risk, and perversely, PFI bidders are very risk-averse, partly because of the costs associated with mounting a PFI bid. For some reason, the exception to that is IT projects, for which the opposite is true. Such projects show a cavalier disregard of risk. In about 10 days, we are to hold a hearing on the Libra project, which is managed by the Lord Chancellor's Department and looks like a classic case of such cavalier disregard. The NIRS 2 benefits computer system was another classic example of a complete lack of forward thinking about the reforms that an incoming Government might make to social security and pension payments, even though many of those reforms were spelt out in the party manifesto of the time. The computer system could not cope with those changes, so the supplier had to be contacted—it was the only supplier that could do the job—and hundreds of millions of pounds were spent on upgrading the system.

The third lesson that I draw from our work on the PFI is that private sector financing costs are very high in relation to the risks involved. In fact, financing is very rarely competed, and there is evidence of market inefficiencies. A classic argument that is used by people who do not like the PFI is that it is more expensive for the private sector to borrow money. That is true, but it need not be that much more expensive. Government-guaranteed bonds for the channel tunnel rail link are significantly more expensive than gilts, although the risk is identical.

The fourth lesson is that PFI deals continue to be costly to negotiate and complicated, even after 10 years of experience. High bidding costs deter bidders and reduce competition. I have lost count of the number of

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hearings in which it emerged that there was only one bidder for the PFI contract at the end of the process. In such cases, the Department handling the negotiation had to pretend that other bidders were involved in the process. I would be amazed if the people bidding did not know that they were the only bidders. Of course all that ends up being paid for by the public sector.

The final lesson that I learned is that risk transfer—again, this point was made by the hon. Member for Hemsworth—is not as extensive as it seems because, ultimately, delivery risk can never be transferred when it comes to Government projects. The Royal Armouries Museum in Leeds is a good example. That prestigious project obviously meant a huge amount to that city. However, visitor numbers were far below those projected, the PFI company got into all sorts of trouble, and the Government had to bail it out: they could not afford to let that brand new museum close because that would have been too embarrassing. At the time, the PAC concluded:

Mr. Jenkins: The hon. Gentleman started his contribution on the PFI by saying that he agreed with it in theory, but he then said that its implementation was flawed. Is he saying, with hindsight, that the theory was wrong or does he still believe the theory to be right but that we are failing to get to grips with its practical mechanics?

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