Private Finance Initiative

Jesse Norman Excerpts

Thursday 23rd June 2011 Westminster Hall

[Jesse Norman (Hereford and South Herefordshire) (Con)]

I am grateful for the opportunity to discuss the important issue of the private finance initiative under your chairmanship, Mrs Main. I thank the Minister, the Backbench Business Committee, which allowed us to hold this debate, and my many colleagues in the Chamber today.

Since its inception in the early 1990s, the private finance initiative has resulted in more than £200 billion of public debt, the cost of which will hang over the British taxpayer for decades. It has created great private fortunes and fundamentally shaped the nature of our public services. It has generated huge public outrage, as we will hear in this debate. It has raised profound issues of fairness between this generation and the next and it has affected virtually every constituency in the land and the lives of millions of people.

For reasons that I will explain, the extraordinary fact is that until now there has never been a full three-hour debate on the PFI in this House. There has never been a comprehensive assessment by the Government of the cost and benefits of the PFI or a successful attempt to collect all the relevant data about the PFI into one place. None the less, the topic of this debate could hardly be more relevant. We need to ask three questions. How did we get here? How can we make savings from the PFI for the taxpayer? How can we design a better system for the future?

[Philip Davies (Shipley) (Con)]

I am grateful to my hon. Friend for bringing this debate to the House. One thing I have stumbled across is that the Prison Service does not own a computer because of the PFI. It rents them all at the cost of £160 a month, which most people would think was a ludicrous state of affairs. To prevent such a thing happening again, does he not agree that the people who negotiate the contracts within Government should be surcharged if the National Audit Office or some other similar body judges that the contract that they entered into was negligent to the taxpayer?

[Jesse Norman]

That is an extremely interesting suggestion. I am not sure how the details would work, but I will make specific proposals for improvement to public procurement later on in my speech. I thank my hon. Friend for his intervention.

Like many colleagues, I first understood the impact of the private finance initiative through my local hospital. Starting in 1999, Hereford hospital was one of the earliest PFI projects. It was built and is currently owned and managed under a 30-year contract through a special purpose company, which is three-quarters owned by Semperian, a large PFI firm based in the City of London, and one-quarter owned by the French industrial services giant, Sodexo. Non-clinical services are contracted out to Sodexo, WS Atkins and to others.

Car parking charges at the hospital have been the source of huge local anger because they penalise patients at a very vulnerable time in their lives. They particularly hit frequent users such as those visiting in-patients and those suffering from cancer. They are socially regressive, falling relatively harder on the poor than on the rich. As I investigated further, I found that that was only the tip of the iceberg. The reason why the charges were so high was down to the PFI itself, because car parking was contracted out not once but twice—first to Sodexo and then to CP Plus, and each had its own mark-up.

[Joseph Johnson (Orpington) (Con)]

Is my hon. Friend aware that fewer than a quarter of England’s 168 NHS hospital trusts have significant PFI hospitals within them, but that those trusts account for almost two-thirds of A and E closures or proposed closures? I know from my own observation of the South London Healthcare NHS Trust how extreme the operational constraints are that face managers who have PFI hospitals within their trusts and how those hospitals force them to take decisions on operational grounds that might not be in the best interests of patients.

[Jesse Norman]

It seems to be true that many decisions were made from a desire to fit the financial cloth to the pocket rather than from the actual clinical needs of the patients. It is certainly true that the squeeze that these inflation-adjusted costs exert on hospitals is heavily responsible for the closure of A and E units.

Let me return now to the situation at Hereford hospital. Later PFI contracts have contained financial safeguards for the NHS, including automatic efficiency savings of 3% a year and the right for a hospital to put services out to public tender periodically. However, the Hereford contract contains neither of those safeguards. There are no automatic efficiency savings, and the contract cannot be retendered until 2029. The hospital trust is doing a valiant job, but it has little influence, legal scope or access to underlying costs which might help it to negotiate changes to the contract. Worse still, no mechanism exists by which the hospital can group together with other PFI hospitals to exercise collective influence over the PFI contractors. By contrast, Semperian has 106 PFI contracts. The imbalance in power is obvious, yet the NHS seems to have done nothing to remedy that.

