Simon Hughes
Stephen Byers speech at the Social Market Foundation: Public private partnerships and P.F.I.
Last year the Labour Party conference debated whether or not to set up a review of the Private Finance Initiative.
I listened with concern and mounting frustration to the contributions. It was a classic of its kind – the type that the Winter Gardens Blackpool seems to lend itself so well to.
More sound and fury than light being shed on complex and difficult issues. It was a resolutionary debate. We had two diametrically opposed positions.
On the one hand P.F.I. was the route to greater public investment, provided value for money and was crucial in order to raise standards and increase capacity in our public services.
On the other P.F.I. undermines the whole basis of our public services, it is a tax payers subsidy which increases the profits of private sector companies and that the rules are rigged in its favour.
The situation of course is far more complicated than that. What I want to do is to look broadly at the part to be played by Public Private Partnerships and specifically to give consideration to the Private Finance Initiative and to learn the lessons from those contracts already entered into.
My conclusion is that they are both important tools and can play a useful role in the reform of public services with the objective of raising standards and improving quality. But that more needs to be done to address concerns which have been raised. In particular that value for money in its broadest sense needs to be achieved; that there needs to be a level playing field between the public and private sectors and that steps need to be taken to halt the development of a two tier workforce in which private sector employees suffer worse pay and conditions.
The main case put by the government is that in order to get the most out of the extra investment going into the public services the involvement of the private sector will help ensure that the extra money delivers the most improvement in the shortest possible time. There seems to be a presumption that something which is publicly owned and operated will by definition be inefficient. Only by bringing in the private sector with the discipline of the market will efficiency be achieved and value for money gained in respect of every pound spent.
There is nothing new in involving the private sector in the delivery of public services. Schools, hospitals and roads are not built by direct employees of the government departments involved but by the private sector working for those departments.
In recent years consideration has been given to new ways of working together. Pressure to do so has grown due to some high profile failures of contracts developed on traditional lines.
The Jubilee Line extension of London Underground completed two years late and £1.4 billion over budget.
The new Guy's Hospital in London opened three years behind schedule and four times over its original budget.
British Library opened 15years after construction started. When it started in 1982 it had no budget. Its first budget in 1990 was for £450 million. When it was finally completed in 1997 the cost was £511 million.
So what should the new relationship be?
Public Private Partnerships
Over recent times most attention has been focused on the Private Finance Initiative but this is just one type of Public Private Partnership.
Public Private Partnerships can take many different forms in addition to the Public Finance Initiatives there are joint ventures; the sale of equity stakes in state owned businesses and other innovative forms of partnership.
In deciding whether to proceed the key issue must always be what best serves the public interest.
To achieve this the government must play a lead role. It will need to decide between conflicting and competing objectives. To identify clearly the desired outcomes. To ensure that they are met to the required standard whilst at the same time safeguarding the wider public interest.
There are now a relatively few large commercial bodies which are still in the public sector. Where this does exist the government has adopted an arms length approach. Providing a broad strategic framework but then giving greater commercial freedoms and leaving day to day decisions to the directors of the company.
These are steps in the right direction but the position will always need to be kept under review. For each company there needs to be a clear understanding that the role of the government is that of an informed and active shareholder.
The government itself needs to recognise that the aims and it objectives of each company will be different. The Post Office cannot be treated in the same way as British Nuclear Fuels.
One of the first actions of the incoming Labour Government in 1997 was to draw up the National Asset Register. For the first time all the assets of the government were provided in a comprehensive list.
Each government department and agency were encouraged to analyse and critically evaluate the assets they held and identify how they could make best use of them.
The time is now right to give fresh momentum to this and it will need to be done from the centre.
There is a strong case to be made for the Treasury bringing together expertise and finance from the private sector to identify across the register how assets can be put to best use.
It always struck me as rather odd that whilst the government was launching a programme to provide houses for key workers the Highways Agency was holding empty homes in London and the South East which had been C.P.O'd for road schemes which were still many years from being started and Police Authorities were selling land and property on the open market.
A Public Private Partnership to maximise the value and benefits of these assets, cutting across individual departments by taking an overview would deliver a real return to the advantage of the government.
Private Finance Initiative
But it has been around the use of the Private Finance Initiative that much recent comment has been made.
It was in the early 1990's that the then Conservative Government identified Private Finance Initiative as a possible solution to a number of problems they faced at the time.
The late 1980's had seen the Nigel Lawson boom. The early 1990's were the days of bust. Public sector borrowing was in danger of spiralling out of control. The Private Finance Initiative would allow for some government investment without it appearing on the government's balance sheet.
Under Private Finance Initiative the private sector raises the capital and then delivers the required service over the life of the contract which typically will run for 20 to 30 years.
In return for their investment in the asset and the provision of services the private sector receives a guaranteed income stream for the life-time of the contract.
Ken Clarke when he was Chancellor went a stage further and insisted that universal testing be introduced. This meant that the Private Finance Initiative option had to be considered for every relevant contract.
On taking office in 1997 it was clear that Private Finance Initiative was not working.
One reason was universal testing which was quickly ended and a review of Private Finance Initiative was established under Sir Malcolm Bates. His recommendations streamed lined the whole process. Introduced standard contract conditions and an order of priorities for projects.
The Private Finance Initiative is now a system which is understood by both the public and private sectors. As a consequence since 1998 – 99 the volume of the Private Finance Initiative as a percentage of the total public investment has consistently been between 10 – 13.5%.
So Private Finance Initiative has not become the dominant source of public investment as some people portray. In reality it makes a relatively modest but still important contribution.
The Private Finance Initiative must always be able to demonstrate that when applied to an individual contract it delivers value for money.
