Private Finance Initiative

Steve Barclay Excerpts

Thursday 23rd June 2011 Westminster Hall

[Andrea Leadsom]

I was coming to exactly that point. The point is that funding the project through a special purpose vehicle means that it is not consolidated into the national debt picture. In other words, it is an off-balance sheet form of financing. Therefore, for a Government who want to spend a lot of money on capital projects without blowing up their national debt picture, it is the perfect opportunity.

[Stephen Barclay (North East Cambridgeshire) (Con)]

Further to the point made by the hon. Member for Cambridge (Dr Huppert), is it not a central claim made by the industry that part of the advantage is the management of construction risk? One of the issues, however, which my hon. Friend the Member for Hereford and South Herefordshire referred to, is the bundling of contracts. The construction risk and the design are bundled with the management service charge, and that drives some of the complexity, which drives some of the cost.

[Andrea Leadsom]

I think that my hon. Friends are reading my speech, because that was to be my next point. They have obviously been given advance notice. That is exactly the point: the builder, in theory, takes the risk on a project such as building a school, and the LEA only ever starts to repay the debt when the school is built and everything is in place. Theoretically, the builder takes the project risk. However, as my hon. Friend the Member for North East Cambridgeshire (Stephen Barclay) says, in reality there is bundling, and because there are sometimes unique risks to a project, often those revert to the LEA. The perceived advantages from the fact that the builder takes the project risk are therefore not always as clear cut as they might appear. In the end the major advantage has been that of not consolidating the debt on the national balance sheet.

--- Later in debate ---

[Stephen Barclay (North East Cambridgeshire) (Con)]

I am conscious that my hon. Friend the Member for Warrington South (David Mowat) wants to speak, so I shall try to limit my speech to half the time remaining.

In this debate and as a member of the Public Accounts Committee, I have heard about many of the things that have gone wrong in PFI, but I want to focus not on the past but on the future. I shall do so by discussing three areas: first, contract design, because 61 PFIs are being planned; secondly, contract management, because there is a big disparity between private sector and public sector expertise, and I do not get a sense that it is being addressed, so it will continue to lead to poor value for money; and thirdly, if time allows I would like to touch on the secondary market, in particular the greater role that insurers and pension funds could play in certain elements of PFI and the regulatory task force that the Treasury has set up. It will be interesting to see how that will interplay and report back to the House.

First, on contract design, my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) mentioned bundling. We had rather disturbing evidence from a Treasury official at the PAC last week, who suggested that bundling remained necessary because without it the design and construction would not take on board maintenance costs in future. I suggest that they can be decoupled. It is possible to design and put out to tender in such a way that the construction risk is assumed through the PFI if required, by buying in management expertise from the private sector. However, the tail, where there is certainty of revenue, which is particularly attractive to other forms of finance companies, can be decoupled. That will also avoid some of the complexity of contracts, which is where the opaque pricing structures often lie and the legal costs come in. I would welcome clarity on the extent to which the 61 pending PFIs will be bundled.

[Mr Bacon]

What is interesting is that the Treasury sounded more reluctant to see unbundling than David Metter of Innisfree, who gave examples of projects in Canada where unbundling appears to work perfectly well.

[Stephen Barclay]

My hon. Friend is absolutely right. It is helpful for the Minister to look at that example as a benchmark.

Secondly, although I am conscious of time, I want to cover the public sector comparator. Hon. Members have touched on the fact that it has often been flawed, because the PFI was a way of taking deals off the balance sheet and it was the only show in town, but there have been other imperatives. There was a regulatory imperative—not to mention, with a lot of marginal seats in the north-west, a political imperative—to go ahead with the Manchester incinerator, even though it was, at 350 base points, over and above the 300 threshold that the Treasury had at the time. Likewise, there was a defence imperative to go ahead with the air tanker contract, which was appalling value. The existing fleet was falling apart and there was no fall-back position, so there was a defence need for that contract to go ahead. It would be interesting to get from the Minister a sense of the extent to which guidance has changed to guard against some of those risks, and how we as a House get visibility of whether a viable fall-back position has been developed for some of those 61 contracts.

Thirdly, specifically on defence, the response in the Treasury minute of December 2010 is a little ambiguous. It says:

“The Government does not agree with the Committee’s conclusion…on the applicability of PFI to Defence, but agrees with the Committee’s recommendation.”

It will be interesting to see how guidance on defence PFIs will be refined.

I welcome the appointment of David Pitchford in connection with the major projects defence review. That will be useful in addressing some of the problems we see with these contracts, such as their long-term nature and the increased costs.

[Stella Creasy]

rose—

[Stephen Barclay]

I will give way, but I wish to allow time for my hon. Friend the Member for Warrington South to speak.

[Stella Creasy]

Briefly, does my colleague on the Public Accounts Committee share my concern that Mr Pitchford has said that he was not looking at PFI as part of his work in the Major Projects Authority? That seems to have been an oversight.

--- Later in debate ---

[Stephen Barclay]

I was just coming on to that exact point. Clarity would be welcome as to what falls under his remit.

Turning to management, my hon. Friend the Member for Warrington South made a point about disparities. One disparity is that, to take as an example Innisfree, that firm has consolidated 24 hospital PFIs with one provider, while 36% of hospitals have fewer than one full-time equivalent person managing PFI contracts, and 12% have no one managing them at all. There is disparity in how contracts are being negotiated and managed, and even a good contract will be ineffective and poor value for money if it is not effectively managed.

In the Treasury minute it says that the Romford pilot, which health officials set great store by, will “hopefully” provide data that trusts can use, but there is no scope to enforce that and no requirement for an increase in the amount of data being asked for. Again, we hear that there is a potential solution, but that solution is not enforceable, the amount of data required will not be increased and there is no transparency in the expertise at the centre. The Department of Health has only four people providing PFI expertise, and the Public Accounts Committee will hopefully get a note from Treasury officials clarifying that.

Finally, in the secondary market there is a problem with regulatory arbitrage, with different treatment of insurers and banks in their access to the market. It is important that the Treasury arm that deals with regulation is joined up with the arm that deals with finance. On the refinancing taskforce, the acknowledgment that life insurance and pension funds are important alternative sources of finance is not clear in the February 2011 minute. It also states that

“the refinancing task force will act on this recommendation”.

That is very welcome, but how will it do it, and by what date? How will the House get scrutiny of that?

Perhaps the Minister can touch on these areas in her closing remarks. I commend my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) for the work that he has done in this campaign and for the formidable way in which he has taken it forward.