For almost a year now, I have been campaigning for a voluntary rebate for taxpayers on the PFI of £500 million to £1 billion. Those are large numbers, but that goal is not unrealistic.

[Sir Peter Bottomley (Worthing West) (Con)]

I hope that my hon. Friend does not think that I am sitting on the other side of the Chamber because I do not support his proposal; I do support it. May I ask that those who read his words as well as those who listen to them pay some attention to the old Ryrie rules, which were supposed to limit Ministers using private finance when it was not appropriate? May I also ask my hon. Friend if he would direct the Chamber’s attention to the design, build, finance and operate Dartford crossing, which was a proper use of the private sector? There was a limit to the amount of time that the project could be charged and it had an income stream, so there was no powerful debt either.

[Jesse Norman]

I shall be talking about the early history of the PFI shortly. As my hon. Friend implies, the Ryrie rules were an important part of the fiscal stringency that surrounded that project. What the issue of the Dartford crossing brings out is that PFI is often successful on these economic infrastructure projects and less effective on social infrastructure projects.

[Michael Fallon (Sevenoaks) (Con)]

While my hon. Friend is on the subject of a voluntary rebate, is he aware of the research from the university of Adelaide showing that the average profit made when PFI equity on hospital projects is sold on was more than 66%. Is it not the case that we should be looking at something more than voluntary?

[Jesse Norman]

At this point, I want to keep the rebate voluntary because we are making good progress, but many Members feel that something more stringent would be appropriate. In the assessment of the profits on these equity stakes, I would caution that in some cases those equity stakes have been built up over a considerable period and one should not necessarily look at just the headline number if it is the result of a 10 or 15-year investment.

I have spoken about the campaign that we have run so far. An important feature of the rebate campaign is that at least part of any savings would remain with the public service involved. The result, therefore, would be a win not merely for the taxpayer but for local communities, which could potentially benefit from many millions of pounds in savings over the next two decades.

Let me make it clear that I am not for one moment suggesting that existing PFI contracts should be torn up, but contracts are routinely renegotiated in the private sector. The rebate would be a voluntary one, and not a haircut imposed by Government. There is a valid precedent in the code of conduct that was signed in 2002, by which the contractors agreed to share windfall refinancing gains with the taxpayer. It may be that that code of conduct needs to be further extended to the secondary market trading of equities.

What I did not expect was the level of support that I and colleagues have received from key players in the PFI industry itself. They know that something is wrong. They are aware of public concern, and they want to participate in the next generation of economic infrastructure. Having started as a solo mission, the campaign has become a cross-party movement of more than 70 Members of Parliament. We have sat down with many large PFI companies and talked in detail about the scope for savings.

Parliamentary concern about the costs of the PFI has resulted in an inquiry by the Treasury Committee and, to their huge credit, the Government are taking the idea of a rebate very seriously indeed. Ministers at every level have made clear their desire to see savings. The Cabinet Office has been looking closely at the PFI in its quest for greater efficiency across the public sector; the Ministry of Defence has announced that it is reopening three major contracts as part of its own renegotiation strategy; and the Treasury has opened discussions with the PFI industry about a new code of conduct and it has recently concluded a “deep dive” investigation of the PFI contract at the Queen’s hospital in Romford. That is the first time in 15 years that a Government have taken a forensic look at a specific PFI contract, and it sends out a clear signal of intent to dozens of other PFI projects. So we are making progress. That is the context for this debate—the first Parliamentary debate on the PFI—and I hope that colleagues from all parties will make their support loud and clear for these actions for better public services and real savings for the taxpayer.

However, to understand the present we must understand the past. How did we get to such a sorry state of affairs with the PFI? The history is surprising and damning by turns. It can be divided into three phrases: experiment; ramp-up; and standstill. The PFI was introduced in 1992 from Australia by the Major Government, which was interested in how private capital and expertise could be used to support the public services. Labour Members often deride the Conservatives for introducing the PFI, but the facts tell a very different story. The Major Government could not make the PFI work. They insisted on judging each deal on its merits, having inherited a structure from the Ryrie rules, and the merits were sometimes very thin indeed. By 1996, barely £6 billion worth of PFIs had been approved and no PFI hospitals had been approved, let alone built.

