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Session 2002 - 03
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Delegated Legislation Committee Debates

Local Government Finance (England) Special Grant Report (No. 115) on Special Grants for Local Authorities

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Fifteenth Standing Committee

on Delegated Legislation

Thursday 20 March 2003

[Mr. Mike Hancock in the Chair]

Local Government Finance (England) Special Grant Report (No. 115) on Special Grants for Local Authorities

The Chairman: Before I call the Minister, may I thank him, on behalf of the Committee, for his courtesy in sending out the guidance notes? They are much appreciated by all hon. Members and help to cast light on the matter. I hope that other Ministers will learn that lesson.

2.30 pm

The Parliamentary Under-Secretary of State, Office of the Deputy Prime Minister (Mr. Christopher Leslie): I beg to move,

    That the Committee has considered the Local Government Finance (England) Special Grant Report (No. 115) on Special Grants for Local Authorities.

I thank you, Mr. Hancock, for your comments. I shall not test hon. Members on the contents of the helpful, informal guidance, but I trust that it sheds at least some light on the technical matters that we are discussing today.

The Government believe that partnerships between the public and private sectors are essential to the delivery of better public services. The private finance initiative is one way in which better public services are being achieved. Capital investment in local services is significantly increasing, and the PFI plays a crucial part. Since 1997, the local government PFI has delivered new and refurbished schools, care centres and residential homes for the elderly and those with learning difficulties, fire stations, magistrates courts, better street lighting and housing renewal. So far, the schemes approved for Government support represent nearly £7 billion of capital investment. Continuing Government support is a key element in that success story, and Parliament is seeking approval to pay that support for another year. The report for 2003–04 is very similar to the previous one, which we debated around this time last year. The method of calculating grant is the same, but the total amount payable has increased to £340 million as more projects become operational.

The report encapsulates details from the PFI programmes of several Departments, including the Department for Education and Skills, the Home Office, the Department for Culture, Media and Sport, the Department for Environment, Food and Rural Affairs, the Department of Health, the Lord Chancellor's Department and, of course, the Office of the Deputy Prime Minister.

Given the technical nature of the report, I arranged, as I said, for all Committee members to receive in advance of the debate additional informal guidance. I hope that that has been helpful, but I am, of course, willing to elaborate on any of the technical issues.

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The PFI approach may be used whenever it promotes best value in the delivery of public services. When the amount of support to be given in the 2002 spending review period, which will achieve nearly £7 billion of capital investment, is added to the funding provided since 1997, the total value of local government PFI projects will be over £12 billion. That is a significant amount of public investment, and I should like to say something about the safeguards that will ensure that it is well spent.

Funding for PFI is allocated to sponsoring Departments, to which local authorities seeking revenue support to finance projects must submit their proposals. Authorities will not receive revenue support unless they have demonstrated that procuring them under the PFI offers better value for money than the public sector alternative.

Proposals supported by sponsoring Departments are sent forward to an inter-departmental body, the project review group, which is chaired by the Office of Government Commerce. It meets several times a year to assess projects for which Government support has been requested. Projects endorsed by the group are issued with PFI credits, which are part of the formula for calculating the grant. The endorsement of projects offers a local authority the assurance that it will receive a grant and provides the private sector with greater certainty that if a bid is made for a contract it will be affordable for the authority.

The Chairman: Order. Will you please speak up, Mr. Leslie, because some hon. Members have indicated that they are having a problem hearing you?

Mr. Leslie: Thank you for that helpful request, Mr. Hancock. I shall try harder to project my voice.

Legal constraints on the format of the special grant report prevent us from adding in too many details of projects, and, in any case, the need for commercial confidentiality means that it would be inappropriate to specify financial contract details for each project. Nevertheless the special grant report gives an explanation of PFI, PFI credits and grant; a list of authorities to which the grants are to be paid; details of how the amount of grant payable to authorities is calculated; arrangements for combined fire authorities and waste authorities; and other conditions of grant, including provisions for recovering overpayments, procedures for claiming grant and having the payments audited.

John Mann (Bassetlaw): Are any PFI credits excluded, either on geographical grounds or in specific respects such as education?

Mr. Leslie: No, many authorities are listed under annex B of the special grant report, and various departmental schemes are included, such as for schools, housing, policing, fire, leisure, library services, transport, waste, magistrates courts, social services projects and others. They run through the local government finance system, so any local government capital project could be relevant under the PFI scheme in each financial year.

The traditional way to obtain the use of capital assets is to buy them outright. That is a perfectly

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acceptable strategy, and the new prudential system provided in the Local Government Bill will give authorities greater flexibility to pursue that approach. Under the new system, the Government will continue to pay grant support towards authorities' capital investment programmes, while allowing authorities the freedom to undertake extra self-financed borrowing without Government consent.

