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  Public Accounts Committee debate


This speech was given in the House of Commons on 29 January 2003

Mr. Richard Bacon (South Norfolk): It is a great pleasure to follow the hon. Member for City of Durham (Mr. Steinberg). We have all been delighted and entertained by his enthusiasm for the private finance initiative, especially in relation to his local hospital.

I, too, want to dwell on the PFI. It is a matter of great concern and affects much of what the PAC does, in relation both to central Government projects, such as buildings and computer systems, and to schools, prisons and hospitals.

The work of the PAC is of huge importance and I am privileged to be one of its members. According to figures that the Committee has seen on just three aspects of Government—Customs and Excise, health and social security—between £16 billion and £24 billion of taxpayers' money disappears in one way or another. I do not say that it is all unaccounted for, as not all the accounts are qualified. Neither do I pretend that it is easy to account for all such money, or someone would have done so by now, but the figures show the large scale of Government expenditure and thus the importance of the PAC's work.

The PFI has been the subject of much comment and debate; it is a matter of some controversy. The Institute for Public Policy Research recently pointed out that only 6 per cent. of PFI projects completed by central and local government were subject to independent value-for-money examination by official audit bodies. I discussed the 6 per cent. figure with the National Audit Office, which suggested that it might be slightly higher depending on how it is calculated. None the less, a substantial proportion of PFI projects have not been independently evaluated. The institute called for a full and independent review of value for money in the PFI to check both that the schemes are expected to deliver value for money when signed and that they deliver the predicted benefits once they are up and running. During last year's conference season, the trade unions called for a moratorium on the PFI until a full assessment had been made, although they got short shrift from Treasury Ministers for doing so.

The Health Committee mentioned the PFI in its recent report on its work over the last Session. It noted that its inquiry, "The Role of the Private Sector in the NHS", was undertaken in the knowledge that there had been a great deal of controversy and debate about the merits and cost-effectiveness of the PFI. The Committee sought to discriminate between polemical evidence that was being advanced by both sides in order to reach a balanced judgment. Its report noted:

"Perhaps the key deficiency identified by the Committee related to the lack of accessibility and clarity in the data used to support PFI decisions."

The Audit Commission recently published a report on the PFI in schools that was critical of some of the early contracts. By measuring PFI projects against a control group of traditionally funded schools, it concluded that the PFI had not yet delivered some of the most important benefits expected of it. I accept that those were early contracts and that lessons have been learned—I am sure that that is what the Economic Secretary would say; that is probably what he is writing down now—but my enduring impression from my time on the Public Accounts Committee is that, across various areas of Government, lessons that should have been learned from experience often are not: they are ignored or forgotten. Regardless of the merits of the case for the PFI, I hope that the Economic Secretary will accept that neither the Treasury nor the Government generally has yet succeeded in building a settled will in favour of the PFI. On the Committee, sceptics include left-wing state socialists and right-wing free market chartered accountants.

Mr. Rendel: And one or two Liberal Democrats.

Mr. Bacon: Yes, even one or two Liberals are sceptical about it. If there is a bandwagon going, I guarantee that a Liberal Democrat Member will jump on to it. With that kind of spectrum, who could possibly go wrong?

If the Treasury wants to persuade people of the merits of the private finance initiative, it has to do at least two things. First, it should be much more open and transparent. Secondly, it needs to do much more to allow competition, by which I mean that it needs to allow PFI and conventional procurements to compete with one another on similar projects and to run side by side in the long term.

Let me take those two points in turn. First, the Treasury simply needs to open up more. If it is right about the PFI, what has it got to be afraid of? It can only gain from greater public understanding of the arguments. It should be open about professional fees, about which I shall say more in a moment, and explain more about how an assessment is made, openly acknowledging the other factors that are involved. If it involves using a balanced score card, it should say so, and explain how that works. People understand that value for money does not always involve buying the cheapest—that is why we are not all driving around in Reliant Robins.

