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  Improving value for money for taxpayers in PFI projects

Given to the City Forum, 7 June 2004

Mr. Richard Bacon (South Norfolk): I have listened with great interest to many of the things I have heard including Sir John Bourn and Howard's own contribution and I agree with a lot of what has been said. I should start by saying, I think, sitting on the Public Accounts Committee there is a remarkable degree of consensus, which may be too strong a word but only slightly, about the existence of PFI; that it is there; that it is not going to go away and that the question is not if but simply how, whether it is done correctly, whether it is done for the right reasons in the right places and how it is managed. The Public Accounts Committee, although it is chaired by an opposition Member of Parliament, Edward Leigh, it is dominated by Labour Members of Parliament and yet that degree of consensus holds.

Nonetheless, let me start by being slightly provocative. I listened with interest to what Sir John said about cartoons and I suddenly thought, what is a cartoon? If any of you read Matt in the Telegraph or Alex or any of the other cartoons you will know that actually a cartoonist is someone with a great skill in describing in very few lines something that we recognise immediately and that we know to have something about it that is fundamentally true.

A very senior Treasury official said to me only a month ago, if the public sector was a very good procurer, there would not be a role for PFI. I happen to think that if the public sector were a very good procurer, PFI would probably be greater in extent and that it would be better managed. I am astonished at the extent to which most people do not acknowledge instantly that if government is to have any core competencies at all, one that absolutely must be at the centre of government skill set is procurement. It is absolutely of the essence and yet it is something which I think any government has a long way to go in order to achieve.

I do not know how many of you are familiar with the novel by Giuseppe di Lampedusa, The Leopard; the classic novel that was made into a film by Visconti, but when I look at all the things that have happened in the public sector over the last twenty years: the Financial Management Initiative in 1982; the Next Steps; the market testing; the contractorisation, the Private Finance Initiative; the PPP; now we have got Statements of Internal Control with permanent secretaries supposedly frightened for their heads; Sir David Omand saying recently (the Security Coordinator and Cabinet Office has a responsibility for risk management as well) that permanent secretaries in the departmental spending round totals are going to be judged by their ability to keep to their Statements of Internal Control and their risk management plans. Over the last twenty years, as all these hoops have been created and permanent secretaries and other civil servants have been made to jump through them, I have been reminded of a scene in The Leopard, which is a novel about a Sicilian prince. It was written by Guiseppe di Lampedusa who was a Sicilian Prince but it was set as a novel about the declining old order of Sicily being superseded by the coming of Garibaldi and the Risorgimento in the 1860s. The old Duke did not actually have a son but he had a nephew, Tancredi, and Tancredi was very taken with the new order and very impressed by Garibaldi and the old Duke was a little worried about this and they would talk about it from time to time; he admired his nephew hugely. On one occasion, his nephew said to him "Uncle, don't you understand, if we want things to stay as they are, things will have to change." Sometimes I wonder whether that is not what has been going on in the Civil Service over the last twenty years.

One other cartoon - earlier the point was made that the cartoon idea of each side represented the private sector as being rapacious and the public sector as being full of pedantic civil servants; of course this is a huge exaggeration, but I would be absolutely astounded if private sector providers in any marketplace, other than say mutual organisations, were not automatically profit maximisers. I would be astounded if that were not the case and one of the things that interests me about the way personalities work in the jobs market is why it is that people who go into the private sector do so and why it is that people who go to work in the civil service do so. I do not think we can ignore these motives and we do see them around us in our daily lives when we encounter people.

Let me briefly canter over the role of the Public Accounts Committee, at least in theory, then say something about the reality for good and for bad, about some of the criticisms that have been made of the PAC and about some of the criticisms that have been or, in some cases, should be made of government; and then I shall try to draw a couple of conclusions.

The theory for those of you who are not familiar with the way the process works, is that the National Audit Office, which is a body of Parliament, not a government department, does studies at its own volition, it listens to the Public Accounts Committee, but essentially it drives itself. Its budget is agreed by the Public Accounts Commission which is an obscure body within Parliament made up of Members of Parliament most of whom sit on the PAC as well. Then the NAO goes off and does its work, writes the value for money studies, agrees them with departments and then presents them to the Parliament and to the public, at which point the Public Accounts Committee will usually hold hearings with evidence and publish our own report. The Treasury is then obliged to respond to that report with a minute and it usually accepts 95% of our recommendations.

