Private Finance 2/Private Finance Initiative

Stella Creasy Excerpts

Monday 5th September 2016 Commons Chamber

[Stella Creasy (Walthamstow) (Lab/Co-op)]

Most MPs can show in their constituencies where there are rotting floors, outdated buildings and potholes. Some may even have made a website about it, but the truth is that this is no laughing matter. We know that our schools in this country are falling apart, and that investment in our education buildings is 18% lower in 2014 than it was in 2009. Britain is now ranked 24th by the World Economic Forum for the quality of its infrastructure, down from 19th in 2006, and we cannot see this getting any better. Indeed, spending on infrastructure has nose-dived since Brexit.

Whatever some may say about fixing these problems, all of it has to be paid for, and Governments of all persuasions, including the previous Labour Government as well as the current Government, have used private finance to build. It is the equivalent of getting a mortgage or even remortgaging our home to pay for a new roof or an extension. Crucially in these deficit-denying times, it is seductive not only because it spreads payments for new schools, hospitals and stations and their management over decades or more, but because it keeps them off the books.

[Jim Shannon (Strangford) (DUP)]

According to a report of 2014, in Northern Ireland there were some 39 PFI projects with a staggering total cost of £7.3 billion for the maintenance and so forth. Does the hon. Lady agree that any further PFI must be an absolute last resort and indeed should only be permissible in cases of extreme need?

[Stella Creasy]

I hope to convince the hon. Gentleman that there may be many alternatives to PFI, because the question for us is: at what cost have we engaged in this borrowing? We now pay £10 billion a year in PFI repayments, equating to £3,400 for every man, woman and child in Britain. These projects are worth £57 billion, but we are committed to paying back £232 billion by 2050.

It is clear that PFI has addressed some of the project management issues we had in the public sector that made it so bad at building. As the National Audit Office highlights, it has dramatically cut late delivery of projects and overspending on buildings, but as the Treasury Committee points out, it is “sub-optimal value for money”.

One hospital was charged £52,000 to demolish a £750 shelter for smokers, and a school had to pay £302 for a plug socket to be replaced, five times the cost of the equipment it wanted to plug into it. In my constituency of Walthamstow, we have seen first-hand the damage done. My local hospital, Whipps Cross, is part of the Barts health foundation, which has the largest UK PFI deal, at £1.1 billion. By 2049 the amount paid back will be £7 billion. Last year alone the trust shelled out £148 million, equivalent to the salaries of 6,000 nurses, of which half was the interest paid on the loan. Its deficit of £90 million has led managers to downgrade nursing posts. It is little wonder the Care Quality Commission placed my local hospital into special measures as the quality of care declined.

The Minister will, I have no doubt, say his Government have reviewed PFI and made cuts to the costs, renegotiating to buy fewer lightbulbs and to do less cleaning, saving us a whole £1.6 billion out of about £220 billion, but as the NAO has pointed out, no one has really considered whether private finance itself is value for money.

Tonight I want to ask three simple questions: whether the terms of PFI—the rates we pay to borrow this way—are the best we as taxpayers can get to build schools and hospitals; whether even now we can save money on the costly deals that have been signed by Governments of all persuasions, and which are draining our public services of much-needed money; and above all whether the Government are doing enough to secure the competition for our business as taxpayers.

Of course it is hard to answer those questions without the data on what we are paying. I know that the Government do not have those data, because I have asked. I tried asking all the hospitals around the country what rate they were paying, because on 8 February this year Treasury Ministers told me that they do not hold those data centrally. Most NHS trusts refused to disclose the information, claiming that it was commercially sensitive, but those that did were very revealing. Their data showed that, in December 1994 under John Major’s Government, two PFIs in Durham—one for the Dryburn district hospital and one for the Bishop Auckland general hospital—had rates of return of 15% and 18% respectively. In comparison, the 10-year gilt rate was just over 8% at the time. In December 2002, the Crosshouse maternity hospital in Kilmarnock was rated at 16%, while a month later Edmonton acute services were rated at 14%. The gilt rate was 4.6% at that time. In March 2010, the Leeds Wellbeing Centre offered a return of 14% and the Liverpool University hospital redevelopment offered 11%. The long-term gilt rate was then 4.2%.

