Examination of Witnesses (Question Numbers
100-118)
Councillor Richard Kemp and Mr Richard Buxton
Councillor Kemp: We are quite happy to answer questions,
my Lord.
20 OCTOBER 2009
Q100 Baroness Kingsmill: What about the
credit crunch, has that impacted?
Mr Buxton: The evidence at the moment is that
the interest rates that we are having to pay on some of the major
schemes that have closed recently are slightly higher than the
interest rates that we had perhaps a year or two ago. I think
long-term I would expect the interest rate gap to diminish, but
at the moment schemes are working out slightly more expensive
than they were so, yes, there has been an impact. Secondly, for
some of the most complex schemes we have to rely on some additional
funding sources and the Treasury is now actually making funding
available and the European Investment Bank. Schemes that would
have relied 100% on finance from the commercial banks for some
of the most complex schemes, and I am thinking, for example, of
the Manchester Waste Project, has had to rely on Treasury and
European Investment Bank funding. Clearly that funding has to
be repaid, it is not a grant, it is investment. Actually just
securing the level of investment on the very biggest of the projects
has in the last year or so been more difficult. On the other hand,
the latest evidence suggests that in the course of the last three
or four months, compared with this time last year, a significantly
higher proportion of schemes are closing and, therefore, the situation
does appear to be easing. Yes, there has been an issue and still
is a little bit of an issue but I would expect the situation to
continue to improve over the course of the next year or two.
Q101 Lord Griffiths of Fforestfach: My
Lord Chairman, before asking a question I would like to declare
an interest as the chairman of what at the time I think was the
largest PFI project, namely Trillium, which was the outsourcing
property services to the DHSS and then to the DWP and its successor,
namely Land Securities Trillium, and at present as an advisor
to Telereal Trillium. My question is do you see any benefit in
developing alternatives to the current private finance models
and, if you do, what would they look like?
Councillor Kemp: The answer is yes and the second
answer is we are not sure. We are very clear that in the face
of the recession, which is hitting council public sector finances
in a variety of ways, we have to form new relationships between
the public, private and third sectors. What we are trying to do,
and I would be happy to invite one of your Lordships to this,
is on 16 November we have some leading members of those three
sectors coming together. What we are trying to do is to look again,
as I have said before, at partnerships and relationships to make
things work. Traditionally the three sectors relate to each other
in one way or another purely on a contractual basis. If we can
find more flexible ways of creating long term partnerships which
will play to the strengths of the three sectors, that will be
very strong. At the moment though we tend to create contracts
which appeal to the worst aspects of those because we do not trust
each other, so we build in certainty instead of originality and
flexibility. We are acutely aware of the need to change, but certainly
for most of us it is work in progress which we would be happy
to report back to you if those relationships developed that we
can define better the new ways.
Mr Buxton: I think it is fair to say that there
are already a range of different models that can be used. You
have your traditional vanilla-flavoured PFI, clearly the further
alternative is conventional local authority procurement. That
exists and may well be appropriate under certain circumstances.
You then have some of the major government schemes, such as the
local education partnerships and LIFT, which are designed at a
broader programme level to deliver things. Other ways of doing
things might include local authorities entering into some sort
of Joint Venture Company and actually directing investing. It
may be the local authority giving a session. It may be a local
authority doing some form of outsourcing of services. I think
there is a range of models and it comes back to the point that
Councillor Kemp and I were both making in the beginning that if
the playing field is neutral in the sense that if there are subsidies
available then potentially any of the existing models might be
appropriate depending on the circumstances of the individual project
and what you are seeking to achieve. I think increasingly partnerships
with third sector organisations and so on are going to be important
and how does that fit into some of the programmes that we have
at the moment? It is about trying to provide that flexibility.
Q102 Lord Best: I would like to look
ahead a bit because we are still in the early years of all these
PFI contracts and to draw you a bit on the inflexibility of being
boxed into a contract that lasts 25 or 30 years. Although everything
comes in on time or on budget on day one—great and there
are the gains—is it not likely that almost every public
service we can think of will change very dramatically in a much
shorter timescale than 25 or longer years? I am familiar with
the world of residential care homes and I cannot believe that
the same home, even though there is a wonderful contract to maintain
it for 25 years, will be required for the same purpose 25 years
from now. We are going to do all kinds of things differently.
