Private Finance Initiative

Mark Spencer Excerpts

Thursday 23rd June 2011 Westminster Hall

[Mr Richard Bacon (South Norfolk) (Con)]

I join other hon. Members in congratulating my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) on his tremendous campaign. It has been a marvellous example of leadership, which is built on his expertise, and we are all in his debt.

I have been watching the private finance initiative from my position on the Public Accounts Committee for many years. I always had a sneaky suspicion about it, without being able to put my finger on what that was, until I met an investment banker at a private event in 2003. He was a securitisation expert and had been involved in many PFI projects. He said: “I like the PFI. It’s a good source of income and is good for the business, but as a taxpayer it really pisses me off.” That rather woke me up. This was not a trade unionist complaining about costs being cut by worsening the terms and conditions of his members; it was a City fat cat getting fatter on the proceeds.

As a member of the Public Accounts Committee, I used to get invited to conferences on the PFI, when it was in its earlier heyday under new Labour. At those events, I met a group of people whom one can only really describe as theologians for the PFI. Rather like some Marxists, or even some Roman Catholics, there was no question to which they would not have an answer. It was a sort of self-containing system, at the root of which was the idea that the PFI was a competitive bidding process and that there was no possibility of its not being all sorted out and being in the best possible interests of clients—the public authorities involved. After all, it was a competitive, open-market process in which anyone could bid, and certain things would already be in the price. It was almost as if they were talking about the market for foreign exchange, or another perfect market. We know, of course, that because of the huge costs involved in bidding for a large project, the PFI has far more of the characteristics of an oligopoly. The Royal Institute of British Architects estimated, many years ago, that the cost of bidding for a PFI hospital was more than £11 million—probably significantly higher now. All those costs end up getting passed on to the client.

The other thing that these theologians would suggest was that it would not be possible for anything to go wrong, because it would not be possible to have an ill-informed or inexperienced client. There would be no question of there not being the right experience on the client side, or the right capacity or resources to manage a project after a contract had been signed. It was as if all must be for the best in the best of all possible worlds, because it could not be any other way. I continued, however, to be suspicious, and I continued to go to the conferences, becoming ruder and ruder until, I am pleased to say, they stopped inviting me. Customers paid £1,000 to attend and all I got out of it was a slap in the face with a wet haddock and a one-way ticket to Great Yarmouth, so I am glad that I am no longer invited.

I must congratulate the National Audit Office on something that recently opened my eyes. The NAO has produced more than 60 reports on the PFI in the past decade, and I have been pleading with it for years to do more synthesis. We have had analysis after analysis after analysis, and project after project, and in the office’s recent report, published in late April, there is more synthesis of some PFI issues. I had a light-bulb moment when I read on page 7 of the report, in a section about the skills, capacity and experience used in negotiating

“high margins on the changes in asset usage which are likely to occur over a long contract.”

I realised that the providers know full well that it is not possible to write a contract that is flexible enough to last for 25 to 30 years, and so they do two things. One is that they insure themselves by tying down every conceivable cost that might arise—every conceivable risk with its attached price. That process is enormously expensive, and it is reflected in the figure of £11 million that the Royal Institute of British Architects came up with. Although it is true, as my hon. Friend the Member for Hereford and South Herefordshire has said, that in rare instances people have lost a packet on projects, such as Jarvis, the National Physical Laboratory and the Joint Services Command and Staff College in Shrivenham—Laing had to sell its construction business after that—the contractors have a lot of people involved, and they do it well, insuring themselves on the downside pretty effectively, to ensure that they make money whatever happens.

The other light-bulb moment in my reading of the NAO report was when I came to:

“as major contractors seek to develop their income from the project”.

I thought to myself, “Hang on a minute. How do you develop your income from the contract? Okay, you might index the contract to protect yourself from inflation, but basically you have a contract and you provide services. It is predictable, and that is why you know what you’ll get going forward.” No. They know full well when they sign up that it is not possible for the public authority, particularly those in education and health, to write a contract that is flexible enough to last for 25 to 35 years. They ensure that all their risks are covered and then develop their income from the contract over time, as changes occur. One can also see a sudden shift. Just as the flagship Norfolk and Norwich hospital in my constituency was finished, the mood music suddenly changed towards much more primary, locally based care.

The contractors also do fancy financial engineering. The Norfolk and Norwich hospital was perhaps the locus classicus of that. The contractors added about £100 million in extra debt to the contract at the time of refinancing, thus accelerating their return from the project. The NAO produced a report specifically on that hospital, which stated that not only was the repayment period for the hospital extended from 34 years to 39 years—it is hard to see how that was in the interests of taxpayers—but the rate of return for the investors was accelerated from 18.9% to more than 60%, more than tripling it. If they can get all their money out that quickly, it means that it is not nearly as important, and there is not nearly the same incentive, to carry on managing the contract in the same way as before.