Some people will argue that we cannot make a direct comparison with gilt rates, so let me flag up the fact that equity returns on the stock market have averaged between 5% and 6% per annum over the past 30 years. It is therefore clear that PFI investors got a great rate, and that was no accident. Critically, research from Edinburgh University shows that these rates do not vary as other premiums do in our financial markets, and that they stay well above the cost of other forms of funding. So public bodies might know full well that the premiums are high, but if that is the return that the market expects for managing the projects and there is no alternative, there is not much they can do without the Government’s help.

I should also point out that those are the rates for when the contracts were signed. As we now know, much profit has been made by selling the debts on. The South London Healthcare NHS Trust, which collapsed, had two large PFI contracts, one of which was offering investors annual returns of 71%. Most PFI contracts were let on an expectation of an already high rate of return of 15% to 17%, but refinancing has seen some returns to investors rise to over 70%.

In 2007, a new standard contract clause was created to allow authorities to request this financial information in order to track the returns that investors were creating. However, there is little evidence that the clause has been used or even that the Government have promoted it, so it is hard for us to see just how much taxpayers’ money is being recycled into higher payments for investment funds rather than into infrastructure for the UK. Again, no central database exists.

We might not know what we are paying, but we do know who we are paying, and it is often the same companies, with 45% of projects funded by the same people. Firms such as Dalmore Capital, Semperian, Kajima, Innisfree and Barclays crop up time and again, and they often invest together too. This dominance by a small group of companies matters because this Government are continuing to use their services in their proposed replacement for PFI, known as PF2. PF2 separates out the service element—the building management—from the capital, which involves the building of the project. So far, so good. Those lightbulbs might be replaced after all, if their cost is not connected to the cost of building the schools.

However, PF2 is supposed to attract more long-term investors by increasing the requirement for equity—the most expensive bit of the deal—potentially making it even more expensive to the public purse than PFI. It also expects us as taxpayers to take on more—not enough to be in charge of the project, but more to cover the cost. So it is not that different from PFI. It is still about us borrowing money from private companies to build things, at rates that are not transparent or competitive with the alternative sources of finance that we could raise.

Are there better ways to borrow to build? Certainly the calculations used by the Government in the Green Book to compare the cost of these deals with public spending have not made that question easier to answer. They set the value of public sector borrowing at 3.5% real and 6 % nominal since 2003, despite the cost of public borrowing being well below that for over a decade. The Treasury Select Committee has suggested that the Government review the Green Book, but it is not clear that the Government have heard that message. Will the Minister tell us whether PF2 is using the same calculations as PFI, at the very time when the cost of borrowing to the public sector is even lower? The Green Book also includes the shadow price of tax—the money that private companies will pay in tax in the UK as a result of getting this business. That money is set against the cost of borrowing from those companies to decide whether the deal is better than using public money to fund a project.

The lack of information about such projects means that the Government are simply unable to verify whether the tax presumptions are accurate. The NAO suggests not. The companies themselves continue to be sited overseas. Innisfree and Palio Partners are sited in Guernsey, and Semperian is registered in Jersey. PF2 will do nothing to tackle that or to stop the resale of shares in such deals, which make more money by taking advantage of the fact that Governments do not default. What does the Minister make of the bosses of the Sandwell and West Birmingham Hospitals NHS Trust, who admitted that they could not stop Carillion, investors in the PF2 for the Midland Metropolitan hospital, from selling on its equity investment to generate the kind of profits that we saw under PFI?