Meanwhile, Labour was split. Old Labourites denounced the PFI in traditional terms as “creeping privatisation”, but it is often forgotten that the new Labour position was the exact opposite of that. New Labour thought that the PFI was a good thing and that the problem was that the Tories had not gone ahead with it fast enough. In a speech in Parliament on 28 November 1995, Tony Blair rammed that point home repeatedly. His position was perfectly clear:

“The PFI is right in principle. We have supported it, and in many ways we have been advocating it.”

At that point, John Prescott, who is now Lord Prescott, helpfully intervened with, “We initiated it.” Blair continued:

“It should not be manipulated to cook the books of public finance.”—[Official Report, 28 November 1995; Vol. 267, c. 1077.]

On that point at least, the future Prime Minister and his Chancellor, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), were agreed, since the right hon. Gentleman also remarked in the early 1990s that

“PFI is a cynical distortion of the public accounts.”

How are the mighty fallen, and in what disgrace. We are accustomed to make fun of Lord Prescott—rightly so—but at that point he spoke truer than he knew. In many ways, Labour was in fact the real originator of the PFI in its current form. In 1997, the new Chancellor, the right hon. Member for Kirkcaldy and Cowdenbeath, and his then adviser, the right hon. Member for Morley and Outwood (Ed Balls), were tied down by the promise that Labour had made to stick to Conservative spending plans for two years. They had committed to keep public sector net debt below 40% of GDP, according to their sustainable investment rule, but they were desperate to leave a legacy by building a huge amount of public infrastructure. They quickly spotted that PFI projects offered a way out of that quandary, because PFI liabilities could be treated as off-balance sheet and so they would never appear formally within the net debt numbers. Of course, as we now know, they later fudged the sustainable investment rule by redefining the economic cycle and then the rule was blown apart as the financial crisis took hold.

After the 1997 election, the new Paymaster General, the hon. Member for Coventry North West (Mr Robinson), summarily fired Alastair Ross Goobey, the chair of the PFI panel and a man with an impeccable record of protecting shareholder value, and ramped up the PFI dramatically. Over time, an unholy alliance developed between the Labour Government and the PFI companies. PFI became the “only game in town”, as more and more projects were pushed in its direction by Government Departments that were desperate for capital spend but prevented by central Government from looking at alternatives.

That ramp-up was aided by the introduction of PFI credits, which allowed Departments to avoid running local authority PFI spend through their own budgets, thus evading responsibility for them; it was also aided by the use of high official project discount rates, which artificially privileged the PFI over other forms of procurement; and it was also aided by the unwillingness of both the Blair and Brown Governments to permit debate on the issue, conduct any overall analysis of the PFI’s cost-effectiveness or gather the full data on primary and secondary transactions, which would have allowed proper transparency and proper public accountability. Frankly, that was disgraceful behaviour.

Fast forward to today and what do we find? More than 800 PFI projects are now in place, covering every imaginable form of public infrastructure from hospitals and schools to roads and military hardware. Nearly £70 billion—not £6 billion, as was the case in 1997—of capital commitments have been made, with a total liability to the taxpayer of well over £200 billion. And—irony of ironies—new accountancy rules are in place that require PFI debt to appear in the national accounts after all. The Balls-Brown attempt to fix the books has proven to be a failure, and a costly failure to boot.

It is important to say that many PFI projects have been completed on time and within budget. There is a mixed picture. Contractors such as Jarvis have gone bust when projects failed, or taken huge financial hits. Also, conventional procurement itself has not always covered itself in glory, as demonstrated by the Eurofighter, Wembley stadium and British Library projects.

