Private Finance Initiative

Baroness Burt of Solihull Excerpts

Thursday 23rd June 2011 Westminster Hall

[Andrea Leadsom]

My hon. Friend makes a good point, and many of the problems arising from PFI have happened because the private sector saw the public sector coming. There have been all sorts of issues with poor public procurement, and where two PCTs in neighbouring counties have both commissioned a hospital, one has not learned the lessons of the other. Everyone comes at the thing afresh, and they all have the same problems and run into the same weaknesses. Nevertheless, there is an inherent lack of flexibility built into the projects, which cannot be overcome. It is therefore incredibly important to consider that the PFI on its own, even if it were the cheapest option, and even though it does not at the moment have an impact on our national debt picture, has an inherent weakness in its structure.

The other massive weakness in the structure, which has been exacerbated since the financial crisis, is the cost. As my hon. Friend the Member for Hereford and South Herefordshire said, the reality now, with Government gilts at about 3% to 4% long term, is that direct Government procurement would be much cheaper than a bank trying to fund a project itself over five to 25 years and make a profit, where the net cost to the taxpayer ends up at 8% or 9%. There is an enormous difference between the costs of direct procurement and PFI procurement. That is exacerbated by the financial crisis, and makes things almost unaffordable. We must begin to look at alternatives.

I want to float an idea that I have been trying to put to Ministers—and will be doing in the near future. That is the possibility that the green investment bank could provide some necessary competition to the PFI market. As I said earlier, there is a serious lack of competition. The Treasury Committee heard from PFI providers that often they bid only for perhaps one in three deals. Since there are only six or seven major PFI providers, that means there are probably only two, or at most three, serious bidders for any deal; that suggests an enormous lack of competition.

However, we are now thinking about the green investment bank—a brand new idea for this country, whose time has come. That bank will be looking to fund many of the low-carbon, high-tech and potentially economic infrastructure projects of the future, such as offshore wind farms—I shall not talk about railways, but others might; hon. Members will appreciate my personal sensitivity there. Offshore wind farms, roads and all the rest require long-term financing. That is a big challenge, and the green investment bank could address it.

[Lorely Burt (Solihull) (LD)]

I totally agree with the hon. Lady about the green investment bank. Does she think that that could prove to be a model for types of investment other than green infrastructure—things more along the lines of some of the PFI issues that are causing a problem at the moment?

[Andrea Leadsom]

Yes, I think that that is right. The green investment bank will have the specific remit of promoting green investments, and that is right and proper; but alternatives could be talked about.

What I propose is specific: it is that the green investment bank should be a bank in its own right. It should be listed on the London stock exchange and the Government should have perhaps a 10% shareholding in it. The UK high street banks should have the offer to purchase up to a 15% shareholding each, and the final 15% to 20% shareholding should be offered at a highly discounted rate to the British taxpayer. We would therefore have a bank with an undoubted triple A credit rating that would be able to fund itself extraordinarily cheaply—somewhere between Government gilts and triple A bank finance—and access the international capital markets, including very long-term funding.

That would kill many birds with one stone because there would be instant competition in the PFI market, which is something we desperately need, and an instant and huge threatening competition to the UK banking sector, about which we on the Treasury Committee are extremely worried. With its green remit, there would also potentially be a big competitor in the small and medium-sized enterprise market, about which I think all colleagues are concerned. I strongly ask my hon. Friend the Minister to consider the prospect that the green investment bank could provide a realistic alternative to PFI.

--- Later in debate ---

[Lorely Burt (Solihull) (LD)]

I congratulate not only the hon. Member for Hereford and South Herefordshire (Jesse Norman), but everyone who has spoken today. We are having an absolutely first-class debate with some very innovative thinking.

When the PFI was first introduced, I was deeply concerned about it in the west midlands, which is where I am from. I felt that clever companies were running rings around the inexperienced procurers of a lot of our public services. I was worried about it then and I am still worried about it, because everything I have feared has come to fruition. Today, £67 billion-worth of PFI contracts have been signed, and the total payment has been £210 billion, which says it all. In the NHS, the BBC found that £11.3 billion of investment in hospitals will have a total lifetime cost of £65 billion. The average NHS PFI profit is a return of 66%. If we compare that with the 2.8% figure for major construction companies, there is a shocking contrast.

A number of speakers have talked about PFI being the only game in town, the lack of access to capital finance and the need for off-balance-sheet funding. The problems have been very apparent. There are long, inflexible arrangements that are often unresponsive to change. Again, I shall give a health-related example. Hospitals currently do not have the money to keep pumping into these inflexible contracts. Hospitals change their functions and have a need for physical alterations, but PFI contracts are not responsive enough to help. Of course, there are also policy changes. We now have a situation whereby we are trying to conduct as much care as possible within the community. It is very interesting to speculate about what that will mean for the PFI. At the moment, we are facing the spectre of closing beds and sacking staff to balance the books and satisfy the contracts that were drawn up with inexperience a long, long time ago.