At a time when huge spending cuts are being threatened and when the NHS faces a financial shortfall of £20 billion by 2020 alone, to continue to pay inflated rates to rich investors is to continue to ignore the problems. A quarter of single-tier and county councils now spend the equivalent of 10% of their revenue on debt servicing. The answer to the first question is no; private deals are not always a good deal. We therefore need to answer a second question: if we cannot get out of them, can we renegotiate? Can we consolidate to reduce the repayments and put the savings back into front-line services? To date, sadly only Northumbria NHS Trust has done that and only at great expense to the council and with minimal savings. Imagine the savings that could have been achieved had the Government negotiated a group of the contracts with these companies at the same time. The savings in interest could be paying down debt or paying nurses and teachers properly.

We then face our final question: why are we borrowing only from these companies? Why are more companies not competing for our business as taxpayers? In the past few years, this Government have been making it harder for local government to pay down its debts. The Public Works Loan Board could use the Government’s financial strength as a borrower to secure much lower rates and then pass them on to public bodies. Instead, they changed the early repayment terms in 2007. In 2010, changes were made to loans to make it harder, not easier, for local councils to borrow efficiently.

If that does not excite Ministers, perhaps they will support an alternative in the shape of the new municipal bond agency created by local councils. The agency seeks to lend at margins of between 0.6% and 1% over the underlying Government funding rate. Currently, if a council wants to borrow money for 30 years from the Public Works Loan Board, it will charge just over 2%. In contrast to the complexity of PFI or PF2, municipal bonds are simple and transparent. Bonds are issued to the market to raise funds and local government lending is at a fixed rate.

The Government could make pensions funds more likely to invest in partnerships with Government by being more transparent about the deals and the returns to be made. The current Pensions Infrastructure Platform has led to such companies buying old PFI debt, but that can change. The Manchester and London local government pension funds have recently acted together to invest in windfarms and biomass, so there is clearly a market. With Government support, that could be the basis for a UK sovereign wealth fund—the people’s money used for the people’s projects. The sad truth, however, is that no such innovations are coming from this House or the Treasury, so why are we throwing good money after bad trying to make private finance initiatives work? With a Prime Minister who has pledged to put infrastructure investment at the heart of post-Brexit economy, Britain cannot afford to keep making expensive mistakes.

I have five simple questions for the Minister. First, will he commit to publishing the rates at which public agencies are borrowing so we can have greater transparency of the costs incurred to the taxpayer and so that we can check whether, as many fear, PF2 will be more expensive than PFI? When will the Government publish the equity returns data, promised since last year, on the PF2 deals? Secondly, is the minister not perturbed by the relationships between a small group of institutional investors in these deals and the lack of competition for taxpayers’ business? If so, will he ask the Competition and Markets Authority, which acts on the behalf of consumers—as taxpayers, we are consumers—to review the sector and explore whether barriers to new entrants exist? Thirdly, will the Government help public bodies saddled with PFI and PF2 contracts to renegotiate debts and get the costs down to save money for front-line services? Fourthly, will the Government rewrite the Green Book to reflect the real costs and benefits of public borrowing versus private borrowing? Fifthly, what does he make of the new Eurostat rules published in March that consider the equity stakes that the Government intend us to take out under PF2 to be direct financing, meaning that they should be on the books? Does that not undermine the point of PF2 in the first place?

Finally, how will the Minister stop money simply going overseas into tax havens and into higher profits for private companies, not public services for the people? As things stand, 46 schools, and many more hospitals, will be built using £700 million of that PF2 control total, at a time when borrowing is at an exceptionally low cost for government. Do not take my word for that. Instead, take the word of Leo Quinn, the chief executive of Balfour Beatty, who recently said that “money is effectively free”. There is no excuse not to act, to tackle the costs of existing PFI contracts and the lack of competition for our business as taxpayers, so that we can really get value for money and so that instead of injecting our cash into profits for private companies overseas, we can inject our money into the kind of projects that will get Britain’s economy and Britain’s people back into business.