An area in which we need complete transparency is that of professional fees. The National Audit Office's report on the PFI contract for the development of West Middlesex hospital states that the cost of the advisers was made up of £967,000 for financial advisers, £803,000 for legal fees, £204,000 for project management, £128,000 for the quantity surveyor, and £237,000 for "Others", making a total of £2,339,000. What it does not say is that those are not the total fees for the project, but only the fees paid by the Department of Health. The professional fees paid by Bywest Ltd., the PFI contractor for the hospital, are separate. When the witnesses appeared before our Committee, I asked them to supply more details about the other fees, and I await their answers with interest.

PFI contractors are in a position to pay their side of the professional fees only because they know that they have a contract with the Government that in the end will entitle them to receive annual unitary payments from the Government. The taxpayer is therefore financing those fees. Hon. Members have a right to know on behalf of taxpayers how much is being spent in that way. The Treasury explicitly acknowledges that in relation to its building in Great George street. I tabled several parliamentary questions about that PFI project. The Economic Secretary is fortunate that he did not hold that position at that time; the current Financial Secretary had the burden or pleasure of answering them.

The answer to my parliamentary questions was that the fees on the Treasury's side were £3.223 million, and that Exchequer Partnership, the PFI contractor for the Treasury building, paid £22.08 million. The total at 27 June 2002 was therefore £25,303,000 in professional fees. Given that the building cost only £118 million to construct, according to Treasury figures, it is odd that the professional fees should constitute such a high proportion of the total. Common sense suggests that if one pays £118,000 for a house, one would not expect to pay professional fees of £25,000 to the solicitor and the bank. Even allowing for the higher fees that one would expect for a complex project such as the Treasury building, it is odd that the professional fees should be more than one fifth of the total construction cost.

Sir Kevin Tebbit, who is permanent secretary at the Ministry of Defence, said in evidence last year that the fees in relation to the financing of a typical PFI project should be approximately 1.2 per cent. of its net present cost. The net present cost of the Treasury project is £170 million. Under my preferred COTD - cash out the door - measure, the expected payments for the building in the 35-year life of the contract, including the project's inflation assumption, total £838 million. Again, the former Economic Secretary provided the figures in an answer last year.

If we use Sir Kevin's rule of thumb of 1.2 per cent. for financing costs, one would expect that the total fees for the Treasury building, with a net present cost of £170 million, would be around £2,040,000. However, the actual fees relating to the bond issue for the Treasury building are £6,968,000 for Exchequer Partnership and £2,637,000 for the Treasury. Again, the Treasury provided the figures. That is a total of just over £9.6 million, which is 5.65 per cent. of the net present cost. That is nearly five times more expensive than the figure that one would assume using Sir Kevin Tebbit's rule of thumb.

I asked Sir Kevin whether he knew why the fees for the Treasury building were so high. He assumed a somewhat Delphic appearance and replied that it was perhaps not a good idea for him to tell the Treasury how to do its job. However, I should like Ministers to explain why they appear to be spending so much taxpayers' money all over the City. I wonder whether the Treasury has decided that, after three years of falling stock markets and a rather light deal flow, short of bidding for Safeway it is time to help the City of London through some old-fashioned pump-priming. However, if that is so, hon. Members should know about it.

Will the Financial Secretary explain why I received two replies from her to the same parliamentary question on fees? Both answers were received on 27 January. The code numbers for both are the same. Every reference number is identical, but one answer states:

"I refer the hon. Gentleman to the reply I gave him on 27th June 2002". [Official Report, 27 January 2003; Vol. 398, c. 619W.],

yet the other states:

"I shall let the hon. Member have a reply as soon as possible."

That suggests that something has been missed, that the information has not yet come out or that further expenditure has occurred. I await the reply with interest.

Treasury Ministers will know that the bond issue by Exchequer Partnership for the financing of the Treasury project was for £127,790,000, and that, with some mezzanine debt and other shares and stock, the total capital involved was £140, 965,000. What interests me is whether the bond that was issued the other day, on 16 January 2003, by Exchequer Partnership (No. 2) plc for £165,145,000 means that there is now a whole new tranche of fees to be paid on top. If so, how much is involved? Are all the numbers that I am talking about in relation to the Treasury building only half the picture? Does Exchequer Partnership (No. 2), which covers only the eastern end of the building, mean that all these fees should be roughly doubled?

