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The technique works best when the procurement contract is written in such a way that, over its period, it properly aligns the profits of the contractor with the interests of the client, and that is where contracts have gone wrong so frequently. It is a technique that also works best when the market is reasonably deep, so that value for money is achievable, and some of the points about how weak the market is are right. The PFI technique also works when there is reasonable certainty as to the nature of the contract that is needed, which is to say that multiple changes will not be made over a 20 or 30-year period. Again, one issue is that, in certain instances, we have been locked into hospital contracts, which, as health care changes come through, we are unable to alter.
Those reasons are why the PFI technique may be valid. There are instances, however, where we should not use PFI, and the overall reason why it has been a bad thing is that it has the characteristic of off-balance-sheet finance. It is a way of constructing a load of activity and projects without putting it on the public debt. I am sorry to say that—without being too political—the previous Government built many schools and hospitals in that way, and, frankly, those schools and hospitals will be paid for over a long time. That is a poor thing.
PFI also does not work if there are asymmetric negotiating skills, and we have heard much about that this afternoon. Unfortunately, that is the case in the example that my hon. Friend the Member for Wyre Forest (Mark Garnier) gave about the contractor’s interest and expertise. All that is true. It strikes me that the issue is also one of accountability. In an earlier intervention, I made the point that I see no accountability in public sector procurement, which is disappointing.
The consequence of all that is that we get the multiple messes that have been mentioned. I was interested in the example that was given by my hon. Friend the Member for Nuneaton (Mr Jones) of a hospital that is under pressure because work has had to be transferred to a PFI hospital, because exactly the same thing is happening to Warrington hospital due to a large PFI hospital being built just up the road and needing patients to satisfy the contract. That is an example of terrible failure.
I am delighted that the review of contracts is going on, but I want to raise several points that I do not fully understand. We have to be careful about opening up contracts that have been entered into in good faith, and we must be careful about bandying about profit figures. In my previous life, I had some contracts where I made a lot of profit, and I had some where I made so much loss that it could not be counted. It is only reasonable that all such activity is looked at in the round, so we must be careful. Regarding the list of organisations that was read out earlier, I reiterate that, as far as I am aware, none of those companies is making excessive profits in terms of return on capital employed or share price. We need to think through what is happening between the extraordinary profits that everyone is talking about and the fact that those publicly quoted organisations do not seem to making them.
It is worth trying to get some of the money back in the same way that the Cabinet Office has been doing for large consultancy and IT projects. However, what carrot are we giving to such people, who in many instances entered into contracts in good faith? From their point
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of view, they have carried out the contracts to the best of their ability. In the case of the Cabinet Office initiative, the bribe being used is the threat of not getting further contracts unless they play this game. That is a valid thing, and the directors, who have a fiduciary responsibility to their shareholders, can go back to their boards and say that they have a choice to make: they can either knock some money off or do no more work for the Government. That is their choice. In our discussions in this area, we must enable ourselves to create that choice for such organisations. I am not sure that characterising them all as money-grabbing private sector rogues is necessarily the way forward. I have heard a bit of that this afternoon.
I shall sit down now but, before I do, I again congratulate my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) on initiating the debate. The issue is very important and could have significant impacts on all our communities.
5 pm
Kerry McCarthy (Bristol East) (Lab): I, too, congratulate the hon. Member for Hereford and South Herefordshire (Jesse Norman) on securing the debate. It has been a very interesting two-and-a-half hours so far, and I am sure that it will have been a very interesting three hours by the end of the debate. There has been an unusually high turnout for a Thursday afternoon debate, for which we are normally on a one-line Whip. During the afternoon, I gather that we have moved from a one-line Whip to a three-line Whip and back again to a one-line Whip, so hon. Members are free to go at 5.30 pm, if they really want to.