How wise is it? Even schools—and you were mentioning schools
as the shining example—can you be sure that we will teach
our children in the same way of going to classes and maintaining
as is. Is it not going to be fantastically expensive to buy your
way out of those contracts later on as a local authority if you
do not like what you have got then?
Mr Buxton: I think those are very valid points.
It is important to recognise that local authorities enter into
20-year contracts outside what we would regard as a PFI framework.
I am familiar with a local authority that sold its residential
care homes and gave the contractor who purchased the residential
care homes a 20-year contract guaranteeing occupancy of the residential
care homes. That happened completely outside this traditional
PFI and that was an outsourcing transaction. Was the local authority
right to do that? No, I think they were completely wrong. At a
time when we are seeking to encourage more people to remain in
their own homes a 20-year guaranteed occupancy contract for residential
care homes would seem to be a major mistake, regardless of whether
you do it by an outsourcing deal or a PFI deal. Schools are a
very interesting example. Remember, if we did not have PFI and
we would be only be going down conventional procurement we would
still be building the school. In other words, you would still
end up with that building. The very valid question is what we
would require in 25 years' time. I have heard the suggestion—and
I am not saying whether this is right or wrong, I am not entirely
sure—that what we are doing at the moment with schools,
regardless of whether it is PFI or not, is that we are simply
building new versions of old schools. So we are simply building
something that looks modern, it has new technology but essentially
it is the basic fundamental concept that we have had for a very
long period of time, which is a place to which a large number
of young people go where they are detained during the day time
and fed knowledge, information, learning and so on. As a parent
I am not uncomfortable with that but if we were to say what is
education going to be like in 25 years' time, if we judge by what
has been happening in offices—in my own organisation most
of my staff are home-based, they travel around to where they need
to be, they are linked up electronically in various ways—does
this mean that in 25 years we will not need the same type of buildings
but we will have a much more networked education? I do not know
the answer to that. It is the same question whether or not we
are going down a conventional procurement route or a PFI procurement
route. We still have to make that decision as to whether we are
building a set of buildings. Therefore, I do not actually think
the critical issue there is around PFI. I think you are absolutely
right to raise the issue but that is why I am saying the same
skills are needed whether we go down conventional or PFI procurement
because they are skills about scenario planning. What is the educational
world going to look like over a longer period of time? The difference
is, yes, we are committed to the maintenance aspect but actually
that is a relatively minor aspect of the overall contract and
one on which most of the contractors do not expect to make a significant
profit margin, therefore I see the issue as being broader than
just PFI.
Councillor Kemp: If you were to look at it in
the long-term, that is one of the reasons I am really in favour
of local flexibility. If you can imagine a school which capital
asset was controlled by a local organisation which knew the patch
it was responsive to, it still ends up with a school, but if you
can build the other things in then the ability to move it around
and make it more flexible would be much enhanced. As someone who
has gone round and tried to convert old schools into other uses,
because we have lots of them in Liverpool that are listed buildings,
one of the problems is that once you build something with classrooms
designed for people to move around every three-quarters of an
hour, you have designed a particular type of building and they
do not convert very well to anything else, even if they are lovely
listed buildings.
Q103 Lord MacGregor of Pulham Market:
It has been suggested that private finance models have not been
overly successful in providing innovation and delivery. Would
you like to comment on that general view in relation to local
authority PFIs?
Councillor Kemp: First of all, I think we should
set this against what I believe is a massive change in local government
over the last 12 to 15 years. I have been a councillor a long
time and in my view local government is now operating at as high
a level as I have ever known it. The importance of that to your
question is that that also means that local government is more
imaginative, innovative and more pragmatic than it has ever been
before. That means that when it goes to providers, whichever route—and
we are fairly neutral about this—it is coming up with a
more innovative specification where it is able to. Where it is
not able to then we will just procure a school, as we have discussed
before. So I think that local government is engaging with the
private sector in ways that we would not have dreamed of 12 years
go, and it is that coming together, that bringing together the
best skills of both, which I think is feeding innovation, but
not a PFI route per se.
