Private Finance Projects (EAC Report)

Lord Tunnicliffe Excerpts

Wednesday 3rd November 2010 Lords Chamber

[Lord Tunnicliffe]

My Lords, it is the lot of a Whip, whether a government Whip or an opposition Whip, that by the time a topic has cascaded down to one’s level, one usually finds oneself talking about a subject that one had not heard about 48 hours before. It is therefore a refreshing change, although it is perhaps going to be a painful one, to find myself talking about a subject in which I have had very considerable personal involvement. I shall declare my interests in PFI; I was managing director of London Underground and subsequently its chairman between 1988 and 2000, a period in which it was a leading player in PFIs. London Underground bought a fleet of Northern Line trains on PFI, handed over management of its power and communications systems, both telephone and radio, to the private sector, had a very successful ticketing programme, to which I shall return, and had the infamous London Underground PPP, of which I will admit to being the architect. I say that because it has been explained to me that success has many parents, whereas failure is an orphan, so there will be little contention of my claim to be the architect of the London Underground PPP.

I shall touch on the contributions of other Peers before I start. I thank the members of the committee for the work they have done on this report, and the noble Lord, Lord Vallance, for his presentation of it. I am very respectful of the report and greatly welcome its contribution. I thank the committee for finding the new term—PFP—which I shall try to use in future in this confusing terminology. I shall touch on a number of the points made by the noble Lord, Lord MacGregor, but we have a joint confession to make that during that period he was at one point my boss, so there is some coresponsibility in this Chamber. I thank the noble Lord, Lord Lipsey, for his quote from the NAO. It is probably a good summary of where we are on what we now call PFP. It is like the curate’s egg, but there is a lot of good in this egg as well as some problems. On banking issues, I would be trespassing on areas where I have no in-depth knowledge. The noble Lord, Lord Newby, brought up risk. I shall spend a little time on it. It is ill understood in the realm where PFPs happen.

The Opposition’s position on the report is in many ways the Government’s, in so much as it is contained in HL 114. I am sorry that the noble Lord, Lord MacGregor, found the Government’s response dismissive. I will concede that on some issues there should have been more reflection and more depth, but one is between a rock and a hard place in trying to get the response out quickly—we are grateful for the commendation—and responding in depth. Tonight is only the beginning of what will be a continuing debate on how the new Government will respond to the issues brought out in the report.

The first area that I would like to touch on, which is touched on gently in the report, is what I will call government pressure on public sector managers to use the private road for procurement. In the 1990s—I will limit myself to that time because I have no direct personal experience—the pressure at official level was not gentle, it was brutal. You were flatly faced with the fact that if you wanted your project, it had to be done the private way. I tried all I could to make sure that our submissions were honest and fair and balanced, but when you think of that pervasive pressure right the way through the system, it is not surprising that questions are asked as to whether the right public sector comparator was used, et cetera.

Treasury pressure is touched on in the report, but possibly the strongest paragraph is paragraph 61 in which the Government are asked to commit to not bringing institutional pressure on parts of the public sector to use private procurement. So, the first assurance I seek from the Minister is that best value for money will be the principal consideration when deciding whether to use a PFP procurement road. In responding to that question, I would like him to reflect upon the need for there to be practical public alternatives if that evaluation is to be made in an even-handed way.

All Governments fail to see—they say the words but they do not enact them—that investment in infrastructure is investment in what makes our country work. That is quite different from present consumption. The actuality of finding the money for investments from public sources is extremely difficult for a public sector manager; he is driven in this private direction. It was seen as almost the only way for investment to be brought into the business one was responsible for.

It is extremely easy to talk about risk at a theoretical level, but in the real world it is not like that. When you have big projects and you are in the public sector, you do not say “you take the risk” and that is the end of it. In practice, with a big project you are in what I describe as a deadly embrace. Yes, the survival of your supplier depends on your behaviour towards them, how you push risk and how you prosecute the route, but your ability to trade tomorrow depends on that supplier. The worst example in my professional career was not in private sector procurement; it was in the acquisition of 85 trains for the Central Line. That company threatened to go broke about a year and a half into the project. Our problems were so extreme and our options so few that we seriously considered buying the factory off the receiver and going into train manufacture. In the end we did a deal with one of the co-parents and paid the money for a parent company guarantee to see the project through.