Why in the new Exchequer Partnership (No. 2) bond issue, in the many crates of documents relating to the new bond that are available for inspection at Allen and Overy, or indeed at the Financial Services Authority, is the financial model not disclosed, contrary to previous practice?

Incidentally, what precisely were the benefits to the public purse in breaking the PFI project for the Treasury building into two parts? Members of the Committee went round the building. I walked all the way round it, and it definitely looked like one building to me.

While on the subject of openness, may I say that when I asked the Ministry of Defence about fees it gave me figures only in relation to its side, and not in relation to the PFI contractor, Modus Services? The Treasury has been admirable in answering these parliamentary questions in relation to both sides, and rightly so, because ultimately it is the taxpayer who bears the cost.

The Treasury professional fees are just over 10 per cent. of the total. On the same basis, given that the MOD is paying out in relation to its PFI building fees of £11,190,000, one might expect roughly another £107 million of fees for Modus Services Ltd., the PFI contractor for the MOD building. I do not know whether that is too high or too low. It is certainly plausible. The fees for the London underground are already around £400 million, although how much has been achieved for that is a subject for another day and a separate debate.

The point is that the taxpayer has a right to know. If the Treasury seriously expects people to come on side in relation to the PFI, we must know the facts. It is no good saying, as the MOD did in its answer to me, that the fees paid by the MOD are available but that the fees for the PFI contractor are not.

Geraint Davies : As the hon. Gentleman is focusing on the PFI, may I ask him what he thinks will be the impact of the change of the Treasury's discount rate on the present value of PFIs from 6 per cent. to 3 per cent. and on the number of PFIs coming forward and their relative value to public sector comparators?

Mr. Bacon: I shall come on to the public sector comparator in a minute. Answers I have received from the Treasury, although how much credence one can attach to them is a moot point, show that the Treasury view would be that the discount rate cannot be seen in isolation. I talked to the National Audit Office about the discount rate. Its view is—and this is a point that I shall come to when I talk about the public sector comparator—that, although one clearly needs to take note of the discount rate, even more important is the question of the risk factor, the way in which capital risk costs and risk factors for a variety of different items that go into the calculation are assessed. I was going to say "manipulated", but I shall leave out such a tendentious word.

If we are to get the public on side, the Treasury must be more open about this matter. As I have said, it is no good the MOD's saying that its professional fees are available but that the fees paid by the contractor, Modus Services plc, are a matter for Modus Services plc, as if that is that. We need to make fair comparisons if we are to understand the PFI and weigh it in the balance. The Government have more work to do in selling the PFI. Inadequate and unhelpful replies do not assist their case. Such replies only make one think, rightly or wrongly, that there is something to hide.

The second area I want to address is the question of the Treasury's allowing more competition, by which I mean competing types of procurement. It is all very well saying that the investment programme through PFI is only around 10 per cent. of current Government investment. I attended the seminar held at the Treasury last year, which was very helpful. The then Chief Secretary quoted that figure. I think that he said that £3.5 billion was going through the PFI and about £35 billion was going through conventional routes, but if we look at the current building programmes in our constituencies - schools, hospitals or prisons - it certainly does not seem like that. If one asks my local education authority in Norfolk how much choice it has as to which kind of procurement to adopt, it will reply that the answer is zero choice. It is told "You want some money? This is how you get it." That is hardly the best way to assure ourselves that taxpayers' money is being spent in the most efficient, effective and economical way.

The best test would be a live ongoing test. Procurements could run side by side for different projects in similar areas. For example, one could allow some school contracts to be let under the private finance initiative and others by conventional methods. That would give a better basis for assessing whether the PFI was delivering the claimed benefits and whether mistakes from earlier contracts had been learned. At the moment, we are just assured that that is the case. The fundamental point is that we should subject the PFI to ongoing competitive pressure from other forms of procurement. At the moment, Ministers reassure us that everything is rosy because the project has been compared with the public sector comparator. We are supposed to take that at face value.