Mr Buxton: Again, I think it comes back in part
to the more general issue around procurement and in part the creativity
and skills of the team that is leading the procurement process.
PFI can produce innovation, as can conventional procurement, but
it actually needs a leadership that wants to challenge and develop.
To give you a specific example, I think in the waste sector at
the moment some of the waste PFI projects are actually very innovative.
Specifically, the recent example is Manchester Waste, which is
a £640 million project and they are actually using waste
to produce solid fuel and the solid fuel is then used to actually
produce energy. This is something that has been developed through
the PFI process. In waste we have got contractors who are looking
at biofuels coming out of waste and so on. So I think that there
is real innovation going on there. We can point to a number of
community type projects where you actually have health facilities
and libraries and CABs and youth clubs in the same centre. Yes,
you could probably have produced the same innovation with conventional
procurement but the skill is in the team that sits behind that
and says, "Yes, we want to make this a community project.
Yes, we understand the needs of our community. Yes, our elected
members are fully engaged. Yes, we have teams of people who are
working with the community to get their input." I think if
you do that then you can actually generate innovation both with
PFI and conventional procurement.
Q104 Lord MacGregor of Pulham Market:
Yes, because the example you have given on biofuels, biomass and
bioenergy and so on could happen within the conventional field
as well because the innovation and inventiveness is in relation
to the project rather than the financing.
Mr Buxton: I think that is right.
Q105 Lord MacGregor of Pulham Market:
Just listening to you in the whole of this session it seems to
me to some extent that the whole PFI issue is different for local
authorities compared with Central Government. There have been
criticisms that PFI has been used in Central Government to get
projects moving faster than the old conventional arrangements—off
balance sheet financing, if you like, and so on. That does not
seem to apply in the local authority area, not least because of
the constraint and impact on council tax. You are really saying
that it is just one model among a number that should be used but
it does not have an effect on big capital projects going ahead
faster than they would otherwise.
Mr Buxton: Except to the extent that Central
Government determines that certain types of projects may only
proceed through the PFI credit mechanism. I am sure that was understood
in your question.
Q106 Lord MacGregor of Pulham Market:
Yes, it was.
Mr Buxton: I just wanted to make that clear
for the record.
Q107 Lord MacGregor of Pulham Market:
If that was not there, all the school projects were PFI, then
you would want the level playing field.
Mr Buxton: Absolutely.
Q108 Lord MacGregor of Pulham Market:
That is really the message you are trying to convey.
Mr Buxton: Yes, indeed.
Q109 Chairman: Let me ask it in a slightly
different way to be absolutely clear. If the hidden hand of the
Treasury said that rather than having 10 or 15% of the local authority
expenditure in this area being PFI you could double it if you
wanted to, would that make any difference?
Councillor Kemp: It would depend on the types
of projects, as we said before, that any council was dealing with
at any one time because there are some types of projects that
we do not think that would apply to. In general terms it could
increase or go down but as long as we could relate it to what
was particularly needed in our own individual circumstances.
Q110 Chairman: I was not suggesting that
they mandated you should, but if you had the freedom to double
it would that make any difference to your investment programme?
Councillor Kemp: No, I do not think it would.
Q111 Lord MacGregor of Pulham Market:
Why then do you think that you have this constraint in terms of
school building? Why is that linked entirely to PFI?
Mr Buxton: How are you going to build a school
without the capital subsidy? That is the issue for a local authority.
A local authority cannot afford to go around building schools
without some form of subsidy.
Q112 Lord MacGregor of Pulham Market:
I understand that but why do you think that the Central Government
is insisting on that?
Mr Buxton: Central Government has done a programme
level value for money study and concluded that at a programme
level PFI is value for money for the delivery of schools.
Councillor Kemp: Because it is looking at the
savings of bigness, whereas as we said before we can also make
savings through smallness. We are not getting the benefits of
local knowledge, the full application of local services and opportunities
into what is effectively a national programme delivered locally.