The hon. Member for Hereford and South Herefordshire is right—or he at least makes a valid point for discussion—about a number of issues. He is right in saying that there has not been enough debate and scrutiny about the PFI issue in that past. That is partly because, as the debate has reflected, it often comes down to the devil being in the detail of individual contracts. It is hard to extrapolate from that general point whether the PFI is a bad thing or a good thing, or whether there are particular flaws in some of the contractual processes. I will come on to that in a moment, because it is a valid issue to thrash out.
The hon. Gentleman is also right in saying that not enough data are available on PFI schemes. I shall touch on some of the difficulties with the PFI. As I have said—I do not think he used this phrase—the devil is in the detail. We have heard some micro-detail about issues such as car parking, and the hon. Member for South Northamptonshire (Andrea Leadsom) discussed a hockey pitch that was slightly too short and the difficulty in rectifying that situation. The hon. Member for Newton Abbot (Anne Marie Morris) touched on some local issues. The hon. Member for South Norfolk (Mr Bacon) and others mentioned the naivety of the civil servants who negotiated the deals and that perhaps a lack of commercial nous meant that they did not realise the private sector would seek to maximise profits over the contractual term. Other hon. Members then developed that point, and the hon. Member for Warrington South (David Mowat) talked about multiple procurement failures.
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There was then a bit of a debate between the hon. Member for Stroud (Neil Carmichael) and the hon. Member for South Norfolk, who made an intervention, about specifications in contracts. I am talking about this as someone who was once involved in negotiating PFI contracts when I worked for a City law firm at a very junior level—although I was pretty much photocopying the documents and proofreading, rather than doing the heavy duty negotiations. There is an issue about whether the process should be about over-specifying everything in advance—crossing the t’s and dotting the i’s—so that those involved do not get into complicated negotiations throughout the term of the contract. That is a laborious process. Perhaps there is some way of creating a PFI contract that is flexible enough not to get into such situations.
Let me give an example of a school in my constituency. An issue arose when new keys were needed for the room where the sports equipment was kept. Because that was not in the contract, the school was not allowed to get its own keys copied and had to get the contractor to copy the keys. It became a huge thing with huge costs attached, which is obviously ridiculous. However, it would also be ridiculous to have a contract—having photocopied them, I know how huge they are—that specified who was to get the keys copied, if another bunch of keys were needed. Those are certainly valid points, and I do not have the answers on how we can resolve that.
The wider point is whether such a situation is specific to the negotiation of PFI contracts or whether it is an issue with public procurement contracts generally. The hon. Member for Wyre Forest (Mark Garnier) mentioned the asymmetry in negotiating skills between civil servants in the public sector or people in local government and hard-headed business people. That is an issue, but it also occurs in other public procurement realms as well as in relation to PFI schemes. The hon. Member for Wycombe (Steve Baker) developed that into a philosophical discussion on the role of the private sector. Whether the conversation that we are having this afternoon is going down slightly too anti-capitalist a route for him is something that we could explore at greater length on another day.
In the limited time that I have left, I want to focus on a few questions for the Minister, who will respond in a moment. The Government have confirmed that they remain committed to the PFI model that was used by the Labour party. In their technical update last year, they said that they remain committed to public-private partnerships, including those delivered by the PFI, and that such arrangements will continue to play an important part in delivering Britain’s infrastructure.
As we have heard, PFI schemes are still expanding at a significant rate. In March, 61 new PFIs were procured with a total capital value of £6.9 billion, which represents an expansion of more than 10% in the total capital currently committed under PFI. The Government’s support is somewhat surprising given the criticisms that have been aired. Liberal Democrat Members were scathing about the PFI model before the general election. The Deputy Prime Minister described it as
“a bit of dodgy accounting—a way in which the Government can pretend they’re not borrowing when they are, and we’ll all be picking up the tab in 30 years.”
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The Liberal Democrats called for a UK infrastructure bank that would reduce the cost of long-term funding compared with the PFI.
Before the election, the then shadow Chancellor said:
“The government’s use of PFI has become totally discredited…Labour’s PFI model is flawed and must be replaced.”