In response, it is easy to highlight the many PFI projects that have been horrendously overpriced. They range from huge deals, such as the Airtanker contract, which is now estimated to cost £1.5 billion too much, and the M25 widening, which is now estimated to cost £1 billion too much, to tiny but telling details about smaller schemes, such as the kennels at the Defence Animal Centre in Melton Mowbray, which cost more per night than rooms at the London Hilton.

An even more telling criticism emerges if we look at the overall record on the PFI. We now know that there is no general evidence that the PFI is cost-effective, or that the PFI improves the quality of buildings. Average annual maintenance costs are higher in PFI hospitals than in non-PFI hospitals. The most detailed study of PFI hospitals demonstrates that there is a large element of excess return to both debt and equity holders. Indeed, for equity holders the financial returns have been on occasion up to six times higher than the risk would justify.

There have been important secondary effects. The ramp-up of PFI projects helped to create an artificial boom in construction, which pushed up costs and over-extended the construction industry. Within the NHS, it has resulted in a huge and inflexibly designed Maginot line of hospitals, each one on inflation-adjusted contracts lasting decades, at a time when health care is moving towards more flexible models that combine specialist institutions with health and social care nearer to the home.

[Paul Uppal (Wolverhampton South West) (Con)]

First and foremost, I congratulate my hon. Friend on securing such an important debate. It is a testament to his tenacity, research and expertise in this field that this debate has been attended by so many Members. I concur with his view that the PFI picture is mixed—

[Paul Uppal]

I will attempt to be brief. Does my hon. Friend concur with my view that, although the picture is mixed, the fundamental issue is that the PFIs are often short-term solutions to the long-term problems that we face in government? That is illustrated exactly by the issue with Southern Cross, which has often used sale and leaseback to finance its own businesses.

[Jesse Norman]

I thank my hon. Friend for that intervention. I absolutely share his view that there is an interaction between inflation-adjusted costs and budgets, which of necessity are less able to rise, and that that interaction creates tremendous tension within these institutions. In many ways, Southern Cross is rather similar to the PFI, as the Chairman of the Health Committee, my right hon. Friend the Member for Charnwood (Mr Dorrell), reminded me this morning. The PFI costs for hospitals that I have been describing are not under the hospitals’ control, so the effect of escalating payments will be to suck up free cash flow within hospital trusts, to reduce flexibility and to impede innovation, just when those things are most needed.

We are in an unhappy mess, which is the true legacy of Messrs Brown and Balls. We shall better see the financial extent of that mess in July, when the Office for Budget Responsibility reports on the whole of Government accounts. However, the key point is that, although PFI was expensive before 2008, since 2008 it has become exorbitant. As a result of the financial crisis, PFI credit margins over gilts have risen from an average of around 0.75% to between 2.5% and 3%. Specific projects have even worse financial profiles. For example, the outline business case for the £244 million Royal Liverpool and Broadgreen University hospital projects a weighted return to investors of 8.58%. That is more than double the rate on long-term Government gilts, which is 4%. The extra cost is such that there is now a strong case for a one-year moratorium on that project, as on others, to allow proper consideration of alternatives, and I encourage the Government to consider that suggestion closely.

I shall sum up. A new settlement is needed on the PFI, and I offer three recommendations. The first is that the Government should take steps to improve their database on PFI deals, and their collection of new data. The quality and quantity of PFI data are surprisingly bad. On primary deals, that is due to inconsistencies in collection, and on secondary market deals it results from a hands-off methodology, which regards trades in PFI debt and equity as purely private transactions, outside the scope of government. All aspects of data collection should be reviewed and improved.

My second recommendation is that the Government should undertake a major consultation soon on the best means to procure and finance new infrastructure. This country badly needs new infrastructure, at a likely cost of hundreds of billions of pounds over the next few decades, and the private sector has a vital role to play. To finance that development, we need alternatives to the PFI, and several economic models are available. These include regulated asset base models developed from the utilities market, property-based models, strategic infrastructure partnerships and tax increment financing, as well as a reconsideration of conventional procurement methods. I have recently advocated the idea of a national asset trust fund as well, in a publication of my own. The consultation should also focus on how procurement is done. Should different models be used for different sectors? How can public sector institutions be made into better clients?

