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

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Matthew Green (Ludlow): We see PFI as a means of delivering new and improved public services, but it is only one way of doing so. Unfortunately, in recent years, especially with low levels of credit approval, it has effectively been the only act in town. We welcome the fact that from next year, after the passage of the Local Government Bill, and the introduction of the prudential borrowing rules, that will no longer be the case. In the last few years, however, many councils have been forced, by the fact that it was the only option open to them, down a route that they found neither palatable nor the most cost-effective in delivering public services.

PFI is appropriate only for some projects, and it should be used only where it can be shown to be superior to other methods of providing public investment. That is our proviso in considering the grant report. We will not oppose it, because it covers a wide range of projects, many of which will improve public services in much of the country, but our concerns must be placed on the record.

I have some specific questions for the Minister which are not covered in the information that he gave us. To what extent has he ensured that best practice has been disseminated among local authorities? We now have histories of good and appalling PFI projects. It would reassure all hon. Members to know that best practice was being actively circulated by the Department, so that local authorities could learn from the mistakes of the past—and there have been mistakes. The Audit Commission was especially damning on the early PFIs. Perhaps the Minister will comment on what lessons have been learned from those early projects and what steps have been taken to ensure that they will not happen again.

There is a concern that many PFI contracts, especially the early ones, will be inflexible in the long term. Some work has been done to ensure that that is less of a problem with newer contracts. How are the Government tackling the potential inflexibilities in long-term contracts?

We will not oppose the report, because many worthwhile projects are coming forward. However, the sooner we find other means of financing public investment and advances in public service provision, and the sooner a wider range of options is available to local authorities, the more effective will be the means of delivery.

2.49 pm

John Mann: Before I ask my question, may I declare an interest? Information has been given to me by Nottinghamshire county council about PFI credits for schools in Bassetlaw, one of which is attended by two of my children. You will be glad to know, Mr. Hancock, that they, like all the children in Bassetlaw,

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will be studying hard rather than roaming the streets blowing whistles.

As for the exemption or non-exemption of education and PFI credits for schools, Nottinghamshire local education authority maintains that the special grant will not be applicable to LEAs nor, specifically, to the PFI credits already awarded for schools in Bassetlaw. I seek clarification of whether that view is erroneous. It was expressed to me earlier today in writing. If the county council is in error, I should be delighted to put it right. If not, why is education exempt from the special grants?

2.51 pm

Mr. Leslie: I shall certainly seek advice about Nottinghamshire county council and the schemes mentioned by my hon. Friend, although I can see from annex B that the council is included in the schemes. The PFI credit is for a scheme involving a group of six schools. The information that I have to hand is that there is no exclusion for education schemes in the PFI credits that we are discussing today, but I will endeavour to obtain more information for my hon. Friend.

The hon. Member for Cotswold (Mr. Clifton-Brown) mentioned that the Conservative party started PFI. That may well be the case, but the Labour Government are making the initiative deliver public benefits in greater amounts and more successfully. He asks whether PFI is additional or replacement spend. I assure him that it is additional. Looking at the significant amounts of capital investment in the last spending review, for example, we can see that masses more capital investment was given by the Government than was ever the case under the Conservative Administration. The fact that the spending is additional means that we can deliver some projects earlier and deal with the backlog of capital depreciation and dilapidation which has sadly built up from many years of neglect.

The hon. Gentleman asked about risk transfer and how existing schemes were working. I am happy to say that I have no reports of any significant problems with the schemes that we are discussing or those approved under previous systems. There is a rigorous auditing system that goes through local authorities, as they, quite properly, negotiate and award contracts. I understand that the system is working well.

I turn now to public expenditure balance sheet scores. By its nature, PFI transfers elsewhere the risk from liability that would have fallen on the public sector. That is why it is off-balance sheet. In the Budget process we always list and detail PFI sums as a separate amount so that they can be accounted for, but they do not feature on the traditional balance sheet. I can quote the hon. Gentleman chapter and verse of FRS 5, the accounting practice—

The Chairman: But the Minister will not, will he?

