10 June 03
Speech by the Chief secretary to the Treasury, Paul Boateng MP, PFI Congress
1. I am very pleased to be able to join you at today’s session of the PFI Congress. This is, as you can imagine, a rather busy time for all of us in the Treasury, but I was determined to spend some time with you today.
2. I was determined to come because in the Government we see the Private Finance Initiative as one of our most important policy successes in our wider modernisation agenda. As we move forward to improve and extend the PFI programme it is vital that Government and the wider customer base across the public sector work closely with providers and lenders in the private sector. This Congress is an excellent opportunity for discussion, sharing best practice and mapping the way ahead, and I look forward very much to learning more about the discussions you have over these two days.
3. The Private Finance Initiative is central to this Government’s radical agenda to deliver public services that are not just better than they are now, but truly world-class, as is right for one of the world’s largest and richest economies. And I think looking at the video, you get a real sense of what we as partners have achieved.
4. As at April this year, we had closed 564 deals, with a total capital value of £35.5 billion in PFI alone. Of that, over 90 per cent - £32.1 billion – has been in transactions signed since 1997. Investment under PFI has risen from £1.5 billion in 1997-8 to £3.7 billion in 2002-3; and this year it is expected to be over £5 billion.
5. The size and sophistication of the UK’s PPP programme now leads the world, and UK expertise in financing and delivering PPP projects is strongly valued in other markets – as I have found, as I go overseas with colleagues in industry in order to share this experience.
6. Two weeks ago I was in Johannesburg at a business summit, and saw for myself the strong growth of South Africa’s PPP market and much interest in how British companies could contribute to this market and the development of a new South Africa.
7. For the last three years, the Government has provided the funds for Partnerships UK to assist the South African Treasury in developing its PPP programme – through helping to design enabling legislation, standardising contracts to reduce bid costs and bringing its expertise to bear on specific projects.
8. And particular progress has been made across the whole sector in South Africa. I spent some time recently with the prisons Minister in South Africa and discovered what PFI has achieved for correctional services and shared our experiences.
9. We are confident too, that European countries are recognising the benefits of PFI and will develop stronger markets for it. In his speech to the annual CBI dinner last month, the Chancellor set out an agenda for economic reform and market liberalization in the EU that included support for Private Finance Initiatives in Europe, alongside progress on integrating European markets for services and capital. This is all part of the wider EU reform agenda, on which you heard the Chancellor talk yesterday.
10. The increasing debate in the EU about the future role and value of PFI as a procurement tool is an excellent opportunity for the UK to make its case. This means not only the Government, but also our private sector partners, including many of you here today, engaging to influence the debate on how PFI should be used.
11. Today, in our domestic debate, it is the evidence of what PFI is delivering for the public that is winning the political argument. A recent report by the National Audit Office showed how the PFI has revolutionized government procurement. Before PFI, 73 per cent of government construction projects saw the cost to the public sector run over budget, and 70 per cent of projects come in late.
12. Now, under PFI, the NAO confirms that three quarters of PFI projects come in on time, and all are within public sector budgets.
13. Recent years have seen the steady growth of a healthy market in PFI. 451 PFI projects are already 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.
14. And the investment continues apace, as well it should. In his speech to the Social Market Foundation, the Chancellor made clear that the benefits of PFI are not confined to those sectors which already have well-established programmes, such as health and education.
15. So we are now pursuing new opportunities to extend the involvement of the private sector on other public priorities such as urban regeneration. And we believe PFI could have much potential in sectors such as waste, recycling, and sustainable energy.
16. In schools there has been a revolution in capital investment – in 1997 the funding available for capital investment in schools was only £683 million. That was our inheritance. This year it is almost 6 times that, at £3.8 billion, and by 2005-6, the figure will rise to over £5 billion. And PFI is central to delivering the £2.2 billion of that investment committed to a strategic transformation of our secondary provision under the “Building Schools for the Future” initiative: this year alone £830 million in PFI credits will go to Local Education Authority projects.