Thirdly, and finally, the Government should continue their current drive towards a taxpayer rebate and a new code of conduct on the PFI, if possible with every PFI company involved. Many have already engaged with the Treasury, but some—particularly some large banks, accountancy firms and legal advisers—have yet to do so. I have written to the head of every major PFI firm to put the question directly to them, and I plan to keep the House informed of their participation. The code of conduct would in due course lead to a matrix of all PFI transactions, which would show savings agreed with the private sector to ensure that they were fairly shared. That will require implementation over some months, so that the savings are genuinely realised. The Treasury could also set up a small team to advise individual hospitals and other public services on how to benefit most from the rebate process, with the team’s costs being met out of the savings generated. One thing, however, is vital. Most of any rebate should of course go back to the Treasury, and on to the taxpayer, but a portion should remain with the affected local public service, so that local people can be absolutely certain that their school, or hospital, has benefited.

I very much hope that all colleagues present—and there are many—will support these recommendations, and will join me in pressing the Government to ensure that savings are made and local people feel the benefit.

--- Later in debate ---

[Mr Jones]

I am not necessarily saying that PFI should not happen at all, but that contracts should be negotiated in the correct fashion to minimise the taxpayer’s exposure to situations such as those we have seen. Contracts must be right when ensuring that organisations are a suitable size, for example, to fit into the local health economy. With hindsight, we might question whether the PFI hospital at Coventry was too large for the wider Coventry and Warwickshire health economy.

The general point is that we must get the issue right in future. I accept the hon. Lady’s comments, but I am confident that Ministers are ensuring that any contract negotiations will be made properly, so that we do not over-commit the Government, as was done previously.

[Jesse Norman]

Does my hon. Friend share my view that there is a world of difference between Building Schools for the Future, a form of PFI that the Government could and did cancel, or specific projects which were inherited but which they were uncomfortable with, such as Hartlepool hospital, which they have also stopped, at least for the time being, and the vast preponderance of the 61 projects inherited from the previous Government? The toxic inheritance from the previous Government was an enormous sausage machine, with huge embedded costs, which we have had to deal with despite a difficult economic situation. There is something grossly wrong in comparing £200 billion of spending under the previous Government with the need to get the situation under control. Does he share my view?

[Mr Jones]

I share my hon. Friend’s view, which he has expressed powerfully. We must also consider a point made by my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) that, thanks to the Labour party, the country is now so indebted that, to put in any new infrastructure, we have to look seriously at schemes such as the PFI, because without them the country simply does not have the money to finance any projects.

--- Later in debate ---

[Mr Robin Walker (Worcester) (Con)]

I congratulate my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) on securing this debate. Herford and Worcester have a long history of fruitful co-operation, and I hope that the debate will show that we can work together to deliver better value for our constituents and our country.

As we have heard, PFI has become a dirty word—almost a term of abuse—but it was not always so. Both Conservative and Labour Governments saw the benefits of working with private finance and, from the 1990s onwards, the opportunity to deliver better public service by using it. Rightly, many hon. Members have challenged the essence of the scheme, and I accept that it should be reviewed and that we should look at competition, as my hon. Friend the Member for South Norfolk (Mr Bacon) has suggested. However, Members should remember that some PFIs allowed valuable new public buildings to be delivered, which would not otherwise have been possible. That was often used to justify the scheme, even after some of the initial value-for-money problems became clear. That was certainly the case with the Worcestershire Royal hospital in my constituency, and I want to focus on matters close to home, in the same way that my hon. Friend the Member for Nuneaton (Mr Jones) did. Most of my comments today will be about that particular PFI.

Over time, it has become clear that value for money was not sufficiently protected, particularly in early PFIs, such as our hospital in Worcester. When the Labour Government came to power in 1997, they were determined to embark on a massive programme of public building, but with a commitment to remain within the spending plans of the previous Conservative Chancellor. The PFI provided a valuable get-out from that Catch-22 situation, because it allowed the Labour Government to borrow against the future—build today and pay tomorrow. That was not in itself a problem, as long as future costs were taken into account and rigorously controlled. Sadly, the political imperative overrode financial good sense, and projects were signed off without the rigorous checks that should have been made.

