27 November 2003
Speech by the Chief secretary to the Treasury, Paul Boateng MP, at the Global PPP Conference in Berlin
Opening Remarks
1. Chair, Ministers, colleagues, it is good to be with you today. I have been given what one calls in English the ‘graveyard slot’ – the last speech at the end of the second day of this conference. Coming in, I was daunted by such a splendid hotel and in particular by the sign, right in the middle of the entrance to this conference, with the exhortation ‘do not disturb’. If anyone is at that stage, I understand.
2. But seriously, I am delighted to be at this conference today – hotfoot from Cabinet. I have attended three of these conferences in the past and I must say that this conference is the best attended yet – that is indeed a sign of where we are with PPPs and PFIs. There is now worldwide recognition of the role of PFIs and PPPs in procurement and investment in reforming public services.
3. The UK has experience with many of these kinds of PPP. I would like to share some of these, and in particular our experience with one of the most established forms of PPP – the Private Finance Initiative or PFI.
4. I hope to show that in the UK, PFI plays an important role in the Government’s radical agenda to deliver public services that are not just better than they are now, but truly world-class, as is the entitlement of the citizens of one of the world’s largest and richest economies.
5. I would also like to take the opportunity to lay out both what we mean by PPP and PFI, and what the UK government’s approach is to using them.
6. And this is the right time for this conference. European countries are increasingly recognising the benefits of PFI and are developing stronger markets for it. Last month our Chancellor Gordon Brown set out an agenda for economic reform and market liberalisation in the EU that included support for Private Finance Initiatives in Europe – alongside progress on integrating European markets for services and capital.
7. It is imperative to see PPP/PFI in this context, not least given the last but one ECOFIN in Luxemburg, which I attended along with the French and German Finance Ministers. We discussed, among other things, a letter sent by Gordon Brown, Francis Mer and Hans Eichel where reference was made to the need to meet the growth challenge stating that, and I quote, “progress is also necessary in public private partnerships, which can help introduce private sector efficiencies throughout the planning and operational stage of projects, and so enhance value for money”.
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8. That was the considered opinion of the Finance Ministers of Germany, France and the UK. That is the context of this discussion. And the growing debate here in Europe about the future role and value of PFI as a procurement tool is an excellent opportunity for the UK to make its case.
9. At the heart of the UK’s approach to PFI is value for money. PFI delivers investment programmes on-time, and with budgets properly controlled. It makes sure that assets are built with their whole-life cost in mind, and that high standards are maintained throughout their life.
10. So this value for money is the rationale for using PFI to modernise and reform procurement in Europe.
11. PFI’s benefits are not about balance-sheet treatment. When it comes to accounting for the assets built under PFI contracts, we follow independent rules set down by the UK’s Accounting Standards Board. And in fact almost 60% of the investment under signed PFI contracts in the UK will score on the Government’s balance sheet. So this is not some sort of accountancy device; rather it has to be about value for money if we are to reap the benefits.
12. And because we report the full costs associated with the PFI programme over the next 30 years in each years budget, these costs are in fact better understood, more transparently reported, and represent better value for the public sector than the same costs would be in a public procurement.
13. We want to play a constructive role in this debate and dialogue. Indeed we embrace the opportunity to engage with interested European states and to share global experiences on where the PFI programme has the ability to deliver the investment and assets needed to modernise public services. And we want to base our contribution to this debate on the value for money benefits that PFI offers.
14. PFI projects involve delivering cost-effective and vital pieces of infrastructure – the infrastructure on which modern public services can run effectively.
15. And the reason why we have found it works so well is because the provision of assets, and the proper maintenance of those assets is an area where involving the private sector can provide efficiencies with no threat to equity or to the public sector ethos.
16. PFI can structure in the incentives and the safeguards necessary to ensure value for money on the one hand, and the integrity of public services on the other.
17. To set this up as private against public is to miss the point entirely. And let me make it very clear that our commitment to PFI rests not on dogma, but on experience. Our evidence shows that in many cases PFI provides better value for money than other forms of procurement.
18. It is this commitment to value for money - achieved not at the expense of the terms and conditions of staff - that means we continually seek to improve the way that we evaluate projects, and to improve the way the public sector acts as a client. And there are real wins here for the public sector making us smarter clients; making us better at procurement.
Background to PFI
19. It is important that the use of PFI in the UK is seen in the context of the long years of under-investment to which our public services had been subjected.
20. For too long, Governments had succumbed to cutting back on investment when times were hard. Plans for renewing public infrastructure were put off and the money needed to carry out proper maintenance on existing assets was squeezed.
21. The legacy of this short-termism – when the New Labour Government came to power in 1997 – was a crumbling infrastructure. And I’ll give you just some examples:
- Backlogs of schools repairs were estimated at £7 billion.
- Maintenance backlogs in the NHS were over £3 billion.
