Private Finance 2/Private Finance Initiative

Simon Kirby Excerpts

Monday 5th September 2016 Commons Chamber

[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.

[Robert Jenrick (Newark) (Con)]

My local hospital and that of my hon. Friend the Member for Sherwood (Mark Spencer) has one of the particularly egregious examples of PFI, signed some time ago. With reference to what the hon. Lady described, that is an example of a hospital with a severe PFI that could be bought back, avoiding some of the inflated interest costs in the years to come. Will the Treasury seriously consider, in this age of incredibly low public borrowing, a 30-year bond, for example, to buy back the most egregious PFI debts, particularly in the case of hospitals, where such debts have a major effect on certain trusts, such as mine? That must be the way to secure best value for the taxpayer in the long term.

[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.