In the case of Worcestershire Royal hospital, I can state categorically that the decision to approve the structure of the PFI was political, that it was taken by a Labour Government and that it would not have been approved by a Conservative Government. The reason why I know that is peculiar. I happened to be working as a volunteer driver for my right hon. Friend the Member for Charnwood (Mr Dorrell), who was then Secretary of State for Health, during the 1997 general election campaign. We were both from Worcestershire originally, and we were both well aware of the clamour in the city for a new hospital, so the topic came up naturally during our travels around the country. I asked my right hon. Friend why he would not sign off the hospital that everyone wanted. He explained that, although it was absolutely right that the city should have a new hospital, the contract that had been put forward for it was too expensive and inflexible, and did not build in the extra capacity that the hospital would need over the next 30 years. He said that when the Conservatives were re-elected he would renegotiate that contract and ensure that we had a hospital to be proud of. Alas, that was not to be.

With the advent of a new Government impatient to get spending, the contract was signed off unchanged and the Worcestershire Royal hospital, a fine building in many ways, where a lot of fantastic work is done, lived up to the concerns of my right hon. Friend. The reply to my recent parliamentary question to the Department of Health in February on the costs of the PFI confirmed that over the life of its 30-year contract the Worcestershire Royal hospital will cost approximately 10 times the capital cost of the project—£852 million over 30 years, compared with its £82 million capital cost.

Hon. Members may point out that it is not reasonable to compare directly the capital figure of a project with the total cost of the PFI contract, because account must be taken of the cost of capital, the service elements, and the fact that a PFI project is maintained as new throughout its lifetime. However, it is reasonable to benchmark such figures against other, and especially more recent, hospital PFIs. In recent hospital PFIs, the lifetime costs have been more like four times the capital cost, which shows the vast gulf in value between early hospital deals, such as that at Worcestershire Royal hospital, and more recent PFIs.

Hon. Members do not have to accept my word for the poor value of that PFI. In 2006, Patricia Hewitt, who was then the right hon. Member for Leicester, West and Secretary of State for Health in the Labour Government, told the Select Committee on Health that the financing of the Worcestershire Royal had been “a disaster”, and that it had been much more expensive than other PFIs.

We have a problem not with cost alone but with capacity, and they are similar to those raised by my hon. Friend the Member for Nuneaton. The hospital in Worcester has to serve as both the acute hospital for the county and the community hospital for Worcester. It is now, and has been for some time operating at close to full capacity, and as more services have been centred there, it has become a headache for the management of our acute trust. With the opportunity to have more cancer services centred on the Royal, which my constituents warmly welcome and support, comes the challenge of deciding which services must go elsewhere in the county as a result of the capacity limits.

As my hon. Friend the Member for Hereford and South Herefordshire has pointed out so eloquently in this debate and others, one of the knock-on effects of poorly negotiated PFIs has been to raise the price of hospital parking, which is certainly true in Worcester. In fact, in the early life of the PFI, land that had originally been set aside for parking had to be sold to help the trust to meet the costs of paying for it. That has added to the difficulties of parking. The costs are of understandable concern to patients and visitors, and there is a knock-on effect of people parking in nearby residential estates to avoid those costs.

[Jesse Norman]

My hon. Friend’s powerful speech suggests that his hospital, the total cost of which is 10 times its capital cost versus an average of four times, leaves six times £80 million, or just under £500 million of excess cost, in that contract. Is that an appropriate calculation?

[Mr Walker]

That is an appropriate point to raise, and a strong argument for the sort of rebate that my hon. Friend has been advocating.

It is regrettable for all those who are affected by high charges for parking or by cars cluttering their streets as a result that the previous Government did not take more time to negotiate, to think more about the long-term consequences of their hurried decisions and to get a better deal for taxpayers before signing off that PFI.