“we are working on reforms to the discredited PFI model that are transparently accounted for and genuinely shift risk to the private sector.”
As I have said, a significant number of PFI projects are in the pipeline, so the work is still continuing. Will the Minister explain where the Government are on reviewing the PFI model? Have any changes been made to the PFI model since the Government were elected last year? Are further issues under consideration? Have the Government managed to save any money from the PFI?
In a document published in January, the Treasury said:
“Value for money is a cornerstone of PFI and the key rationale for its use.”
But the Financial Times reported earlier this year that the Government are struggling to find PFI savings. I appreciate that the pilot project involving the Queen’s hospital, Romford was launched in February to identify where savings could be made. Will the Minister tell us what savings have been found to date? I gather that that hospital was chosen because it is representative of a typical PFI project, so should we presume that the savings that are identified by the Romford project could be used as an example to make similar savings from other projects?
The Government must also decide whether the PFI is right in every case. Much has been said about Labour’s use of the PFI when it was in government, but, unfortunately, I do not have time to go into that. Although the PFI played a major role in delivering the Building Schools for the Future programme, it is a good example of where Labour used the PFI where it would deliver savings to the taxpayer, but used conventional procurement where appropriate. Of the BSF capital allocated up to 2011, 41% was provided through the PFI, with the rest coming from conventional public funding. In the NHS, 118 new hospitals would not have been built without the PFI—88 were provided through the PFI, and 30 were provided through conventional procurement. What principles are the Government working to in assessing the viability of PFI projects? In how many cases have the Government decided to use a non-PFI approach, because the PFI is not seen as value for money?
As my hon. Friend the Member for Walthamstow (Stella Creasy) pointed out in the Public Accounts Committee today, 33 deals, which generated £38 million in profit last year, paid only £100,000 in tax. Treasury officials have confirmed that the tax consequence of the deal was part of the initial assessment of the contract, but subsequent changes, such as moving offshore, were not. Will the Minister confirm that she is looking into that issue? What steps will be taken in future PFI deals to prevent tax avoidance?
Finally, the PFI model allowed enormous investment to take place under the previous Government. It simply would not have been possible on that scale without the PFI, but we accept that the PFI should only be used
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responsibly and where it delivers the best value for money for the taxpayer. I accept that the issue deserves greater scrutiny, and I look forward to hearing what the Minister has to say about how the Government can take that forward.
5.10 pm
The Economic Secretary to the Treasury (Justine Greening): I pay tribute to my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) for securing this debate. The topic is incredibly important, and he has done a brilliant job of raising it high up the agenda and rightly so.
We have heard from many Members today, but not from as many Opposition Members as we might have expected. Many Members feel that the PFI has, in their experience and their constituencies, let them down. Nevertheless, one of the qualities of today’s debate was the balance demonstrated by hon. Members. Not all PFI contracts have been bad. Many have delivered good contracts. There have been bad ones for the taxpayer and bad ones for the private sector. The one that is particularly close to my heart, as my hon. Friend the Member for South Norfolk (Mr Bacon) has mentioned, is the public-private partnership for the London underground. Investment in my stretch of the underground was significantly delayed, because of its bad structure and the ultimate failure of both of the private companies that participated in it due to the losses that they were making as a result of their poor contracting. The topic is important.
My observation as an incoming Treasury Minister was that the background to the issue was all part and parcel of a much broader lack of financial management shown by the previous Government across government. I might address that later, if I have time, but I intend to leave a couple of minutes at the end to my hon. Friend the Member for Hereford and South Herefordshire to have a final say.