The private finance initiative is an alternative to the straightforward acquisition of assets. Its attraction is its potential for offering better value for money over the whole life of the asset. However, authorities that choose PFI also face significant ongoing revenue costs—the regular service payments to the PFI contractor. The support is intended to contribute towards the capital element of those continuing payments, usually up to 70 or 80 per cent. of the overall amount, and starts when the authority begins to make payments to the contractor.

The Government are committed to giving revenue support to authorities whose PFI schemes have been endorsed. The report that we are debating today is an essential part of the revenue support process. It lists eligible authorities in annex B; it explains in annexes A and C the way in which the grant is calculated; and it sets out in annex E the conditions under which it is paid.

Many examples of good worthy schemes could be cited, but I am constrained by time, so I shall mention only a few. In Hammersmith and Fulham, housing and social services are being combined to provide sheltered housing and day care centres, and five school projects provide school sports activities and library facilities. The Government particularly encourage proposals that cross traditional service boundaries and join up local services. The Office of the Deputy Prime Minister is especially keen to support ''joint service centres'' where local authorities will join other public bodies, agencies and voluntary organisations to provide a wide range of public services under one roof. The other agencies could include NHS bodies, Jobcentre Plus, citizens advice bureaux and many others.

I hope that I have explained in sufficient detail why we are committed to paying revenue support to local authorities for the financial year 2003–04 by means of a special grant. If hon. Members want to ask any questions, I shall do my best to answer them. I commend the report to the Committee.

2.35 pm

Mr. Geoffrey Clifton-Brown (Cotswold): I am grateful to you, Mr. Hancock, for your chairmanship of our proceedings.

Conservative Members approve in principle of the private finance initiative; it was, after all, the Conservative Government who introduced it. We are grateful to the Minister for his helpful brief. Provided that PFI operates properly, we have little contention with the special grant, which covers about £340 million of public expenditure and applies to 104 authorities, including, I am pleased to see, my own authority in respect of a combined fire station. PFI is a useful way of providing for capital projects sooner than would

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otherwise be the case. The Minister and I both have antecedence on this matter, because we served on the Public Accounts Committee, which, then and subsequently, examined the working of PFI.

I want to put several questions to the Minister. First, we want to ensure that PFI is not simply a substitution of public expenditure, but an addition to it. The Treasury can, after all, borrow more cheaply than anyone else, so we want to ensure that any risk is transferred to the private sector. I recall, as will the Minister, an in-depth study by the National Audit Office of the Skye bridge project, on which things went radically wrong. Will the Minister tell us how the projects approved in last year's special grant turned out in practice, and whether they worked out cheaper than they would have been if they had been procured by the public sector? If the capital projects are not cheaper, there is no point in the system at all.

Will the Minister tell us how the PFI projects are accounted for? Does the expenditure score as public expenditure? Philip Stephens, commenting on PFI in the Financial Times in 1996, said:

    ''The most obvious effect on the public finances is to reduce spending now and replace it with a stream of future liabilities. A private contractor picks up the bill for the construction of, say, a new prison, while the taxpayer guarantees it an income spread out over the lifetime of the asset. Today's capital investment thus becomes tomorrow's current spending.''

Are we effectively mortgaging our children's future, or is it all part of the normal pattern of public expenditure? Some assurance on that is desirable.

What of cost over-runs? I refer to the Skye bridge project again. I know that the Minister will be aware that costs can over-run considerably and sometimes go completely out of control. Is the original cost specified by the Government likely to be the final cost? One of the most shocking examples of an over-run was the Benefit Agency computers project: the initial cost was estimated at £200 million, and the final cost was £1.4 billion—a cost over-run of 600 per cent. I accept that that is an extreme case, but we are talking about public money, so will the Minister outline the initial estimated costs and the final out-turn for last year's projects?

The helpful guidance notes inform us that the grant provides the money to repay the capital, but the revenue costs form part of the loan, of which the Government provide 4 per cent. of the outstanding debt each year under the special grant, equivalent to the notional debt repayment. Does that mean that PFI projects are always expected to run for 25 years, or do they have different lengths?

In paragraph 6 of the notes the Minister says that the Secretary of State will be entitled to recover in two instances. The first is an overpayment of grant, which obviously should be repaid. Secondly, there is provision for repaying the grant if, for one reason or another, the project does not come to fruition. I would be grateful if the Minister could say something about the projects that were approved last year, but which never came to fruition. How much grant was claimed back from last year's approval? Anything that the Minister could tell us would help. This is not a contentious matter. We want to see PFI working and

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providing good capital projects in the public sector; it is part of improving public services. I hope that this year's special grant will achieve that and that there will be no wrinkles in it.

2.46 pm


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