However, we are here not simply to point the finger of blame but to deliver solutions. I believe that there are solutions to these problems, which is why I have passionately supported my hon. Friend’s campaign for a significant PFI rebate. We need not let past mistakes for ever damn the idea of the PFI, but we should learn from them and ensure that we deliver better value for money, better planning and a stronger position for taxpayers in future.

I support my hon. Friend’s contention that a 0.5% rebate nationally would deliver enormous benefits for taxpayers and, in the case of the Worcestershire Royal hospital, it would deliver millions of pounds that are desperately needed in our local health economy. I also support the urgent measures that our Government are already taking to bring PFI companies to the table and to ensure that better value is delivered for taxpayers. I am delighted for that reason that the Worcestershire Royal hospital is one of those being reviewed by McKinsey, and I urge it to examine closely the details of the current agreements and to search for areas where value can be unlocked. In Worcestershire, as elsewhere, many of us believe that the long-term costs of the PFI are placing serious strain on the finances of our acute trust. Consequentially, they are a significant barrier to the vital short-term goal of achieving foundation trust status, not to mention the essential long-term aim of delivering the best possible care for everyone in Worcestershire, free at the point of need.

There is good news on that front, which shows that the light that my hon. Friend has shone on the PFI, and the determination of this coalition Government to deliver value for money, are already bearing fruit. I understand that the Worcestershire Acute NHS Trust is already finding significant savings that can be delivered from the soft services parts of their contract. As part of the trust’s strategy to deliver greater efficiency from its PFI provider, commercial discussions are currently under way with ISS to benchmark the provision of soft services every five years. ISS provides services such as cleaning, catering, portering, security and laundry to the Worcestershire Royal hospital site, and it has indicated that it is prepared to work with the trust to deliver savings over the next five years in line with national efficiency assumptions of 4% a year. That would be delivered while offering a guarantee that there will be no impact on quality. I understand that the trust’s board is due to consider a formal offer within the next month, and I welcome that.

The trust is also due to commence negotiations with Siemens on the managed medical equipment deal, which is due to have a benchmarking review in 2012, in line with its 10-year anniversary. Those negotiations are entirely welcome and show that some private companies are already engaged in seeing how better value for money can be achieved for taxpayers. However, I am worried that, as yet, there has been no indication of similar negotiations with the main PFI contractor, Catalyst, a special-purpose vehicle. I take this opportunity to urge it to come to the table and, recognising the exceptionally good deal that it has had at the Worcestershire Royal hospital, to begin talking about how some of the value from that deal could be rebated to taxpayers and the local NHS.

The main shareholders in Catalyst when it was set up were Bovis Lend Lease and the British Linen bank. The latter, via HBOS and the ill-conceived merger that the previous Government forced through, has become part of the Lloyds banking group, in which UK taxpayers now have a significant stake. Surely such banks, publicly bailed out as they have been, should be doing everything in their power to ensure that they are giving good value to the public and the NHS? That should be the case whether or not they hope to win more business from the Government, but I have recently discovered that that same consortium has hopes of winning the contract to deliver a new radiotherapy unit for the Worcestershire Royal hospital.

That radiotherapy unit will be a vital addition to the suite of services that Worcester is able to offer to cancer patients, and I have been campaigning for that for many years. I welcomed the decision of our trust first to approve it and then to locate it in Worcester at the heart of our county. I have been asked whether I am worried that Catalyst is in the running to deliver it. I do not see it as a matter for concern so much as a golden opportunity. I hope that Catalyst can show in its bid for the radiotherapy unit that it is determined to offer taxpayers value for money and to share the benefits of the original PFI contract for the Worcestershire Royal hospital. It must have many advantages in terms of cost and synergies with its existing contracts, so I am sure that it will be as determined as I am that those advantages are shared fairly with taxpayers. I will be only too happy to support my acute trust in its negotiations with Catalyst to make sure the bid offers the excellent value for money that it should.

