Exchange of correspondence between the
Committee and John Kingman
I am writing to confirm the request made by
Mr Bacon in his telephone conversation with you last Thursday
(19.07.07).
At the Committee's hearing on 20 June, Mr Bacon
requested details of the projection for the aggregate future cash
outlays expected under PFI contracts up until 2031-32 (Qq 99-122).
He also set out his request for a total in question 129:
Q129 Mr Bacon: Is it possible you could first
do it up to 2031 as far as it goes and then explain in total how
much there is beyond that accounted for by whatever contracts
there are that for some reason or other run longer than that?
Mr Kingman: We will certainly do our best.
I am not sure there is anything very useful we will be able to
say about the period beyond 2031-32.
Mr Bacon: I am looking for a number that
probably is in the region of £150 billion to £160 billion,
by the sound of it, but I would like a more accurate one and some
assessment from you of where you think it might be going after
on that, so if you add the two together you would get a total
public sector liability.
The supplementary note provided by you on 3
July provides the figures year-by-year up to 2031-32, but does
not give a total as requested.
Mr Bacon appreciates that any total would be
spread over a 24 year period and would thus not have the same
economic value as an identical amount paid today. Nonetheless,
he has repeated his original request for such a total: he would
be happy for this to be accompanied by a note thoroughly explaining
the differences between a total spread out over 24 years and a
total in today's money.
26 July 2007
Your clerk's letter of 26 July asked for an
aggregation of the future nominal cash outlays expected under
Private Finance Initiative (PFI) contracts up until 2031-32.
I should first apologise that, due to a problem
in one of the underlying spreadsheets provided to us by Departments,
a slightly incorrect version of the annual unitary charge payments
table was provided to you in my 3 July letter. A corrected version
is attached to this letter. I apologise to the Committee for this
error.
You have asked us to provide you with a total
of these figures. The total, if one were to add together these
future and non-comparable figures without applying any appropriate
adjustments, would be £170.8 billion. However, I must emphasise,
as I already have to the Committee and to Mr Bacon, that this
number has no meaning. To add together a figure in today's money
to a figure in the money of 2030, without making any adjustment
for the changing value of money over time, produces a nonsensical
number. It is rather as if we were adding a figure in £ to
one in $, without converting the currencies, and ending up with
one that is not denominated in any currency at all. I am obviously
uncomfortable providing the Committee with a figure which is meaningless
and I would not want the Committee to be in any way misled about
this.
A more meaningful exercise would be to take
the stream of future payments set out in the table and to aggregate
them as a net present value. If one were to do this one would
end up with total future payments under the PFI measured in today's
money which aggregate to £91 billion. The discounting methodology
applies the Green Book rate of 3.5% to account for time preference
and a discount of 2.8% to account for inflation. These two elements
are compounded to give an overall discount rate of 6.4%. The inflation
figure of 2.8% is HM Treasury's projection for RPI inflation consistent
with CPI inflation remaining at its 2% target.
I should emphasise, as I explained in my previous
letter, that it would not be correct to regard either of these
figures as additional to Public Sector Net Debt (PSND).
This is for two reasons. First, many of the
liabilities (where the debt portion of the relevant project is
on the public sector's balance sheet) are already included within
PSND. Second, unitary charges under PFI contracts include an element
of payment for use of a school or hospital, but also include payment
for the services—cleaning, catering and maintenance—associated
with running that asset. These service payments would score as
current expenditure in any circumstance. (To add PFI unitary payments
together and say this is to be added to PSND would be akin to
adding up the electricity, gas, cleaning, and food bills for a
family home over the next 30 years and saying that this amount
is part of the mortgage debt on the house.)
Table C19
ESTIMATED PAYMENTS UNDER PFI CONTRACTS—MARCH
2007 (SIGNED DEALS)1
| | |
|
| £ billion | |
| |
| Projections | |
| |
| | |
|
| 2006-07 | 6.8 | 2019-20
| 6.3 |
| 2007-08 | 7.3 | 2020-21
| 6.4 |
| 2008-09 | 7.8 | 2021-22
| 6.0 |
| 2009-10 | 8.2 | 2022-23
| 6.0 |
| 2010-11 | 8.5 | 2023-24
| 6.0 |
| 2011-12 | 8.6 | 2024-25
| 6.0 |
| 2012-13 | 8.7 | 2025-26
| 5.9 |
| 2013-14 | 8.8 | 2026-27
| 5.6 |
| 2014-15 | 8.8 | 2027-28
| 5.4 |
| 2015-16 | 8.9 | 2028-29
| 5.1 |
| 2016-17 | 9.0 | 2029-30
| 4.8 |
| 2017-18 | 8.4 | 2030-31
| 4.3 |
| 2018-19 | 6.2 | 2031-32
| 3.8 |
| | |
|
| |
| |
1 The figures between 2006-07 and 2017-18 include estimated
payments for the LUL PPP PFI contract. These contracts contains
periodic reviews every 7.5 years and therefore the service payments
are not fixed after 2009-10.
John Kingman
Managing Director
Public Services and Growth
HM Treasury
7 September 2007
| 