As my hon. Friend the Member for Wycombe (Steve Baker) and a number of other colleagues have pointed out, the main attraction for the previous Government in turbo-charging the PFI process was the fact that they were able to spend not only taxpayers’ money that was being earned at the time, but taxpayers’ money that had not even been earned and that would be earned at some point in the future. The main appeal of PFI for them was that it was off balance sheet. It was also unfortunate that it came at a time when that Government thought that they had abolished boom and bust and were saying that we all lived in the land of milk and honey. The general ethos that was applied to the public sector was to spend, spend, spend, get on with things, and be less worried about whether it was good value and just get on with the job at hand. My hon. Friend the Member for Worcester (Mr Walker) pointed out how that impacted upon his local hospital.
We have some problems. I will discuss what the Treasury is doing to try to sort some of them out, but we seem to have three main issues. One is a lack of accountability, which is an inherent risk in these contracts, mainly because of their longevity and the fact that the people who set them up will not be there to manage them or be accountable for them throughout their duration. There is also an issue of transparency, and I will talk later about what we are doing in that regard. Underpinning
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all that is the need for value for money and for having contracts in place that deliver on behalf of taxpayers in the way in which they are meant to. My hon. Friend the Member for Warrington South (David Mowat) put it very well: PFI can work, but the challenge is making sure that, in structuring our contracts, we end up with a win-win situation for the private sector contractor, for the public sector and for taxpayers. We can do that, but the challenge that we saw over the past decade is that it just did not happen often enough.
The shadow Minister asked about the number of contracts that we have signed off. No PFI contracts have been approved yet by the new Government, and we have put in place much more stringent processes to ensure that any contracts that go ahead have a much better prospect of being good value for money.
My hon. Friend the Member for Nuneaton (Mr Jones) asked whether the Government are looking closely to see how we can ensure that we get value for money. We are doing that—he is absolutely right to say that we should do it—and we are doing it across the board.
Many hon. Members discussed transparency, which I will discuss shortly. My observation is that one of the reasons why we are debating the PFI is that, ironically, there is perhaps more transparency in the PFI in some respects than there is across the rest of Government spend. One of the projects that I am leading on behalf of the Treasury is to introduce common chartered accounts. Any hon. Member who has been in business will find it fantastical to learn that the Government do not have common chartered accounts, but that is indeed the case. Once that system is in place, once we are able to upgrade the combined online information system database and once we can drive central Government further in terms of the transparency agenda, we will go through a similar process of lifting up the stone on central Government spend as we have done in relation to PFI contracts. Transparency is absolutely critical in that regard.
I want to outline where there is room for improvement. We are all aware that we face tough economic conditions and that we must ensure that we get value for money. The Government have already taken a number of steps to address many of the concerns about the use of PFI in funding public infrastructure, concerns that have been expressed in this important debate. I will go on to talk briefly about what we are doing in relation to existing contracts, but first I will talk about what we are doing to ensure that we can achieve good value for the taxpayer for new projects.
With new projects, value for money is, of course, the primary driver for the choice of procurement route. We are very clear that private finance should be used only when it can be demonstrated that it offers better value for money than a publicly financed alternative. As I have said, my hon. Friend the Member for Worcester made a powerful case in relation to that. We have already taken measures to strengthen the value for money assessment of new projects.
As the hon. Member for Solihull (Lorely Burt) pointed out, we abolished PFI credits in the 2010 spending review. Previously, funding for local government projects was ring-fenced. That had become a genuine cause for concern, because what it actually meant was that Government Departments and local authorities could
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use the PFI as a means to increase their budgets, with the potential for diverting funds away from more beneficial areas—areas that could have offered taxpayers better value for money. Now, the economic case for PFI projects must be compared by Departments and local authorities on a like-for-like basis with the other calls that they have on their budgets.
I have huge respect for my hon. Friend the Member for South Norfolk. His experience on the Public Accounts Committee goes back many, many years. As he pointed out, too often there has been insufficient competition and an insufficient ability for firms to compete. I actually felt that he was violently agreeing with my hon. Friend the Member for Stroud (Neil Carmichael) on the point about specifying contracts. The key is to specify contracts smartly, in other words tying down the details that need to be tied down in areas where we have certainty, as my hon. Friend the Member for Warrington South pointed out, but leaving flexibility in other areas—the right areas.