In particular, I am hopeful that the benefits of this project will be not only financial but will provide the opportunity to address the long-term parking problems at the hospital. I urge it to consider the need for a multi-storey car park at the Worcestershire Royal, and the golden opportunity to deliver that alongside the provision of a new radiotherapy unit. Indeed, more broadly, the Government should recognise that, as we strive to deliver value for money in all our public services, we must take a more aggressive approach in our purchasing and commissioning, negotiating hard to ensure that taxpayers receive good value. I was happy to hear of the hundreds of millions already saved by the Cabinet Office through negotiation with major suppliers, and I hope that the Minister can assure us that that approach will in future be taken to the PFI.

I congratulate my hon. Friend the Member for Hereford and South Herefordshire again on his campaign and exhort the Minister to take on board the many excellent points that have been made in this debate. Not only do we have a responsibility not to repeat the mistakes of the past but we have an opportunity to put things right for the future.

--- Later in debate ---

[Mark Garnier]

Those are the equity sale profits. So those companies are PFI providers who have then sold their contracts, and those figures are the profits they have made. Just to be fair, the figure was 56.3% for Kier Group. Those are pretty sizeable returns.

[Jesse Norman]

It is very important to distinguish two things. One is the internal rate of return, or IRR, of an investment, which is the annual amount by which it gets upgraded; the second is the value that a provider gets when it sells a share. We do not know the answer to this question, but those values are perhaps what they are in part because of the period of time that they have been held. If someone held a share in the London stock market for 10 years, they would see a certain uplift in its value. I do not know what the number is, but it might be 20%, 30% or 40%. It is that kind of thing. The contrast is with the returns that were being made, for example, with the Norfolk and Norwich university hospital, where the refinancing, which loaded up the hospital with £100 million of additional debt, realised an IRR—an annual upgrade in the return to the investors—of 60%. So what my hon. Friend is talking about might be, in fact, a 7% or 8% return each year. We just do not know, and that in itself is a great embarrassment for the previous Government, because we do not have the numbers.

[Mark Garnier]

My hon. Friend makes an incredibly important point. I suspect that what these numbers are telling us is that the annual returns are being treated rather like the dividends on an equity investment in the stock market and these capital returns—the sales of equities—are the capital return that the company gets. So they are already getting their annual rate of return and this money is in addition to what they would expect to receive if they ran the contract to the end. But we need to clarify that, because these are incredibly important points.

The Government are committed to the PFI and, as we have already heard, they have 61 new projects being procured as of earlier this year, with a value of £7 billion. That is not necessarily a bad thing because money is being invested into the supply side of the economy, and we need that investment to support our expectations of economic growth and to sort out the financial mess that the coalition Government have inherited. The PFI allows that investment to happen without any immediate impact on measures of public sector capital expenditure or borrowing. However, the efficiency case for the PFI rests on the model’s ability to allocate risk more effectively than regular procurement. To date, there seems to be no empirical evidence to support any claims that the higher price of PFI finance has offset any reduction in costs.

The efficiency case looks even more fallacious in the light of falling interest rates, as we heard earlier in the debate. The Government can borrow directly at around 3.3% and yet the IRR on a PFI contract is now 4% higher than that. That is a significant risk premium to be paid by the Government, especially when the PFI investor frequently offloads risks on to subcontractors. We have heard that before. Given that we have very low interest rates and can issue gilts on a 25-year basis, should that not be one way to look at financing some of the supply side of the economy?

Coming away from the financial side, I am not sure that some of the users of PFI facilities are always that happy. Wyre Forest was one of the areas that suffered under the cancellation of the Building Schools for the Future programme. I am continuing to work hard to get rebuilding finance for up to 11 of my local schools. We are waiting for the James review on that.

Wyre Forest secondary schools were to be built under PFI contracts. In private chats that I had with various head teachers and governors, they were concerned that a PFI contract would tie their hands financially, limiting their ability to determine their budgets and, therefore, investment in teaching and teachers. We all want new schools, but at what cost to education? PFI has a place in the future in terms of funding investment, but it has to be done at the right price. A lot more work needs to be done on ensuring that we get the end product at the right price. That is why I am incredibly grateful to my hon. Friend the Member for Hereford and South Herefordshire, for taking the initiative to question this important area so closely, and to work so hard for the future of PFI.

--- Later in debate ---

[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 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.