On the public sector comparator, which the hon. Member for Croydon, Central (Geraint Davies) mentioned, the Ministry of Defence building report "Redevelopment of MOD Main Building" has an interesting chart on page 24. It shows the public sector comparator broken down by different categories. The left-hand column has a figure of base costs for capital expenditure, replacements, operating costs, legislative change and so on. There is also a risk factor. The middle column has a number and the right-hand column has a percentage. For example, the base cost for capital expenditure is £208.6 million. The risk, as a percentage of the base cost, is 29.5 per cent., making a further £61.5 million. At the bottom of the chart is a total base cost of £643.3 million. If all the risks are added up as a percentage of the base costs, they amount to a further £102.9 million. Miracle of miracles, the total is £746.2 million, which is the public sector comparator. Guess what? The PFI came in at £746.1 million.

Mr. Flight: Not £745 million?

Mr. Bacon: No, the PFI was much closer than that. There was only £100,000 in it.

I had a pocket calculator with me at the hearing and thought that the sum looked strange. It was almost dodgy: how could it be that close? Having done some calculations, I decided that a bit of jiggery-pokery had been going on. If we reduce the 29.5 per cent. figure, which is quoted as the risk as the percentage of base costs for capital expenditure, by 0.5 of 1 per cent., from 29.5 to 29 per cent., instead of the public sector comparator looking £100,000 more expensive, it suddenly looks £1 million cheaper. If instead of going from 29.5 per cent. to 29 per cent. we go down to 25 per cent., it looks £10 million cheaper. If we go down to 20 per cent., it looks £20 million cheaper. The question arises: how was the figure of 29.5 per cent. reached? What is so miraculous about it? What makes it so special? Why is the risk for "legislative change" 4.6 per cent.? Why is it not 3.6 per cent. or 9.6 per cent.?

I share my concerns about the public sector comparator with the hon. Member for Hemsworth (Jon Trickett). He used to be a building contractor. If his clients queried a price, I can only imagine what their reaction would have been had he said, "Don't worry, chum. I've put in this capital expenditure risk factor here of 29.5 per cent. on top of the base costs. Experience shows that this factor varies between 2 and 51 per cent. So if you take the difference between the two, divide it by two and add a little bit for a rainy day—if you really feel like it, divide by two thirds of the square root of the number you first thought of, then the 29.5 per cent. does indeed seem, well, how can I put it, guv, absolutely bang on the nail. You've definitely got the best possible price available." I imagine that had the hon. Gentleman said that, he would have got an answer involving some plain Anglo-Saxon words, possibly mentioning brass knobs.

The plain fact is that the public sector comparator provides enormous scope for manipulation to get the answer one wants by exploiting the inherent uncertainties of any given situation and the complexity of the financial models.

Mr. Jenkins: As someone who has been involved in the public sector, I have made decisions on purchasing and refurbishing contracts. If a contract came that close to the figure, I would have severe doubts about going down the PFI route. The marginal cost of maintaining my staff, expertise and ability to use my staff in future would make me decide firmly in favour of the public procurement route. [Interruption.]

Mr. Bacon: I would be grateful if the hon. Gentleman would rephrase his question succinctly. I did not hear all of it because of undoubtedly incisive and eloquent chuntering on the Front Bench.

Mr. Jenkins: If there was a close decision between PFI and public procurement, as someone who has had experience of such decision making, I can assure the hon. Gentleman that I would go down the public procurement route because it would mean that I could keep my staff, make a contribution to my overheads and be allowed to compare contracts as I would have a control group capable of putting a package together.