I remember that that issue arose when I was serving on the Work and Pensions Committee when I first came into this House, which I very much enjoyed. We looked at the EDS contract in relation to the Department for Work and Pensions. That point—the importance of flexibility—was one of the key things that came out of that process. I am sure that EDS will not mind my putting this on the record, but one of the challenges that it faced was that it was dealing with a Government who wanted to specify absolutely everything and therefore the cost of the contract absolutely ballooned. In fact, what was needed for that system was to retain an element of flexibility for future demands as they evolved. The key to success in all these contracts is people understanding not only what needs to be tied down in terms of the contract but, critically, where flexibility must be left.
We have issued new guidance, which the shadow Minister, the hon. Member for Bristol East (Kerry McCarthy), asked about, to strengthen the approvals for PFI projects. As of 1 April this year, any centrally funded projects that are outside a Department’s delegated authority have to go through a rigorous three-stage scrutiny and approval process with the Treasury. To put that in context, previously the Treasury only reviewed PFI projects when they were at the outline business case stage. After that, it was only the risky ones that were further reviewed. We now have a three-stage scrutiny process, which means that projects are subject to far more scrutiny as they are being developed. In addition, the largest and most risky projects in Government will be subject to a review by the Major Projects Authority, which has just been established by the Minister for the Cabinet Office.
We have also published guidance to help public sector bodies identify savings in their PFI contracts. I will come on to the Romford case study in a second and provide hon. Members with an update. All the measures that I have outlined should mean that we are better placed to ensure that only those projects that offer the best value for money to taxpayers can go ahead, which is absolutely right.
As for operational savings, clearly we have a number of PFI projects that are in place and operating right now. Therefore, it is about looking at not only new projects but the existing stock of PFI projects. As many
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hon. Members are aware, we have taken a strong interest in the pilot savings project that is currently under way at the Queen’s hospital in Romford. As my hon. Friend the Member for Hereford and South Herefordshire said in a recent newspaper article, we have taken a deep dive to get under the skin of the project to see where we can save money. He raised the idea of a rebate. Although we want to drive savings, it is a challenge to do that with contracts that are already in place, as the hon. Member for Walthamstow (Stella Creasy) pointed out. Nevertheless, we want to try to save money.
The pilot is nearing its conclusion, and we will be passing on the lessons that we have learned to the wider PFI portfolio—of course, there will some lessons that are not applicable. Given the commercial sensitivity of the pilot, it is probably inappropriate for me to comment in more detail before it is completed. However, I assure hon. Members that the pilot has made good progress and that there will be lessons that we can take from it to help to achieve better value for money from existing contracts.
My hon. Friends the Members for Wycombe and for North East Cambridgeshire (Stephen Barclay) asked about guidance. We have been seeking industry agreement to a new voluntary code of conduct to support the idea of achieving operational savings from other PFI projects. That is important not only for getting better value for money but for driving better standards of transparency, so it is clearer to the outside world what contracts are delivering for the general public. We also issued some draft operational savings guidance in January 2011. Therefore, although the pilot in Romford is still ongoing, we have already issued some guidance on where further savings can be made.
As for the PFI rebate, the Chancellor and the Commercial Secretary have both met my hon. Friend the Member for Hereford and South Herefordshire. We fully support the principle of making savings in PFI contracts and we will look carefully at how we can do that over the coming weeks, months and years.
The Government want to improve the financial transparency of PFI projects. We currently collect and publish data on each PFI project twice a year. That includes information on the capital value, the equity owners and the full stream of payments over a project’s life. The Cabinet Office is now publishing tender documents and contracts for all future central Government projects over £25,000, and that will capture privately financed projects.