That is the theory and it all sounds very fine and dandy and in truth there is a lot of truth to the theory, because of the nature of what we do, looking at value for money, effectiveness, efficiency and economy rather than whether the government should be doing a particular activity or not, it is very often the case that many of our recommendations are relatively common sense and relatively non-controversial and I think we can claim one or two minor successes.

For example, in the notorious refinancing of the Fazakerley Prison PFI contract, whereby the provider managed to put onto the government a larger risk, it took for itself an increased yield in return for getting a lower risk and putting onto government a larger risk. This has lead to an overall review of PFI refinancing and of course new guidelines which have resulted in a more equitable deal from the point of view of the taxpayer.

It does not surprise me that providers who were in a position to do so went round refinancing at will and, where they could, that they pocketed the proceeds. I would expect no other behaviour, it is just natural. However, from the point of view of the taxpayer, it does seem just and equitable that there should be some sharing of any gains.

Another area where I claim that the PAC and NAO between us did do something to change the terms of trade, was in relation to the use of PFI in computer contracts; there have of course been a huge number of notoriously bad computer projects, the Libra Project for the Magistrates Court being a particularly shocking example. Following that, the chief executive of Fujitsu, the provider, said that really he did not think that PFI is suitable for large scale computer contractors, something which I think people have been saying to the government for quite a long time. I think the government has finally woken up and accepted that for the time being, at least, this is not an area which should be pursued.

There are areas though where you do wonder whether it is not a case of the government listening to our reports, at least paying lip service to them, but then in effect shelving them. In 1998 the PAC put out a Report on Housing Benefit in which we said, and I quote "it is totally unacceptable that seven years after we last looked at this issue, which was in 1991, housing benefit fraud should exceed 900 million and the departments still do not have information to show whether fraud is increasing or whether they have all the information they need on the types of fraud, and the absence of reliable information must cast doubt over the decisions the department have taken to invest in anti-fraud work and over the achievements they have claimed". They could not actually tell whether the housing benefit fraud was going up or down; that was in 1998, looking back to 1991 when they also could not tell. In 2003 they also could not tell, and they had done no work on it at all of any kind in the interim.

I was recently rereading David Lipsey's book on the Treasury which makes a number of comments and criticisms about the Select Committee system and in particular about the PAC. One of the criticisms he levies is that it is always ex post facto, we are always looking back over the government shoulder at what has happened. Another criticism is that we are not necessarily that media 'savvy', a third that the techniques being used are not necessarily as up to date as they should be and do not take in sufficient account of the changes at the frontiers of spending control - things like incentivisation, targeting and so on. Before I take those in turn, I think the fact that we are ex post facto is indeed a weakness and also a strength, it is one of the reasons why the Committee is almost entirely absent of party politics. Indeed Lipsey says somewhere in that book that from listening to the questions of members of the PAC, you would not be able to tell from which party they came and it is one of the great pleasures of working on the Committee from that point of view.

I was taught American government at the LSE by our present Shadow Chancellor Oliver Letwin's father, Professor Bill Letwin, and I used to salivate as I listened to the descriptions he gave of the power of American congressional committees, not only to hold the executive to account but to deny them the money upfront; they are the very opposite of ex post facto. The government has to come to the Congress to ask for the money bit by bit. It has some disadvantages and some advantages.

Unfortunately, we cannot simply lift one element of the system that we like out of a different system where they have a completely separated executive and impose it in the House of Commons where of course we have a fused executive, where any government to sustain itself at all needs to maintain a majority in the House of Commons. It is something which has vexed me for twenty years and to which I am still working on answers. When I come up with a good one I shall of course let you know.

I wanted to say one or two things about other criticisms. The use of the Public Sector Comparator has already been referred to. I think the fact that the National Audit Office described it as conferring a spurious precision; not information, just noise; that it relied on over elaborate models; that it was reliant on irrelevant comparators; unrealistic comparators; and led to a temptation to have fiddled comparators; and was in fact some kind of pseudo scientific mumbo jumbo - all this out of a body as august as the National Audit Office I think it did do quite a lot to put the Public Sector Comparator in its place or rather to cast doubt on it as a reliable principal tool for decision-making; and indeed the NAO made a very simple point, that the only useful comparator is any realistic alternative which may be available. I think the NAO and the PAC between them have done some good here too.

