Private Finance Projects and off-balance sheet debt - Economic Affairs Committee Contents

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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