17. In health, too, PFI is playing a central role. This year, the Department of Health’s PFI programme is expected to involve investment of £1.25 billion – three times the level we achieved in 2001. And the modernization of London Underground, which over the last 6 months has been at the centre of the Government’s agenda for PFI, will deliver £16bn in much needed capital investment to the Tube’s infrastructure over the first 15 years – an undertaking of unprecedented value and scope in the public services.
18. Our commitment to PFI rests not on dogma, but on experience, which shows that in many cases PFI provides better value for money than other forms of procurement.
19. It is this commitment to value for money that means we continually seek to improve the way we evaluate projects. In the new Green Book we unbundled the discount rate to 3.5%, to make separate, more accurate assessments of project risks and optimism bias; and making us more alert to project costs and benefits over the long-term. Shortly, we will release new guidance on a different approach to Public Sector Comparators to ensure that rigorous analysis of value for money is done at the earliest possible project stage.
20. This emphasis on value for money in PFI puts paid to one allegation repeatedly made by critics, not least in the Opposition, which attempts, I fear, to damage the credibility of the PFI programme. The allegation is that the Government uses PFI to hide its liabilities off balance sheet, so as to disguise public spending.
21. I am glad to have the opportunity to expose that misrepresentation, yet again. Because the fact is that it was the previous Government which grasped at PFI only when the public finances were in a state that they were desperate to get what little investment they did engage in off balance sheet. This Government has no need to conceal our investment or our future liabilities. The macroeconomic framework we have put in place since 1997 has created the preconditions for a sustained programme of investment to modernise our infrastructure, a programme in which PFI is a key component.
22. When we negotiate a PFI project, we begin by determining what balance of risk-sharing between the public and private sectors, best serves value for money, with each side bearing the risks they are in the best position to manage.
23. Experience shows that some risks, such as those in the construction and design of assets, are best managed by the private sector. Certain other risks are better retained by the public sector - such as the risk attached to the value of assets when they are passed to the public sector at the end of the contract.
24. The accounting treatment of PFI projects follows from and depends on this assessment of a project’s fundamental value for money. Only once the appropriate balance of risks has been determined do the accounting rules come into play.
25. These rules for accounting for PFI are drawn up not by the Government but by the independent Accounting Standards Board, and follow internationally accepted standards. All PFI deals are subject to strict tests by the NAO or another independent audit body to determine whether they should be recorded on or off balance sheet.
26. So the Government looks above all at sharing project risks to ensure value for money, and this decision is made irrespective of the balance sheet treatment of the asset that follows. As a result, far from using PFI to keep liabilities off balance sheet, as PFI’s critics argue, 57% of all PFI investment by capital value, is in fact on balance sheet.
27. Since 1997 this Government has been and will continue to be committed to transparent and comprehensive accounting. And since 1997 we have made the accounting for PFI contracts more transparent - for those PFI projects that are off balance sheet, we publish a full statement in the Budget of the associated liabilities, including services and maintenance, for the next 25 years – liabilities which were not included in the Budget before 1998. Under conventional procurement, we do not record future maintenance or service costs for an asset until they are incurred - so our accounting for PFI contracts is in fact more conservative than for other government activities. This year these costs will amount to just over £5 billion, a very small amount compared to £450 billion of total managed expenditure.
Avoiding a two-tier workforce
28. It is because our commitment is to achieving best value for money for the public sector that we have had at all stages to draw a careful balance between the goal of capturing the efficiency of the private sector on the one hand, and the need to maintain the terms and conditions of workforces transferred to the private sector under PFI.
29. We have been clear throughout that the purpose of PFI is to deliver better public services. Flexibility in working practices is vital to enhancing service delivery, and one of the principal reasons we negotiated the Local Authority Best Value arrangement was to ensure that the private sector can choose the best combination of working practices and conditions to motivate their staff and deliver business results.