Mr. Leslie: I will not.

Turning to worries about cost over-run, one of the attractions of private finance is that cost over-run is significantly reduced, if not eradicated, in some contracts. By transferring much of the risk and

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signing the contracts, a local authority can ensure that projects are delivered on time and on budget. If they are not, those risks fall on the private sector, which is one advantage of PFI. When they sign the contracts, local authorities must ensure that those arrangements are in place.

It is true that, as the hon. Gentleman spotted, in the technical formula for calculating the grant we use a period of 25 years. Most of the schemes are 25 years in length, but some are dealt with in shorter periods. For example, IT projects can be dealt with in as little as seven years. We are not too rigid on that front.

The hon. Gentleman asked what would happen if a contract were signed but the project did not get under way for some reason. He wanted to know whether there was a possibility of recovering money, which is one of the new aspects of this year's special grant report. I do not know of any schemes in those circumstances, but we included that provision as a prudent and sensible measure in case of such an eventuality.

The hon. Member for Ludlow (Matthew Green) asserted that PFI was the only act in town. I assure him that PFI is not the only means of gaining capital expenditure. PFI is only a quarter of the current capital investment undertaken by this Administration, and we are not at all opposed to publicly funded procurement. It is an alternative that local authorities in particular can explore and exploit.

Best value in local government is obviously central to our ethos. The hon. Gentleman asked whether we have a mechanism for spreading best practice under PFI so that authorities are canny enough and have the necessary skills to sign up to good contracts with the private sector. I entirely take his point. It is important for central Government to give support, particularly to increase the capacity of local government to engage in matters on a good, firm footing.

We must enable authorities to have the intelligence and ability to make sure that they are on a level playing field with private sector firms when dealing with contracts. The strategic partnering taskforce is one way of doing that, and there are a number of other mechanisms for ensuring that local government gets support in building that capacity. The procurement division of the Office of the Deputy Prime Minister is certainly very focused on that priority.

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The hon. Gentleman asked how we would tackle the inflexibility and rigidity that some of the contracts may contain. I do not believe that there are too many rigidities in the contracts. Encouraging good negotiating skills at a local government level is obviously the key to ensuring that a certain amount of latitude and flexibility is built in. That means that authorities can make sure that, when they contract for particular outcomes, they are focused on those outcomes and they transfer the risk to ensure that, if there are any difficulties, the private sector must rectify them and bear any liabilities. That is the best way of dealing with the issue. We have provided substantial extra funds in this system, and the special grant report details those remaining matters.

Mr. Clifton-Brown: I have one small point. The special grant covers 104 authorities. How are authorities and schemes selected? Is there any limit on the number of schemes per authority, or does the overall capital expenditure limit in the Budget mean that, inevitably, there will be a selection process? If so, how will that work?

Mr. Leslie: There are selection processes. As I said, in each spending review, the Chancellor sets out for each year how much PFI credits can total across Government. Each Department is allocated an amount that it can award, and it operates its PFI programme through its own mechanism, whether that involves bids or grants. Rather than going into detail about each departmental scheme, my job today is simply to be the channel through which local government finance goes to local authorities in the special grant report. As I said, a whole rainbow of Departments is included in the report, which is, apparently, the mechanism by which we do such things every year. I hope that I have explained the matter clearly, and I commend the report to the Committee.

Question put and agreed to.


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

Committee rose at Three o'clock.

The following Members attended the Committee:
Hancock, Mr. Mike (Chairman)
Betts, Mr.
Clifton-Brown, Mr.
Cunningham, Tony
Gibson, Dr.
Gilroy, Linda
Goodman, Mr.
Green, Matthew
Hall, Patrick
Leslie, Christopher
McWalter, Mr.
Mann, John
Swayne, Mr.
Woolas, Mr.

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