I still have considerable concerns about government and its willingness to listen to outside influences. Consider if you will the following official statement: 'Investigations into the allegations have revealed them to be a mixture of unsubstantiated rumour, incorrect information or repetition of earlier allegations which have been fully investigated and found to be unsupported by the facts'. A question: was this statement aimed at refuting public disquiet about the export to Iraq of machine tools capable of arms manufacture, the efficacy of measures taken again foot and mouth disease, the reliability of the army's SA80 rifle, the existence of illnesses collectively known as Gulf War Syndrome, the possibility that BSE can cross the species barrier to humans, the loss of an RAF Chinook helicopter and 25 security personal on the Mull of Kintyre, the circumstances surrounding the torpedoing of the Belgrano, the denial of full pensions to thousands of disabled ex-servicemen and their widows for over 50 years, the radiation sickness claimed by some participants in the British atomic tests of the 1950s, experiments carried out at Porton Down during the same period, the possibility that lead in petrol might cause brain damage, the possibility that the sedative thalidomide, which was deemed to be so safe that it was prescribed for nausea and insomnia in pregnant woman, might be the cause of birth defects, the possibility that power stations could cause the death of fish and trees hundreds of miles away by producing acid rain, the possibility that chlorofluorocarbons were destroying the ozone layer, or the lack of adequate intelligence that Iraq has an ongoing capability to build weapons of mass destruction?

The answer is that it was a statement made by the Ministry of Defence in December 1994 to refute a body of opinion that there might indeed by a condition commonly referred to as Gulf War Syndrome, but it could have been any of them. The statements indicate that the Whitehall mind set knows best, and that others are either misinformed or mischievous, or perhaps both.

I accept that that may be an exaggeration. I agree with what Sir John said earlier about the learning process that is continuing to take place, but I still fear there is a fundamental reluctance to accept that Whitehall should be anything other than a closed loop, where the replies to questions asked of the government department or a minister are put together by the very same civil servants whose earlier judgment is both the subject and the cause of the enquiry. They decide what is relevant and what is not, and they advise the Minister accordingly.

It is only really with such an attitude that the Ministry of Defence could have wandered into the swaps market without a swaps adviser, in connection with the major refurbishment of the MOD Main Building in Whitehall, on the basis that with a degree in theology or ancient history, one already had all the required information. Howard mentioned the fees for the MoD being over 100 million but I actually do not know whether it is over a 100 million. Actually I imputed that figure purely on the basis that the fees for the Treasury building were 2.7 million for the Treasury side and 22 million for the contractor, and that on the same basis - I have no idea whether it is correct or not - given that the fees for the government side for the MOD Building were 11 million (and they owned up to that) then on the same basis the fees would be around 100 million for the contractor, but I simply do not know for certain because they have refused to say.

However, as a representative of taxpayers I would like to know, and I think taxpayers have a right to know. It is certainly true of the professional fees for the new Home Office building that these were over 25 million. By the way, by the time they had sunk the ground for it they had already realised it was not big enough for the number of civil servants in it! It is certainly true that the fees for the Treasury building at 25.2 million in total were more than one fifth of the construction costs in total.

It is these things which cause suspicion across the political spectrum about the process of PFI and cast doubt on it in the public mind and I think there is only one answer and that is for both government and for the private sector to do something that hitherto they have been relatively reluctant to do, and accept that if we are to have this degree of involvement by the private sector in the day to day provision of services by government, then there needs to be acceptance of a higher degree of scrutiny and a higher degree of transparency with regard to what is going on in the interests of the people who are paying for it.

I noticed in one of the leaflets going round earlier that there was some discussion of bond finance and it talked about the index linked bond market for PFI bonds drying up. Well of course one of the reasons for that was that there were a lot of investors who had basically had their fill of PFI bonds where they could not actually see through the monoline wrap to the underlying transaction, could not assess the quality of the underlying transaction and had to rely on the say so of the ratings agency. Actually the ratings agencies were complaining that they would prefer to go through the barrier of the monoline insurance company wrap themselves to assess the quality of the underlying transaction and yet the way many of these deals have been set up in the past, that has not necessarily been possible.

I do not think that the private sector has anything to fear from greater transparency. If they are to take the taxpayer's shilling then, ultimately, the private sector has to accept a greater degree of exposure than would be normal in dealing with other members of the private sector. That is a lesson which has yet fully to be learned, although is beginning to be accepted. It has also yet fully to be learned by the government itself.

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