[The Economic Secretary to the Treasury (Simon Kirby)]

I start by thanking the hon. Member for Walthamstow (Stella Creasy) for securing this debate. How we go about funding the infrastructure this country needs is a topic of huge importance, and I know Members from across the House will join me in thanking her for this opportunity to discuss it today, because we all share a desire to make sure we fund our public services in the best way possible. We are talking about the schools and hospitals people rely on, as well as the roads, train lines, energy supplies and broadband coverage. In short, we are talking about the public services that not only keep our economy running, but help us to generate new jobs and new opportunities for people across the country.

As someone who has run a number of businesses and now finds himself as a Minister at the Treasury, I do not want to see money wasted. My priority, and that of my colleagues in Government, is therefore to make sure that when we invest in the services people need, we get a good outcome and we pay a good price. Clearly, teaming up with the private sector can be an important way to finance new projects in the most efficient way possible, because often these are complex, difficult projects, which come with a range of risks to delivering them successfully, on time and on budget. One benefit that PFI brought was to move the risks associated with constructing and delivering these projects to the private sector, which was best placed to manage them. For us, that means not only that if something goes wrong, it is the responsibility of the private sector partners to fix it, but that we pay only if the service is working and available for use. As such, partnerships between the public and private sectors can be the best way to find the best value for the taxpayer, and we are clear that we will only enter into public-private partnerships where the evidence shows us that is the case.

We have also done a lot of work to make sure that the system of financing projects privately is as effective as possible. The primary model used for about two decades was, of course, PFI. Although in many cases it was an effective way to deliver new infrastructure, it was not always the case that projects went smoothly, and not all of these partnerships delivered the value for money that we would all want to see. That is why, under the last Government, we did a lot of work to tackle that. We looked at what lessons we could draw from PFI and how we could keep the best parts of it while making important reforms. That culminated in the 2012 launch of a new model for how public private partnerships could work, PF2, which has helped iron out a variety of issues. For example, PFI was often criticised for its long procurement times, which could sometimes last for many years. PF2 has already been shown to deliver shorter procurement times, and has already delivered almost 50 schools and a hospital project.

Under the new system, we have also taken important measures to improve transparency, ranging from the annual publication of data to the Treasury’s involvement on the boards of the companies leading the projects, and we also listened to feedback from stakeholders to build in more flexibility to the standard contracts we used, which often dictated services such as cleaning and catering. These have been removed, which means that the public sector now has a greater say over how the services it uses are run. We also have improved the overall system for new projects going forward. We must bear it in mind that we have a legacy of more than 700 projects that originated under the private finance initiative, which together are worth around £60 billion in terms of capital investment. Six hundred and thirty nine of those projects had reached financial close before May 2010.

We want to do what we can to ensure that these projects run as efficiently as possible. In 2011, we launched a programme to deliver an initial £1.5 billion of savings and efficiencies. We looked at PFI projects across sectors—from health to education and justice to transport. I am pleased to say that, as of March last year, public sector organisations from across local and central Government had reported more than £2 billion of savings and efficiencies over the life of the projects. We are still exploring a potential further £2 billion in savings through the more efficient use of facilities and adjustments to the scope of contracts.

[Stella Creasy]

The Minister just said there that the Government are still exploring how to make further savings on the scope of the contracts. Can he confirm whether the Government are looking at the rates of return paid on these contracts, and whether there are opportunities to negotiate with the companies that own these contracts—they are spread across the country—to reduce the repayments of interest on them collectively and to consolidate some of the loans for the public sector?

[Simon Kirby]

What I can say is that the Government are prepared to look at all of these individual arrangements to see where it is possible to obtain the best value for money. Often, it is simply not possible to restructure or to pay off the debt in a way that offers value for money for the taxpayer. We would be mad, would we not, if we did not look carefully at providing the best possible value for money and the best possible public services? That is an ongoing issue.

As I was saying, if it is not possible to find obvious savings in a project, we will work with Departments and procuring authorities to improve day-to-day efficiencies and management of the contract.