30. Where there are public sector working practices which are too restrictive, Best Value guarantees that these do not have to be replicated in the private sector. But we also want to ensure that advances through PFI are not at the expense of fair wages paid to all employees, particularly low paid employees.
31. So the purpose of Best Value is to create a broad framework in which new staff are recruited on terms which are overall, no less favourable than those of transferred employees, but which allows employers to decide what balance of terms and conditions best suits their business needs. It is being rolled out only in those Local Authorities which have been assessed as already offering Best Value in administering efficient and responsive services.
32. I know that there have been concerns expressed about the Local Authority Best Value arrangements, both from PFI providers and indeed from the trade unions. As the arrangements are implemented we will need to see whether they succeed in practice in ensuring flexibility without eroding terms and conditions of staff. But I hope that all sides can agree that an initiative of this kind was necessary; that a two-tier workforce would be unhealthy for morale in the public services, and indeed for the public’s confidence of the PFI programme.
33. Nor would we in Government welcome a situation in which our partners in the private sector, including many of you represented here today at this Congress, were to be undermined and bid down by competitors who relied only on lower pay and worse conditions to win contracts.
34. For our part, we recognize it is imperative that the public sector be a better client across the range of Public Private Partnerships.
35. We know that bid costs are too high, procurement times are too long, and that all too often the public sector ’s lack of expertise is the limiting factor. We take this very seriously, because we know that unless they are solved these problems will damage competition, push back the timetable for new investment, and raise the price tag for the taxpayer.
36. We have already taken action to address the skills gap in public sector procurement. Partnerships UK and initiatives like NHS Lift have all been established to strengthen PFI procurement expertise in the public sector, cutting bidding costs and reducing delays. The first NHS Lift project has just closed in 14 months, halving procurement times.
37. But as well as building capacity to be an effective client, we have used innovative means to bring efficiencies into the bidding process itself, and the results, I am glad to say, are promising. The Revised Standardisation of PFI Contracts means that public sector clients no longer have to re-invent the wheel for each project they sponsor.
38. The batching of acute hospitals, where a single competition is run for batches of 3 major healthcare projects, has the potential to significantly cut bid costs and overall procurement times.
39. Primary healthcare has seen the use of a national joint venture to lever real procurement expertise into local projects; develop a structured programme, prioritising deal flow to market; and maximise economies of scale. The result has been that procurement times have been cut in half, with the first NHS Lift project closing earlier this year in just 14 months. That is progress.
40. Best practice learned in PFI will help Government become a better client in traditional procurement deals. And we are determined to apply the lessons learned from the early PPPs as we move forward with extending the Private Finance Initiative to new areas.
Conclusion
41. So what I would like to emphasize in concluding today is that we are moving forward, working together to address those areas where PFI has not fulfilled its potential, often due to the public sector’s lack of experience as a client. It is vital – for the Government as much as for our private sector partners – that we learn these lessons, because PFI remains central to delivering better public services through a sustained programme of investment, reform and modernisation. By 2005, we expect to have signed PFI projects worth a further £9 billion in health, education and housing alone.
42. We are winning the political argument by demonstrating the real benefits PFI can deliver, whilst drawing the right balance to avoid creating a two-tier workforce. We reject those who try to discredit PFI by misrepresenting the independent accounting standards the Government and NAO apply. And we have the confidence to extend the programme into new areas as part of our agenda to invest in world-class public services.
43. Improved models like NHS Lift are being developed all the time. No one is pretending PFI is simple. If it were, we would not be seeing such high levels of demand around the world for UK companies’ expertise in providing and financing PFI deals. It is complex. It is ground-breaking and we’re in this together. And as we move forward together, we must continue this close dialogue between public and private sector, spreading knowledge of what works and speeding up the negotiation and delivery of projects.
44. We really are at the cutting edge of procurement. It is good for taxpayers and good for shareholders. It is challenging; it is cutting-edge; and it is worthwhile. That is what this Congress is all about - I hope you find this event a rewarding two days and I would like to wish you every success.