Mr Buxton: We should also recognise that most
school refurbishment is not taking place through PFI. It is much
more effective for new build than for refurbishment and the Government
fully understands and recognises it, which is why if you look
at capital spend on education it is not a case of saying all capital
spend on education is PFI, that simply is not the case.
Q113 Lord Eatwell: It seems to me that
the crucial difference with respect to your financing is the constraints
that you are placing on the future, and where the future is unknown,
such as how technology might change with respect to teaching,
or population structures might change, you are stuck. That seems
to me to be a major issue, that by having a PFI contract you have
committed a set of funds contractually over the future to the
delivery of a particular building or services of that building
or other services which you may, in 10 years' time, not need,
but you have it, you are stuck.
Mr Buxton: If you are building a road you are
putting in street lighting and the chances are that level of certainty—
Q114 Lord Eatwell: No, let us stick with
the school. You have a school building and you get a big population
shift. As a local authority you might want to say, "Okay,
we will take half those buildings and we will use them for something
completely different."
Mr Buxton: Absolutely.
Q115 Lord Eatwell: You have a contract
to have those things maintained in a particular way, services
provided in a particular way, which may be completely irrelevant
for the purpose that you want in 10 years' time, but you are stuck.
Councillor Kemp: Basically you are right, but
we would end up with that constraint if we build a traditional
school now and we would still be saying in 10 years' time, "What
are we going to do with that school?" That comes to the relationship
that you have with your contractor because at the end of the day
it is in no one's interests to be paying out for a building that
is empty, so what will local authority come up with in private
sector circumstances about using the half of the building that
you no longer need. I am not trying to underrate what you say
because clearly if you are in a contract it is more difficult
to get out of than if it is your own building which you entirely
own or whatever. There are some constraints but I would not overplay
that because it is in everyone's interests to make these buildings
work, including the private sector.
Q116 Lord Levene of Portsoken: When PFIs
and PPPs were first introduced the rationale was that both Central
Government and local government had a pretty poor record of managing
large-scale projects, particularly construction projects, so it
was felt that by giving these to the private sector they would
have a better chance of delivering them on cost and on time and
their own overheads would still make the whole project cheaper.
This has been going on for the best part of 20 years now. I do
not want to ask you about Central Government, but has local government
now learnt enough from this, from overseeing these projects, that
they can now do it themselves efficiently as one would hope they
would have been able to do in the first place?
Councillor Kemp: A lot of the pre-work, of course,
is done within the local authority now. In any big project the
local authority, being an excellent client, knowing what it wants,
being able to deliver its part of it—for example, you can
have a PFI project which needs the local authority to deliver
the road system differently to meet it—is up for the major
challenges that it faces. Local government has moved on tremendously
both managerially and politically in the last 10 to 12 years so
I think they are capable of managing it using all the routes.
Q117 Lord Levene of Portsoken: So if
a decision was to made to say, "Here is a pilot project,
let us give it back to local authority X and see if they can do
the whole thing themselves", they might make quite a good
fist of it?
Councillor Kemp: We are doing it already because,
as we said, PFI is only 10% anyway, so for the other 90% we are
already doing it. There is no evidence that we have on which of
the procurement routes you use for the money, if I can put it
that way, changes your ability to deliver things quickly or slowly,
efficiently or inefficiently. I think that we are good enough
clients to be able to cope with any of the financial routes which
would enable us to use capital.
Q118 Lord Levene of Portsoken: If that
is true, and I have no reason to doubt what you say, then it would
infer that Central Government ought to look very carefully at
this because if the local authorities are now so good at it that
they can do it themselves, so why not leave it with them? Somebody
presumably ought to have a look at that.
Councillor Kemp: We would be happy to look for
the evidence. Our general feeling is—and this is a Treasury
quote not mine—that local government is the most efficient
part of the public sector. I would not necessarily let the PCTs
run the same way!
Chairman: On that note, Councillor Kemp, we can draw
a close! Thank you very much to you, Councillor, and to Mr Buxton
for your time and for answering our questions.
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