The hon. Lady asked a number of questions, including one on equity investments and equity returns. Public sector equity—equity and shareholder loans—committed to PF2 projects as at March 2016 totalled £8.2 million. The Infrastructure and Projects Authority, on behalf of the Treasury, plans to collate the equity returns information over the course of this year. This will be the first collection of such data, as the projects included are only now becoming operational and starting to make a return. We have not yet set a date for publication, but we can expect it at an appropriate time in the future.

The hon. Lady asked about the Green Book. I can tell her that it will be refreshed later this year. There will be clear guidance to Departments about the alternatives to PF2, and about whether that particular form of finance is the most appropriate. She also mentioned value for money. To be clear, the Government will only use public private partnerships such as PF2 to deliver a project that provides value for money over a publicly financed solution. Analysis is carried out using the principles in the Green Book, which is published by the Treasury.

[Stella Creasy]

Obviously, one issue here is whether there is effective competition for our businesses as consumers. I did urge the Minister to ask the Competition and Markets Authority to review that very point, so that there may be more options and more alternatives. It may help us to understand why there are barriers to the alternatives. Will he agree to that, and will he clarify what he means by the appropriate time for those equity returns data? Obviously, we have been promised that for more than 18 months. Will he guarantee that that will be an early Christmas present at the very least?

[Simon Kirby]

I can certainly guarantee that it will be as soon as possible. The thing is we need the data to be able to report on them. Most of these projects are only just starting, so I am sure that we will have it as soon as is reasonable.

The hon. Lady mentions alternatives. I am fortunate to have in my constituency, Brighton Kemptown, a fantastic new hospital being built at nearly £500 million. It is not using PFI or PF2. It is the Royal Sussex county hospital. Each of these projects is financed in different ways, but all projects should provide the best value for money for the taxpayer.

[Simon Kirby]

My hon. Friend raises an interesting point. Projects are financed in different ways. The hon. Lady’s local hospital, Whipps Cross, which is part of the Barts hospital PFI, was bond-financed. Refinancing is far more difficult and far less practical for bond debt. It is safe to say that refinancing of bonds is unlikely to provide value for money. The aim is value for money not only in the financing of new projects, but in changing or varying an existing finance arrangement.

[Stella Creasy]

I am pleased that the Minister refers to my local hospital. That is owned by Innisfree, which owns a huge number of such projects across the country. I am not sure if the one in Sherwood is one of those. I believe some of those in Brighton Kemptown may have some connection to Innisfree. There is a case to be made for renegotiating with such companies, which may wish to bid for PF2 business in the future. Is the Minister satisfied that there is enough competition for our business as taxpayers? Will he refer the matter to the Competition and Markets Authority so that it can look at whether those companies have a captive market, and whether alternatives such as bonds or the pension funds might be willing to invest in such projects and help out those public services, as well as not making the same mistakes with PF2 as seem to have been made with PFI?

[Simon Kirby]

I thank the hon. Lady for raising that question. I am happy to reassure her and give her a commitment that I will look at any solution that provides value for money. If that means that we should have more competition, so be it. We have a responsibility as a Government to get the best possible value for money for the taxpayer. In many cases we are historically in a difficult position. Her hospital finance was agreed in 2006, if I remember correctly. It is very difficult to unwind, but if she is asking me whether it is the Government’s intention to get the best possible deal, the answer is yes. If, after all the necessary investigation and consideration, it was appropriate to follow the route that she suggests, I would certainly consider that.

I reiterate that the issue is important. There is surprising agreement across the House. We all want to see the best possible public services and we all want the best possible deal for our constituents and the taxpayers who pay for these vital infrastructure projects, but we must be realistic about what we can change from the past. That does not mean that we should give up and accept that it is not possible to provide a better deal. We aim to achieve the best possible value always, because that is what the public expect and what the nation’s finances need, and it is what I and this Government will do our best to deliver.

Question put and agreed to.