- In social housing, the figures ran into the tens of billions.
- And we were left with a transport infrastructure not fit to meet the pressures of a modern economy.
22. And because of this, publicly funded investment as a whole has expanded dramatically under this Government. Indeed, while total investment in public services stood at £23 billion in 1997, this year, it will amount to over £40 billion, and by 2005-6 it will be greater still – over £48 billion. PFI is a limited but important part of these increases in investment, making up around 15% of total investment each year.
23. This increased investment has been essential, but the problems in our public services went deeper than just under investment. We also needed to address the efficiency of our investment.
24. In the past, when the Government did invest, its record of doing so effectively was not strong. Investment involving the private sector was typically on a ‘cost-plus’ basis. And there was no incentive for the private sector to control their costs, or to build for the long-term.
25. In fact, with affordability putting pressure on the public sector to choose the lowest cost solution, private sector contractors were given all the wrong incentives.
26. They could under-cost projects, only to see costs to the taxpayer then rise stratospherically. They could use the cheapest materials – knowing full well the public sector would be left to pick up the spiralling maintenance bills. Moreover, there was no reason to design a building with it’s whole-of-life cost in mind in the first place.
27. And, in contrast, anyone who has visited our Embassy here in Berlin knows exactly what it is to use PFI to deliver a first-class, modern, fit for purpose building.
28. But the results of previous mis-incentives are all too clear to see in the UK’s record of traditional procurement. For example:
- How could our National Health Service plan a long-term hospital provision programme if, as with one hospital, cost estimates could more than quadruple from £36 million to a final cost of £160 million, and only deliver much needed hospital beds over 3 years late? That is what we were up against in the NHS.
- How could the step-change in performance of public transport in London possibly be achieved if, as for the London Underground’s Jubilee Line extension, costs could overrun by £1.4 billion on a single project or, as in the Central Line re-signalling, work was to be completed 6 years behind schedule? So for those who pine for the halcyon days of traditional public investment in the London Underground, I say just look at the facts.
29. And so, my point is, the UK Government’s use of PFI must be seen against the background of the past.
30. And, of course, against the challenges of the future.
31. My Government has given its commitment to set the UK’s public services on a 21st Century footing. But if our commitment to delivering world class public services is to be achieved, we have to learn from these experiences. We have to ensure that sustained increases in investment are delivered on-time, cost-effectively, and to the highest standards.
32. This is the background to PFI – very particular to the UK – and to the history of the UK’s public services. PFI is about addressing these problems to ensure that new investment is delivered, and standards are maintained.
The UK Government’s approach
33. So why do we think PFI can help address these problems?
34. As I see its getting late, for those of you who would like it, the long answer is set out in PFI: Meeting the Investment Challenge. I don’t necessarily recommend it for long, lonely nights but it can be guaranteed to illuminate as well as send you off to sleep. The document was published by the Treasury in July of this year and, joking apart, it clearly sets out our position and how we got there.
35. For the rest of you, the short answer is that we use PFI because we know – and where we know – it offers the best value for money in public investment.
36. PFI, where it is used effectively, can provide the large-scale but cost effective investment in the UK’s public sector infrastructure that is essential if we are to deliver our modernisation programme. Why?
- With the private sector’s capital at risk, not just its profit, there is a powerful incentive to build and maintain assets and to deliver high standards throughout the contract life
- Assets are more likely to be built on time, as payments only begin when they are available – and cost overruns in construction do not fall to the public sector
- And, contractors have the incentive to build with an asset’s whole-life cost in mind.
37. At the heart of these incentives is the appropriate sharing of risks. PFI’s benefits all flow from ensuring that the different types of risks inherent in any major project are borne by the party best able to manage them.
38. Where private capital is at risk to the construction and performance of a project, it will assess, bear, and manage those risks more effectively than the public sector can. And it is this effective risk management that makes private finance so central to PFI.
39. Ultimately, however, the Government reserves the right to protect the ongoing delivery of public services. That is our responsibility as a Government. And so PFI contracts provide vital protections to the public sector should the private sector fail to meet requirements, or should the needs of the public sector change.
40. PFI also provides the public sector with a better understanding of the total costs of providing and maintaining an asset. It encourages new ways of working, and new approaches to delivery, with the private sector drawing on its experience and its capacity for innovation.
Assessing the success of PFI
41. And, crucially, we are now in a position to assess the policy’s performance in practice – over 560 PFI deals have been closed, with a total capital value of £35.5 billion. And almost all of this has been achieved since 1997.
42. And as a former prisons Minister in the UK, I am able to testify what the private sector has brought to correctional services policy and provision, and I wholeheartedly endorse the role that PFI has played.
43. Today over 450 PFI projects are in operation, delivering:
- 34 hospitals and 119 other health schemes;
- 239 new and refurbished schools;
- 23 new transport projects;
- 34 new fire and police stations;
- 13 new prisons and secure training centres;
- 12 waste and water projects; and
- 167 other projects in sectors including defence, leisure, culture, housing and IT.