My hon. Friend the Member for Hereford and South Herefordshire made another important point when he said that we should not kid ourselves that it has all been plain sailing in the conventional procurement world. He has mentioned the British Library. One might also mention the Scottish Parliament and the Jubilee line extension. I was told that the cost overrun for the windows of Portcullis House—which, again, was a conventional procurement that the Public Accounts Committee looked at when it first opened years ago—was so huge that it would have been cheaper to have clad the exterior of Portcullis House with BMW 7 series cars. We should not be under any illusion that the conventional method has worked as well as it should.

The attempt to find a way to get projects delivered on budget, on time had a certain merit. My hon. Friend was absolutely right to point out that the hon. Member for Coventry North West (Mr Robinson) took this and ran with it. I talked to Lord Lamont, the former Chancellor of the Exchequer, at a dinner a couple of years ago. He said that he had asked the hon. Member for Coventry North West before the 1997 election, “How on earth are you going to finance all these grand promises in your manifesto?” He replied, “Oh, it’s simple—we’ll take your idea of the PFI and run with it.” Lord Lamont said, “But the rules won’t let you,” to which the hon. Member for Coventry North West replied, “Oh, we’ll ignore your stupid rules.” He was very candid about it, in fairness to him.

One of the things that I have regretted about the past few years of the PFI is that, in areas such as health and education, where it would have been fairly easy to do this, the Government did not insist on developing, at the same time, identical or nearly identical clusters and baskets of projects, so that we would then have had a proper way of comparing, over a period of years—three, five, seven and 12 years out—what had actually proved to be greater value for money.

[Mr Mark Spencer (Sherwood) (Con)]

Is my hon. Friend also aware that the issue extends to the emergency services? Nottinghamshire police find themselves in a situation whereby their vehicle fleet is PFI-ed, and it costs hundreds of pounds just to repair a puncture.

[Mr Bacon]

Yes, and of course, we cannot blame the private sector for protecting its downside and ensuring that it makes money rather than loses it. One of the most extraordinary things about all this is the naivety of many of the people in the civil service who have negotiated these projects over the years. They do not seem to understand that the private sector players are profit maximisers. If they have a chance to make money, they will, and if they have a chance to make more money, they will. A certain lack of commercial nous and capacity on the part of the public sector has coloured all this.

Turning to the proposals of my hon. Friend the Member for Hereford and South Herefordshire on steps to improve data, one of the things that have shocked me throughout is the difficulty in getting a view from 100,000 feet of what is going on. I have spent years on the PAC trying to get answers out of the Treasury and other authorities about what is going on, and only very recently has anything started to emerge that looks like a coherent picture. My hon. Friend is absolutely right that we need to think about a variety of different approaches to financing infrastructure. We need to make the PFI compete for business, if we are to use it at all in the future.

There is a paradox in relation to future proposals. The NAO report refers to the fact that there is a pipeline of £200 billion-worth of transport and energy infrastructure projects, and it is precisely for those sorts of enormous, long-term projects that a PFI-type structure might have more attractions to it. However, we have to be able to break down the different components. There is often absolutely no need to ascribe to the entire 35-year period of a project the risks that, in truth, only apply for the first few years, yet that is what many PFI lawyers have been able to get away with in many cases.

My hon. Friend’s campaign for a rebate is fascinating and has certainly caught the attention of the PFI industry. He has led the way on this. It is a remarkable testament to the fact that people in the industry know that things have been going wrong that so many of them have been prepared to co-operate. Interestingly, at the PAC hearing on the NAO report the other day, one of the witnesses, Graham Beazley-Long, from Innisfree, was asked whether it would be reasonable for equity gains to be shared with the taxpayer. He was perfectly prepared to discuss the matter. He said that the Treasury and Infrastructure UK

“would have a view on whether that pushed up the costs of capital”.

In other words, it was all just a negotiation and a certain return would be demanded by investors, and if the taxpayer wanted to pay that up in advance, they could get it back again. There is probably an element of truth in that, but my sense over the years is that the PFI industry, out of which a large number of people have made a great deal of money, has not been made to compete hard enough. There are a number of ways in which they could do that. We should have some conventional clusters that give us, as taxpayers, the ability to compare over the long term, and we should be much more innovative, as my hon. Friend has suggested—I hope that we hear more about his proposal for a national asset trust fund—in securing alternative methods for infrastructure finance, so that the PFI industry knows that it is not the only game in town.