Mr. Bacon: I agree that a control group has merits. One does not have to rely on assurances from Ministers at the Dispatch Box that all the lessons that could be learned have been learned, and that everything is being done in the best possible way with the possible best motive for the best possible result, as one has something that one can look at. That point was made in a report, not by the National Audit Office, which advises us, but by the Audit Commission. A bit of competition between audit bodies does not seem to do anyone any harm. It may be true that those schools contracts referred to in the Audit Commission report were early phase contracts, but that is no reason why we should not go forward with some new conventional procurements so that we can run different systems side by side.

One worry about the contracts that I mentioned earlier is the fact that they are long term. The contract for the Treasury building, for example, runs for 35 years, as does the contract for West Middlesex university hospital. The contract for Norfolk and Norwich university hospital is for 60 years, with a break at 30 years. A short PFI contract lasts 20 years. The worry is whether it is possible to write a sufficiently flexible contract to allow for huge changes that could occur over such lengthy periods. Meanwhile, of course, annual unitary payments are obligatory. I appreciate the point that the Treasury frequently makes about acknowledging the need to pay whole-life costs, but the rational decision may be to let something decline because the resources are needed for something else. We need to consider whether the PFI allows us sufficient flexibility to do that. Running the two systems side by side would be a great way to check that in real time.

Mr. Frank Field (Birkenhead): As I was late arriving for the debate, I may not be successful in catching your eye, Mr. Deputy Speaker. However, as the hon. Gentleman is talking about the Ministry of Defence contract, it is invaluable to have the NAO evaluation, which compares the PFI with a more traditional redevelopment route. Basic questions need to be asked. If we assume that the MOD has more than 700 rooms, the redevelopment contract comes out at more than £1 million a room. Is any redevelopment costing that much sensible, given that the total cost of the contract is three times that for the new parliamentary building?

Mr. Bacon: I have a lot of sympathy with the right hon. Gentleman's point. Asking simple, fundamental questions is an important part of what our Committee does and I am staggered by the extent to which they are often not asked in Whitehall. When I asked the finance director of the NHS how much taxpayers' cash he expected to pay out, making allowances for inflation, during the lifetime of the contract for West Middlesex hospital, he did not know. He did not know the answer to that basic question. He did not know how much money he was spending, even though he had come to our Committee to talk about precisely that.

One of the Treasury's own advisers described the public sector comparator as "cretinous". The NAO is usually a paragon of understatement. As a member of the PAC, I have learned to savour its understatements like a fine burgundy. One of my favourite reports was entitled "Inappropriate adjustments to NHS waiting lists", it was about managers fiddling the figures. Yet even the NAO was moved to describe the public sector comparator as "pseudo-scientific mumbo jumbo" which leads to "spurious precision" and

"a temptation to fiddle the figures".

By its elegant and reserved standards, that is little short of apoplectic. Will the Financial Secretary assure us that the public sector comparator will be put out of its misery as a principal tool for decision making on PFI projects? At least, if it is not, I should be grateful for an explanation of how much longer we will have to flog this dead equine, which I am willing to do if required.

Will the Minister acknowledge that, for schemes of the same type, such as school schemes, it makes sense to run some PFI schemes alongside conventional procurements? That would help to measure outputs properly over the long term, and to maintain competitive pressure.

Will the Financial Secretary explain why the professional fees for the Treasury building were so high? How much more is there still to pay? How much cash is the taxpayer going to have to part with in total over the life of the project, including the eastern part of the building? Should I double my figure of £838 million? Why is the financial model for Exchequer Partnership (No. 2) not available for inspection at lawyers' offices and at the FSA? How does that square with the aim of becoming more open, transparent and accountable, which has been central to my remarks?

Finally, it is a huge pleasure to be on the Committee. I should like to thank Sir John Bourn and his staff, particularly the assistant auditors general, especially Jeremy Colman and Caroline Mawhood, with whom I have had close dealings. I also want to thank the NAO press office staff who do a tremendous job in promoting the work of the office and the Committee. Finally, I want to thank the people in the Clerks Office, Nick Wright, Richard Poureshagh and Ronnie Jefferson, who also do a tremendous job. They are very long suffering and hard working.

I look forward to the Committee's work in the year ahead.


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