Private Finance Initiative - Treasury Contents

Written evidence submitted by Professor Lewis Lesley, Technical Director, Trampower

Before diving into the effectiveness or otherwise of PFI, I would like the Committee to consider the definition of a public service. This term is used very loosely. Does it mean a service provided by tax payers funding, or does it mean a service provided for the benefit of the public?

The danger of the former definition, is that it becomes an end in itself, used by Government to "mop up" "unemployment" or to demonstrate virility by the volume of spending.

If it is the latter definition, then many if not most public services in the UK are not funded by taxes, eg. fresh food distribution, electricity, gas, telephones, etc. In this definition the role of (central) government is to set the rules of engagement, and provide a regulatory framework.

Having worked in a Communist Country, the Government as the provider of services and the protector of the environment/population are often in conflict. Similarly in the UK the Government as the provider of services and regulator are intrinsically in conflict, even before the question of political control/micro-management. Predecessor Select Committees have noted that Ministers are supposed to provide strategic guidance, and leave the daily management to professional managers. In practice often there is little or no strategic guidance and a lot of day to day interference.

Two recent public service developments, namely cable TV & Broadband and mobile phones, have been undertaken with a regulatory frame but private funding and management in competitive environments. A very effective way of making the provider accountable.

The basic flaw with PFI is that it is an expensive way for the public sector to invest. Firstly the risks involved may on paper be passed to the private sector, which then factors these into high costs, paid for by Government (and taxpayers) over a large number of years, with inflexible contracts.

The biggest risk faced in PFI or any other public contract is the public agency procuring the investment. Both the National Audit Office and District Audit Offices have numbers of Reports underlining this.

The most cost effective way of buy investments for the Public Sector, is one where the public procurer takes the risks, and agrees contracts where the contractor warrants workmanship and materials to an agreed cost and time frame, with penalties for lateness, and rewards for early completion. If the public sector procurer then wants to change the project or specification, then it has to be paid for and it is clear why the extra costs occurred and how should pay.

PFIs have enabled Government's to boast that so many new hospitals, schools etc have been built, many of which cannot really be afforded from current taxes but obviously can be funded by the private sector. These will have to be paid for over the next 20 or 30 years, significantly reducing the ability of future governments from making new capital expenditures.

As the cable TV and mobile phone developments show, the private sector can deliver cost effective investments, and make a just profit AND contribute tax revenues. The Government only has to redefine what constitutes public services and many more could be delivered by the private sector to meet real consumer needs, paid for by users with fair prices, and corporate profits taxed for the benefit of those services which cannot be commercial, like defence, security, education, universal health care.

April 2011

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Prepared 10 August 2011