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Dr. Vincent Cable (Twickenham) (LD): I am grateful to have the opportunity to introduce a debate on the private finance initiative in schools, particularly on a matter that is directly relevant to my constituencythe problems encountered by Jarvis, the contractor, and the impact that that is having on a primary school PFI. I shall speak on that rather narrow subject, rather than on the broad philosophical issues.
There are three questions that I shall pose. First, given the extreme difficulties of finishing a PFI contract with a company that has enormous liquidity problems and may face bankruptcy, what happens to discharge the contractual obligations? Secondly, what can be done to head off a bankruptcya situation that affects many constituencies and many PFI contracts? Thirdly, in the longer term, how can contracts be better designed so as to deal with such a contingency?
I am posing those questions to the Minister, although I recognise that in the short run and most directly, we are dealing with a contractual relationship between a local education authority and a company. It is that relationship that is coming under stress, but this is also clearly a matter for the Government, as it is they who designed and approved the general framework of PFI contracts. As far as I am aware, they have been giving good advice to my local education authority throughout its current difficulties.
The Government have a key role, as they have a bird's eye view of a broad problem. I understand that Jarvis is having considerable difficulties with many of its contracts. In the schools sector and further and higher education, a process is taking place in which cash is being switched from one project to another, and the Government are in many ways in a better position than the local authority to make judgments on how to manage this critical situation.
Before I embark on giving a little more detail about the problem that we have, I stress that I do not want to deliver any general ideological tirade about PFIs. I have a pragmatic view of the issue, both in relation to the education sector and more generally. In the education sector, all three major parties in my borough have their fingerprints on the contract in question. A Liberal Democrat council was in power in 1997, and it had had almost a decade and a half of frustration in which it was unable to invest anything in schools. When the new Government came in with their PFIs, the council jumped on them with considerable enthusiasm and had its programme approved by the Government. We have since had a Conservative council, which is taking the matter forward and has indeed proposed a PFI project for the secondary sector. All three parties are involved in, have supported or are complicit in the arrangement, so there are no party political points to be made out of it.
More generally, my constituency has seen a cross-section of PFI projects of different types demonstrating the costs, benefits, risks and opportunities of this type of financing. My local district general hospital, the West Middlesex, was one of the early second stage projects. It
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has now been completed, and it was completed on time and within budget, and with an imaginative design. It has also had quite of lot of snagging problems and there are questions about value for money, but broadly speaking, the perception is positive.
We have also had one of the major PFI projects coming through the Department of Trade and Industry in the rebuilding of the National Physical Laboratory. What happened there again illustrated the costs and benefits of the PFI system. The major contractor, one of the McAlpine group, went bankrupt halfway through the project. It was delayed for a couple of years, but the costs have been borne by shareholders and not by taxpayers, which is what PFIs are designed to accomplish. I have a broadly positive view of the issue, and in no sense a doctrinaire view.
The Richmond primary school contract was worth roughly £50 million over a 30-year period. In terms of education and Department for Education and Skills PFI projects as a whole, the project is fairly small beer. Until roughly a year ago, when I last saw the figures, there were about 93 education PFI projects out of 568 such projects altogether, and they accounted for about £1.85 billion out of £35 billion worth of total PFI investment. The Richmond project was only about 3 per cent. of the total education PFI, so it is fairly modest in scale, but it is not trivial, and it gives some important lessons.
The Jarvis contract for six schools on seven sites was due to be completed in summer this year, and for the most part, it was. Indeed, I have visited all the new PFI schools in my constituency, and most of the projects have been very successful. They have been well designed, imaginative and well received by the schools and their governors. They have been opened and the overall reception is broadly positive. Some niggles have occurred, such as quite serious snagging problems, small loose ends that have not been completed and problems with the maintenance contract. At Education questions, indeed, I have asked the Minister about the complexities of maintenance contracts. Why can we not have simpler standardised maintenance contracts across boroughs, rather than reinventing the wheel on every occasion?
