[Mrs Anne Main in the Chair] — Backbench business — Private Finance Initiative
Mark Garnier (Wyre Forest, Conservative)
It is a great pleasure to speak under one’s chairmanship, Mrs Main. [Laughter.] I also add my name to the chorus of congratulations for my near neighbour and hon. Friend Jesse Norman, who has not only secured this debate but worked so hard on the thorny issue of the PFI. His work includes his PFI rebate campaign, which I have enthusiastically signed up to. He has also managed to secure a Treasury Committee investigation into the future of PFI. It is good to see that four members of the Select Committee have come along this afternoon.
The PFI does not directly affect my constituency—there is only a magistrates court there under a PFI contract. However, it indirectly affects my constituents because they are served by the Worcestershire Royal hospital. Famously, Kidderminster hospital was downscaled to help pay for it. When my constituents hear that we have overspent on those contracts to the tune of half a billion pounds, they will be rightly even more furious than they were when the Government wound down Kidderminster hospital.
The PFI is something that we all love to hate. It has come to signify the inability of the public sector to write proper contracts and it is a symbol of trying to hide capital investments on the country’s balance sheet. However, is that a fair summary of what is a reasonably legitimate way of financing part of the supply side of the economy? I have certainly argued in the past that the public sector will always negotiate bad contracts for the simple reason that there is an asymmetry in negotiating skills. I am certainly not here to criticise the knowledge of public sector employees in terms of how to go about writing a contract. However, when it comes to a contract between the public sector and the private sector, we have, on one side of the table, a well-read and well-intentioned civil servant who is doing his best and possibly looking forward to his retirement, while on the other side we have a hardened businessman who is motivated by profit and return on equity and quite probably incentivised by direct equity in his business and a bonus for concessions won. A civil servant will certainly be very well educated in negotiating, but the hardened PFI negotiator from the private sector will have the concept of return on equity, risk evaluation and profitability etched into his DNA. There is no doubt that there is plenty of money to be made out of PFI for the astute negotiator.
Dexter Whitfield, director of the European Services Strategy Unit, in his submission to the recent Treasury Committee investigation, highlighted the profitability of PFI equity sales—that is where a PFI contract is sold and the profit made is in addition to the profit that is gained on an ongoing basis. He pointed out that although there is little readily available information on PFI sales, the ESSU database holds 63 transactions covering 154 PFI projects, and he has looked at how much they have made. Average equity profit has been 50.6% on the 63 transactions. What is interesting is how they fare by sector. Health has been given a profit of 66%, housing 80% and leisure 86%. However, the truly eye-watering winner by miles goes to the defence sector, which has been giving PFI providers a whopping 134% profit on their equity sales. The Treasury Committee inquiry was lucky enough to have a representative from the PFI industry, one of the directors of Balfour Beatty, and he
was surprisingly evasive in his reply to my questions, implying that that profit may have included the annual premium returns and therefore was not a fair judgment. But my interpretation is that PFI providers that have sold their investments have already made an annual return on the projects—that is perfectly reasonable, given the way that the projects are structured—but that the sale profit is in addition to that annual return.
What does that mean in terms of the contracts that have been negotiated? It seems that the valuation of risk, which is a key part of a contract, has been miscalculated in favour of the provider and it is that premium, in favour of the provider, that gives the opportunity for the sizeable equity sale profit. Indeed, the fact that there is someone out there to buy the equity stake with their own measure of risk and expectation of return means that there is still more to be made by the subsequent buyer, implying even further mispricing of risk.
That is the point. PFI projects do two things: first, they provide a so-called off-balance sheet way of financing a vital piece of investment; and secondly, they devolve the risk element of any project to the private sector. But the private sector will evaluate that risk and charge for it, and the evidence put forward by Mr Whitfield suggests that the PFI provider is making a great deal of that opportunity.