The distribution of risk concerns me greatly. Who really takes the risk if something goes badly wrong? Given the statistics that I have quoted, it must be difficult to fail with such profits built in. There is also the issue of the trading of contracts. Once a company has acquired a contract, it goes out into the market and, as the hon. Member for Hereford and South Herefordshire has said, there is sub-contracting and different people take their profit and a cut. The European services strategy unit found that the Treasury’s poor monitoring of the trading of PFI debt was giving companies a licence to print money. It is a very concerning and problematic picture.

What are the Government doing about the issue? Since we have been in government, we have forced Departments to bear the revenue cost of PFI contracts—I bet that has made one or two people think again about further investment. We are also reopening three major contracts as part of a renegotiation strategy and—I hope that this will be a warning to many PFI holders—as mentioned, we are doing a deep-dive investigation into Queen’s hospital, Romford. That will be the first forensic look at the operation of a PFI in 15 years.

We have talked about solutions. The hon. Member for Hereford and South Herefordshire has campaigned brilliantly on the idea of trying to obtain a rebate, and a voluntary code was agreed in 2002 under the previous Government. After several PFI providers made windfalls in refinancing deals, it was negotiated that 30% of gains from existing projects should be returned to the taxpayer. I understand that today that figure is 50%. We need a proper rebate and a proper code of conduct. I am also attracted to the idea of a national asset trust fund and the possible extension of a Government bank, such as the green investment bank, to use the Government’s natural low-borrowing ability to obtain cheaper funding.

I have been very brief, Mrs Main. This gravy train has got to dry up. There is an issue with many, although not all, PFI companies. That point has been made. Some contracts have been well conducted, professionally done and are good value for money. However, a lot of PFI companies have taken advantage and have bled our public services dry. It is time to release the tourniquet before the patient who feeds it bleeds to death.

--- Later in debate ---

[Steve Baker]

I, too, would like to congratulate my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) on securing the debate, and to pay tribute to his leadership, his courage and his intellect. As I listened to the debate, I noticed a strange thing: Conservatives verging on sounding like anti-capitalists.

[Lorely Burt]

Never!

[Steve Baker]

And indeed Liberals seem to have spoken as anti-liberals. I am perplexed by that. I would like to develop one point: how PFI fits into the nature of our society. I am reminded of something that Churchill said, which I think speaks to the third way. He said:

“Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk.”

I will come back to how he finished the quote at the end. It strikes me that the third way seems to have turned private enterprise into a vampire squid to be suckered on to the faces of people on normal and low incomes.

I am pleased that my hon. Friend wishes to respect contract. Given that the world contains imperfect self-interested people, and given that we have imperfect knowledge of the world, it is important that we are secure in the institutions that we create and in which we operate. Therefore, I am delighted that my hon. Friend emphasised the need to respect contract and to seek voluntary renegotiation. I was particularly impressed that my hon. Friend the Member for Suffolk Coastal (Dr Coffey) hinted at the need for a moral basis on which to operate in capitalism and society. It is necessary that people do not simply blame procurement processes—much as they are an institutional factor—but look to themselves to behave decently.

There are many questions that we could discuss: who provides, who pays, where risk lies. However, I would just like to develop one point made by my hon. Friend the Member for South Norfolk (Mr Bacon), who said that fat cats are getting fatter at public expense. I believe that is broadly his remark. That reminded me of an old picture of the ancien régime in France, where the bureaucrats and princelings were riding on the backs of the poor. From what we have heard from Members of all parties, it seems that today we have a regime where the state and the clients of the state ride on the backs of everybody else.

It is strange that so much money is being funnelled to firms whose commercial risks are being underwritten by the power to tax. Far from protecting the poor, the state now seems to be an institution for protecting the rich from the risks they take with their own investments. I am a capitalist, and I believe that capitalism requires entrepreneurs and investors to bear their own risks. Somehow, through all this mire and mess that we find ourselves in, we need to recover the principles of a free society and a vision of a capitalism that works, and works for everybody.

The state has become an enormous player in society. It spends about half of national income, and we have ended up with far too many investors and companies looking to the state for its decisions. Where will it spend? What will it spend that money on? Whose risks will it underwrite? And so on and so on. It really is no good. If we wish to call this a free society—one in which people make their own way and flourish—we really do have to end the notion of the state as a giant player in society. My right hon. Friend the Prime Minister, at different times, has declared that the era of big government is over. I think that he is absolutely right, and I am delighted that that is the thrust of the Government’s direction of travel.

I think that the British public have a fantastic sense of fair play—that is one reason why Private Eye sells so well. I would like to share with the Government the final line of Churchill’s quote:

“Not enough people see it”—

capitalism—

“as a healthy horse, pulling a sturdy wagon”.

I congratulate the Government on bringing forward their paper, “Making Savings in Operational PFI Contracts”, but I urge them to go further, to try to recover that sense of fair play and regenerate those institutions of a free and fair society which support capitalism and support human flourishing, but above all, pass that Private Eye test.