Examination of Witnesses (Question Numbers
140-146)
MS JIL
MATHESON, National Statistician
and MR JOE
GRICE, Chief Economist, Office
for National Statistics, and PROFESSOR
GEOFFREY WHITTINGTON,
University of Cambridge, examined.
20 OCTOBER 2009
Q140 Lord Eatwell: Listening to all this,
I would like to come back to the issue which I raised at the beginning,
which is in looking at the PFI, the whole programme, what we are
trying to understand is if this whole programme has been a useful
strategy for the public sector, and useful is essentially defined
in value for money and, over a period of time, including the restrictions
that may be placed on you by contracts, of doing a particular
projects one way or doing them another way. What we would like
the accountants to help us do (always understanding there are
various qualitative issues along the way) is to provide us with
a framework to help answer that question. It is: are these things,
in the words of 1066 and All That, a Good Thing or a Bad Thing?
That is what we are trying to get at. If one laid down a set of
criteria which said: "We want projects to cost the least
for a common service with common flexibility", or whatever,
and said: "Okay, would you provide us with an accounting
framework which would help us to look at projects and judge on
that basis"—is that utopian?
Ms Matheson: I defer to the accountant.
Professor Whittington: What you are talking
about is very much in even the other direction from me—not
the national accounts—it is not even at the entity level;
it is really at the project level where you can really evaluate
PFI projects. There have been academic studies done of PFI projects,
mostly critical, about the difficulty of getting information about
them, and it really is at that level. After all, you have just
had the local authorities giving evidence; I am sure there are
a lot of people in local communities who are interested in, "Why
did they build that school there? How much did it cost? Was it
value for money?" and I think they do have difficulty in
getting information about the projects. However, it is really
at the micro level that you can tell whether it is value for money;
whether it is on balance sheet or off balance sheet or what the
total looks like, we are back to the question that we—
Q141 Lord Eatwell: Let us take the evidence
that the local authorities gave us, which is that they get their
capital subsidy on PFI schemes and not on others, so they are
strongly pushed by a policy decision to pursue the PFI route—which
they were not very happy about, actually; they said: "We
would rather be able to choose ourselves". So, clearly, there
has been a policy decision and if that policy decision were to
have been driven by the issue of value for money (in the rather
broad sense that I put to you, which includes risk in the future,
and so on), then could I have an accounting scheme which would
help me to assess whether that had been successful. The other
underlying story has been this decision has been entirely to put
stuff off balance sheet and it is actually a way of fiddling the
national accounts—not with respect to you fiddling the national
accounts as statisticians, Ms Matheson, but the way in which information
is sent to you as a statistician is to fiddle the national accounts.
Let us leave that fiddle aside and concentrate on whether these
are really value for money. Is there a framework or is this just
one project by single project and, in fact, the answer is nobody
really knows?
Professor Whittington: I think it is project
by project, because all these other things are aggregated, and
you cannot just, in aggregate, say: "This is value for money"
or "It is not"; you can look at aspects of it and say:
"Yes, these are distorted decisions if the government has
given subsidies", then the government will say: "We
did this study of schools and this showed that this policy of
large schools (or whatever it was) was a good thing"; you
might say: "Where is the report that said that; let the public
see it and criticise it". However, I find it very difficult
to see, on a macro level, how you can say "All good"
or "All bad", because the truth will always be, of course,
some of it is good and some of it is bad; it is a matter of weighing
one against the other. It seems to me that it is at the micro
level that this has to be addressed; so it has to be information
about projects, ex-ante, how they were negotiated, how
the tendering process went, what was promised at the time, and,
ex-post, how it turned out and why it did not turn out
as expected—and projects never turn out as expected. That
sort of information, I think, is not widely available on PFI projects,
and more disclosure or more availability to the public probably
would help, because they are projects that people are really interested
in as users.
Q142 Chairman: Coming back to what Lord
Eatwell called "a fiddle" (but I will take that with
a pinch of salt), do you think that the ability to take certain
liabilities off balance sheet, whether we are talking about the
national balance sheet or whether we are talking about departmental
or local authorities' balance sheets—or, indeed, whether
we are talking about the UK—has encouraged investment in
infrastructure that might not otherwise have taken place?
Ms Matheson: Again, from my point of view (and
Professor Whittington may be able to say more) the answer is very
similar to the answer to the last one, which is we do not have
the data to be able to answer that question. What we do not have
is the counterfactual; it is hypothetical. So "I do not know",
is the answer.
Q143 Chairman: Do you have a gut feel?
I know you have not got the data. Fair enough.
Professor Whittington: I was struck, again,
when the local authority people said that they got PFI credits
for having things off balance sheet. That was certainly true.
I think, at one time, some areas of government were told they
could only get their PFI credit if it was off balance sheet. Whether
this is material in the national accounts, I do not know. However,
that is a slight distortion, I think, that probably led to people
worrying too much about features of projects that would get them
off balance sheet, and not focusing on whether the hospital delivered
the services to patients quite so much. That may be unfortunate.
Clearly, if the Government felt constrained to such an extent
that it could only allow off balance sheet projects to be funded,
it would have allowed more expenditure as a result; if the PFI
option had not been there, presumably they would have been constrained.
There is certainly a possibility that there was more expenditure.
I do not know—I am giving you opinions.
Lord Best: I think we would be much helped if Mr
Grice could give us those statistics to show whether or not, really,
very much of it has ended up off balance sheet. If it is nearly
all on balance sheet then all of the complexities and all of the
hassles involved in all of this looks to be rather less worth
a can.
Q144 Chairman: I should probably have
explained to our witnesses that our last report was on banking
supervision and regulation, and therefore we are just a little
bit sceptical about the motives for having things off balance
sheet!
Ms Matheson: We will do a note, but our estimate
is that it is about 40% on balance sheet—40% of capital
value on balance sheet.
Q145 Lord MacGregor of Pulham Market:
It would be helpful if your note could actually specify definitions,
and so on, and it is not just figures, so that we fully understand
what it means.
Professor Whittington: I have a bit of difficulty
with this because I have not seen these figures, obviously. The
only thing that puzzles me is that I do not know—and I do
not think anybody knows—how much of these things "ought"
to be on balance sheet, if FRS 5 had been applied rigorously.
Therefore, I do not know what the total is, you see, that this
is a proportion of. I just do not know the full potential magnitude
of the PFI projects. I did read a paper by some people in the
ONS trying to estimate the liabilities arising from leases that
were recognised under the PFI, and they have done a huge amount
of work and come up with very large numbers, but with a great
deal of error around it. So I am not really convinced by the precision
of figures like this; I wonder what is hidden under the iceberg
and below the sea.
Q146 Chairman: It would be quite useful,
therefore, if, in your note, you could put the total value of
the PFI contracts and that proportion which you think, presumably,
is the equivalent of the capital value, and then what is off balance
sheet and what is on balance sheet. That would set it into context.
Mr Grice: It might also be useful, Chairman,
given your reference to your past report, just to point out we
will later this week be publishing a thick paper on some of the
consequences to the balance sheet and, indeed, to the classification
of some of those bank interventions.
Chairman: We will read that with interest.
Lord MacGregor of Pulham Market: I was a little disturbed
to hear Professor Whittington's last comments about what he did
not know; given that these issues are issues of great political
debate and political controversy, it is worrying if Professor
Whittington cannot guide us to the reality of what the figures
are.
Chairman: Are there any other questions that Members
of the Committee would like to ask? Are there any points that
the witnesses would have liked to have made? If not, may I thank
you very much indeed for your time and for answering our questions?
We look forward to the supplementary note.
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