The big problem is that one school was left half completed when Jarvis's financial difficulties struck. I have been keeping in fairly close touch with that school, which I visited two weeks ago. The position is frustrating because 90 to 95 per cent. of the work was completed three months ago, but large parts of the school are simply unusable because minor works are incomplete. For example, a new kitchen cannot be used because the cooker has not been connected, a disabled lift cannot be used because no one has been in to check it, and the school hall needs a final coat of varnish. Such minor problems could have been addressed in a few days by concentrated, focused construction work, but the work has been left for months, and there is no prospect of its being dealt with.
I shall read out a letter sent to me by the school council on the occasion of my visit, which graphically expresses what the children see. The children use quite balanced language, but the letter captures the flavour of the situation:
There are essentially two difficulties. First, there is the cash-flow problem. Jarvis has extreme difficulties in realising cash. It is reluctant to hand out cash to its subcontractors, who turn up on the site and cannot get on with the workeven small amounts of work that require a few hours of a technician's time. The second problem, which partly relates to the first problem, is that because Jarvis's PFI building work is collapsing across the country, there has been a major haemorrhage of construction management staff, so it simply does not have people to carry through the work. The work is not being completed because of a combination of the shortage of people and extreme cash-flow difficulties.
Where do we go from here? The first line of responsibility rests with the local education authority. I know that the LEA is negotiating with Jarvis and the other partners to the PFI vehicle, and I hope that it is successful. As I understand it, however, the PFI negotiations arising from Jarvis's difficulty have been going on for about three months. I have been toldI am not sure whether this is correctthat little is likely to happen before the company's full restructuring is complete, and I am not wildly optimistic that that route will succeed, although I hope for the best. I also understand that the local authority is imposing contract penalties for delays on Jarvis, but the obvious problem is that if a company has severe liquidity problems and councils around the country are imposing penalties, its financial difficulties will become even more serious, which will make it even more difficult to complete the work.
Do the Government have oversight of that problem? I am aware of their involvement in the basic concept for the contracts and giving advice. Will the Minister give us a feel for the problems across the country resulting from Jarvis's difficulties? Are the Government taking a proactive role in trying to manage the process or are they stepping back and allowing the LEAs to deal with it as best they can? As I have said from the outset, I can see an obvious disadvantage in allowing LEAs to manage the situation on their own: because the company can switch cash from one project to another, there will be no oversight of its problems and no sense of prioritisation. Perhaps the Government can help with that matter.
As I come to the end of my remarks, I want to ask a hypothetical question that I do not expect the Minister to answer directly: what would happen were Jarvis to collapse completely? I believe that it has until March to complete its restructuring; it may fail. If a major PFI contractor effectively becomes bankrupt, what happens to
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the many projects that it is required to manage, including those in my constituency? As I understand the contractual arrangements, the banks and other parties to the PFI contract would assume responsibility, and would have a self-interest in ensuring that the project is completed, because they would then be able to sell the contract onfor profit, one hopes. It is therefore in their interests to ensure that everything is eventually sorted out.
The problem is one of time and delay. One of the key lessons of this experiencethe Minister may wish to reflect on itis that however well designed PFI contracts may be in getting a proper balance of risk between the different parties, what is lacking is any sense of urgency when there is an extreme liquidity problem such as that which exists in this caseor would exist in the case of the potential collapse of a contract. I question whether it is possible in the longer term to redesign PFI contracts to allow more active and rapid intervention in such a position of force majeure.
In conclusion, I shall read what the Government themselves said in their helpful report, "Building Schools for the Future", which anticipated PFI work predominantly in the secondary sector and made a balanced appraisal of it. It states:
"We know from our own information and the recent Audit Commission study that the earliest PFI schemes did not all deliver fully on this vision. We also know that while some local authorities and schools have been delighted with the PFI investment in their areas, others have found it difficult to translate their education vision into suitably flexible contractual terms."
In my borough we have a very good example of a major problem erupting in a PFI contract that was not anticipated and is very difficult to manage. What lessons have the Government learned from the situation, can they help to resolve it, and have they learned any wider lessons about how PFI contracts can be better structured to avoid such difficulties in future?
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