It is a fact of life that in these big projects risk migrates to the party of substance, and that is the public sector. The real risk transfer is extremely modest. The value of private sector initiatives is the way in which small behaviours are incentivised to the public good. I will touch more on that later. For this reason I question the value of the off-balance sheet charades that we have played in this area. The report very much gets to the nub of this. I confess that my Government did not perhaps answer these questions in the required depth. This is brought out particularly in paragraphs 59 and 60. I would like the Minister to answer the challenges in those paragraphs with much greater clarity and much greater depth. Public/private finance capital is, frankly, part of the real balance sheet, and at least it must be exposed in a clear way so that we can see what has happened.

The rest of the report shows guarded support for PFI. I share that view. We have had good experiences. One of the worst things about having Her Majesty’s Government as your banker is that they are stunningly unreliable. They will promise you money one year—sometimes just before an election—and suddenly it is withdrawn the next year. The ability through the PPP to assure a partnership and funding is very much demonstrated by today’s Oyster card. That development is possible because of a long- term relationship. That programme started 25 years ago. It was translated into the private sector in the late 1990s and flourishes because the private sector has money to develop it and because the partnership works relatively well.

Whole-life costings work. When we acquired the Northern Line trains we discovered, largely because it took them a year and a half extra to build the damn things, that for the first time in all the time we bought electric trains—and we have been buying them for 100 years—the manufacturer suddenly discovered that he could make them more reliable and easier to maintain, which was not exactly surprising because the manufacturer was going to make all the money out of the deal by repairing them and maintaining them. It was a complete re-design. The concentration of whole-life costing was absolutely invaluable.

Finally, I come to my experience, in a sense. The Underground PPP was a ludicrous failure and so on and forth, but its failure was more complex than the report suggests. I put that down to two things. First, the special purpose vehicle—Metronet in particular—was a very unsatisfactory business structure. We really should have seen that. We were trading with an enterprise that was owned by its suppliers, and its suppliers were making their profits between them and the enterprise, not through a share of the profits of the enterprise. Whenever you bring a consortium together, you must make sure that the owners make their profits in the consortium, not in the supply arrangements. Secondly, the Treasury guarantees were probably reasonable in the circumstances, but the Treasury did not have the right tools of transparency so that it could monitor the risk of those guarantees being called in. The conclusion I draw from this is not that we should not do big complex private deals—they may, in fact, be the right vehicle—but that public sector teams of extremely high quality are necessary to do such deals.

I would like an assurance—the noble Lord, Lord MacGregor, touched on this—that if the Government contemplate such a deal in the future, they will first make sure that they have a team of the weight, the intellectual horsepower, the experience and the breadth necessary not just to look at the lines of the deal, as lawyers do, but to see behind the deal and address how people are going to behave with the various incentives. I ask the Government not necessarily to be deterred by the LU experience but to learn from it. I hope that the Minister will take account of that.

The one area in which, from my experience, I thought the report was weak—I have a slight difficulty with this, because I have nothing to add to it—is the problem of the preferred bidder. The complexity of PFP deals means that they take a long time to put together and are quite costly. The private sector has this device of saying, “You have to come to a preferred bidder status with someone, otherwise we cannot afford to continue”.

It is a real dilemma. The case for having a preferred bidder makes sense, but the problem is that the reality of having an alternative goes out the window. I do not know how, in future, the public sector will be able to establish value during the preferred bidder stage, but be able to find an escape route. But the report lets the process off lightly by not going more into the trap of the preferred bidder. I hope that the Government will think more on that whole issue.

In conclusion, I welcome the report, which gives valuable input to the debate. I would ask the Minister to respond to the report and to the emphasis that I have made. I encourage him to use the report—I think that the noble Lord, Lord MacGregor, touched on this—as source material in the training of public sector teams involved in this work. This very good document, which covers the past, can help people to learn the skills necessary to ensure that the public sector will get best value out of these schemes.