It will never be possible to secure political support for Private Finance Initiative if people feel that the rules are rigged in its favour and that it is the only means by which a project that would bring real benefits to the public will gain approval.
There should be no presumption in favour of Private Finance Initiative. The crucial test has to be what is in the public interest. There needs to be a real choice between a range of financing options in order to identify the one that will be in the public interest.
This means that there must be no incentives or restrictions which benefit Private Finance Initiative over other approaches.
Because the cost of borrowing by the private sector is higher than that in the public sector it is assumed that costs will be higher but this fails to take into account the savings that come from completion to time, greater efficiency and innovation which can often be delivered by the private sector. Private Finance Initiative also covers the whole life cost of an asset including repairs, maintenance and serving.
The government in my view needs to do more if it is to convince people that there is a level playing field. They will also need to introduce greater openness and transparency into the whole process so that an informed debate can take place.
To achieve this some changes need to be made:
First, there should be an Annual Report on Private Finance Initiative produced by either the Office of Government Commerce or the National Audit Office. Amongst other things this could outline the extent of its use; the benefits; the risk transferred and any lessons to be learnt and recommendations for the future.
Secondly, the recent decision to reduce the discount rate from 6% to 3.5% with effect from April is to be welcomed. This does go some way towards the creation of a level playing field.
The discount rate is the adjustment made to take account of the fact that £1 paid by the government to the private sector at some future date will in real terms be worth less than the £1 paid now by the private sector under the Private Finance Initiative.
This change tackles directly the accusation that the rules have been rigged in favour of Private Finance Initiative.
However this change will make it significantly more difficult to demonstrate that a Private Finance Initiative project is delivering better value for money than the public sector.
Had a discount rate of 3.5% been applied at the time there can be little doubt that none of the first wave of 11 major hospital P.F.I's would have been given approval.
Now the challenge for the private sector will be to demonstrate through innovation, greater efficiency and completion on time that value for money will be achieved. This will be tough but the important test must be that the public benefits.
Thirdly, questions need to be asked about the local authority P.F.I. grant. This is worth 11% of the P.F.I. work undertaken. This is made up of 4% as a notional repayment of the capital balance and a 7% discount rate. In my view this does for a local authority make a P.F.I. route look more attractive and is becoming increasingly difficult to reconcile with the establishment of a level playing field.
Fourthly, there needs to be far more openness in relation to the public sector comparator. In judging whether a P.F.I. offers value for money it needs to be compared to the public sector alternative. How this public sector comparator is compiled is often kept secret which allows the allegation to be made that it is manipulated to produce the answer that the P.F.I. is better value for money.
This is unacceptable. We need clarity and openness. The work done in drawing up the comparator should be made public.
The final area that needs to be given further consideration is that of risk transfer.
One of the apparent benefits of the P.F.I. is that the private sector cannot walk away from the contract. That if things go wrong under the contract which is their responsibility then they are under a duty to remedy the wrong.
However it doesn't always work out this way because the private sector knows that whilst it might be able to walk away in many cases the government will need to step in.
For example, the Royal Armouries in Leeds saw low visitor numbers. As a consequence the private company ran up losses of £10 million. Rather than see the museum closed, the government paid off the debts and it is back under public control. A similar approach was taken with the Channel Tunnel Rail Link and a re-negotiation in favour of the private sector when costs increased took place in relation to the construction of nuclear submarine facilities at Devonport.
Events like these show that there is a weakness in the present system which needs to be tackled.
Consideration needs to be given to some surety or bond system being introduced to secure the public interest and ensure that the private sector is held responsible for its contractual obligations.
In addition to these changes which are, I feel, crucial if we are to be able to make the case for P.F.I. there is the other key issue and that is in relation to the terms and conditions which apply to those employed by a P.F.I. contractor and how they compare to the public sector.
The Prime Minister has made his position on this clear when he said, “we want to ensure that when services are contracted out, it is not done on the basis of poorer terms and conditions of employment for the staff”.
There is clearly a fairness argument here but also one that says the private sector should not win out simply by worsening pay and conditions and thereby being able to put forward a lower price.
There is also the issue concerning the quality of service being provided.
I believe there is such a thing as a public sector ethos but this breaks down when people doing the same job are on different contracts.
Let's just take one example of the problems caused by contracting out.
In Camden those dinner ladies who had worked for the council before contracting out are protected by T.U.P.E. and are paid £6.29 an hour. Others who started after BET took over in 1994 are paid £5.49 an hour and those who were hired by Service Team when they took over the contract in 1998 are paid just above the minimum wage.
As far as local government is concerned including the dinner ladies in Camden this is all about to change. As a result of an agreement made in February all new starters will be entitled to pay and conditions that are overall ‘no less favourable' than those given to transferred staff who are protected under the T.U.P.E. provision.
The ‘no less favourable' approach provides a degree of flexibility for the employer but a strong safeguard against abuse. It is fair treatment for employees and will go a long way towards securing improvements in public service provision with local government.
At present this agreement only applies to local government. It needs to be extended to other sectors.
In particular the N.H.S. has now become a pressing case. The Agenda for Change programme marks a real step forward for pay and conditions as they apply to N.H.S. staff. But it only applies to those employed directly by the N.H.S.
There is a distinct possibility that it will lead to an increase in the disparities between those employed directly by the N.H.S. and those doing the same job but employed by private contractors.
So to conclude. There should be no principled objection to P.P.P.s or P.F.I. expanding into new areas where the public sector can contract for a clearly defined product and the private sector has the skill and ability to benefit the public interest. In each of these areas the reform of public services will be advanced not at the expense of worsening terms and conditions of employment, but through greater efficiency and innovation. The private sector being the servant of the public interest.