44. We completed the assessment of performance in practice this summer. And I am delighted to say our evidence shows that major PFI investment projects have been completed on time in almost 90 per cent of cases, and in every case the public sector has paid what it expected to pay.
45. This is in comparison to traditional procurement routes, where three quarters of projects were late and three quarters were over budget.
46. In fact, our research shows that PFI has accomplished the step-change in delivery of public investment that we needed.
47. These are the facts. That is the evidence. And it is against this that those to whom we are accountable to should judge us. These results have been confirmed by the independent findings of the National Audit Office. NAO surveys showed that over 80% of public bodies have said their projects were achieving satisfactory or better value for money.
48. So, where PFI has worked, we will continue to use it to deliver on our commitment to improving public service infrastructure:
- In Health, we plan for PFI to deliver over £6.5bn worth of investment by 2005.
- In Education, £1.5bn in planned investment will redevelop or refurbish 278 schools and deliver 45 new schools.
- And in Defence, we expect to sign over £3 billion worth of PFI projects in 2004 alone.
49. However, as I have already said, our commitment to PFI is not dogmatic – but open, evidence-based, and dedicated to continual improvement of the policy. Our commitment to PFI rests on its ability to deliver value for money, tested against the evidence in a process that ensures there is no inherent bias in favour of one procurement option over another.
50. And so, naturally, part of our experience of PFI has been identifying the areas where PFI has not proven itself. And I’m sure it is useful for me to share these experiences as well.
51. For example, we have found that the procurement times and transaction costs of pursuing PFI for small projects were disproportionate to the benefits. As a result, we are setting a floor for projects to be considered for PFI, around the £20 million mark depending on the sector.
52. We have also found that IT projects are not well suited to PFI because of the fast pace of change in the sector and the close integration of IT with other business systems. This makes it hard to write output-based contracts with effective risk transfer.
53. Because of this, we have taken the decision to end PFI in the IT sector, and replace it with a range of better-suited procurement options.
54. And the challenge remains for the public sector to get the best out of PFI. We are putting in place the necessary reforms to ensure the right decisions are made.
55. To ensure the right procurement decisions are made to secure value for money, we are reforming the investment appraisal process to better support a level-playing field between conventional procurement and PFI. Including:
- A comprehensive assessment of the appropriate procurement route at the investment programme stage;
- A rigorous project level assessment at an early stage, with the flexibility of funding built in to pursue conventional procurement when it is better value; and
- A final procurement assessment, to ensure the PFI market has the capacity to deliver benefits in practice.
56. Furthermore, we are clear that the public sector’s ability as a client is vital for effective PFI, as for all forms of procurement. And so we are making sure that the public sector has the ability to deliver, by:
- Improving public sector skills and increasing support from expert bodies like Partnerships UK and the 4Ps;
- Avoiding re-inventing the wheel by rigorously enforcing contract standardisation;
- And becoming a more effective, joined up client through better information sharing on the advice we receive, and innovative vehicles designed to co-ordinate procurement and provide direct support to local teams.
Concluding words
57. And underlying all of this is the vital necessity of events like this – the importance in continuing to share our experiences.
58. We stand ready to share our experiences of PFI and the contribution it can make to investment in public services. Our experience of how it has worked, and where it has not. Of what problems there have been and how we have sought to overcome them.
59. And we in the UK welcome the interest and progress in PFI – and in other kinds of PPP – coming from Europe and the wider world, because we also want to learn from your experiences. We know we are far from having all the right answers on PFI. It is a continual process with its own ups and downs.
60. And let me leave you with one overriding image that underpins this. On a visit to one of our great industrial cities – the City of Glasgow, I was fortunate enough to visit a school, accompanied by local people – parents, teachers, local authorities and representatives from the private sector. On this visit, I was shown an IT suite in the school that had been refurbished through PFI.
61. The Head of the Department invited me to talk to one of senior teachers – both had taught in the school for more than a decade. And the thrill and delight at this new facility was a joy to behold – I could see it in their eyes and in their approach. The senior teacher told me how she had been offered a Head of Department role outside the local area. Despite the increased pay and responsibility, she had turned it down because she had waited all her working life to teach in an environment like this.
62. She did not have to worry about the IT, the hardware, the software or the maintenance. Her focus was solely on the children and young people. And the private sector’s rewards on the contract were also partly linked to the achievement of the children. So here we see PFI freeing up a frontline worker; genuine partnership with everyone working for success. And she was not going to give that up.
63. So, at the end of the day when we have had the conferences and signed the contracts, we should think about the added value, the value for money, and the continuing benefit to all our citizens.
64. Thank you. I am delighted to have been here and I am looking forward to informal discussions over dinner tonight.