My hon. Friend the Member for Wyre Forest (Mark Garnier) mentioned the PFI equity issue and the trading in secondary markets. We agree that more can be done in that area and that there is not sufficient transparency around investor returns, particularly with regard to secondary market sales. The Treasury is now collaborating with the National Audit Office to look at PFI equity issues, including not only transparency, but equity risk issues and equity returns. We are currently working with it to ensure that we scope that work stream effectively to obtain output that will be of use to the Government. We are also engaging with PFI investors and contractors to reach agreement on the voluntary code of conduct, as I have said, and transparency will form a critical part of that.
Value for money, not the accounting treatment, should be the key determinant of whether a PFI scheme goes ahead. We have talked briefly about the fact that public-private partnerships have been left off Government
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balance sheets. The whole of Government accounts project, which will be completed in the coming months, is basically, in a nutshell, the Government’s first set of consolidated accounts. They will be done under international financial reporting standards—in other words, proper accounting standards—and they will put that liability on the balance sheet, so giving us a sense of what it is for the first time. That will show the massive liabilities that were run up by the previous Government not only for our generation but for future generations.
The Green Book covers offshore tax. I understand the point made by the hon. Member for Walthamstow. From my experience of having worked in business, of course we want to look at the bottom bottom line, but we also need to be pragmatic in understanding that companies will always look at their tax position. If they think that they are having to move onshore and are disadvantaged by doing so, there is always a sneaky suspicion that they will recoup that lost cost elsewhere. It is not quite as straightforward as simply saying that we should not use any company based offshore.
The key challenge for us all is to ensure that we have a more competitive tax system in the first place that does not drive companies offshore, which is why we are reducing corporation tax year on year. I very much hope that the hon. Lady will find time to support and vote for that when the Finance (No. 3) Bill finally goes through. The best way to tackle offshore tax is to have a competitive tax regime that makes companies want to stay in the UK and be based here for tax in the first place.
Stella Creasy: I am interested in what the Minister has said. Does that mean that the Treasury will rewrite the Green Book, so that it does not take account of the potential tax take under a PFI, if she is saying that offshore tax avoidance is unavoidable in some circumstances, given that it is part of the value-for-money decision on a PFI? There is a specific point about PFI and tax, so will the Green Book be rewritten, so that it is not part of the decision in future?
Justine Greening: We are not going to rewrite the Green Book. My point is that there are a number of variables in any PFI contract. There are several variables in the overall propensity for it to be profitable for the taxpayer in relation to value for money or for the private sector firms considering engaging in it. Tax is one of those variables. Obviously, it can change, as can the costs, which the parties to the public-private partnership for the tube discovered once they became engaged in it. We need to tackle the underlying issue that, under the previous Government, Britain became uncompetitive in the corporation tax world. We have got to get back to being more competitive over the coming years, which is exactly what we plan to do.
We are working on the skills agenda across Government. I do not have time to go into that now, because I want to give a minute to my hon. Friend the Member for Hereford and South Herefordshire. I assure hon. Members that we recognise that, as does the civil service. There is currently a huge review of skills going on across government to ensure that we have the right skills in place. We have therefore taken a number of steps. I know that my hon. Friend wants to come in, so I will conclude my remarks.
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5.29 pm
Jesse Norman: I am grateful to you, Mrs Main, for permitting me to speak again. I want to thank everyone who has contributed today. It has been a fascinating and extraordinarily enriching debate. I thank the Minister and the shadow Minister. I especially thank the Minister, who is not formally responsible for PFI, for discharging that responsibility today.
I have three short comments. First, the claim that without the PFI projects would not have been built is not true. A cheaper PFI could have been devised under
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which they would have been built. Secondly, far from being difficult to negotiate, a rebate is under way as we speak, and that process will culminate in the code of conduct that the Minister mentioned. I welcome the support given to the code of conduct by the Minister and other Ministers all the way up to the Chancellor. Thirdly, we need a wider debate, and I hope that we will have it in the main Chamber soon.
5.30 pm
Sitting adjourned without Question put (Standing Order No. 10(11)).