Part of the debate – in the House of Commons at 10:42 pm on 6th December 2004.
I welcome this debate and congratulate Dr. Cable on securing it and on the balanced way in which he tried to deal with the issues nationally as well as in terms of their effect on his constituency.
I think that the hon. Gentleman would agree that, over the past 10 years or so, the private finance initiative has developed into a strategy for genuine public-private partnership and that that has been a significant development, if not without its difficulties, which I shall try to address. I welcome the opportunity to set out the Government's position.
It is fair to say that, in the mid-1990s, the private finance initiative was conceived, at least in significant part, as a replacement for public investment. Some saw it as a free lunch—private money supporting national infrastructure. As the hon. Gentleman knows, there is no such thing as a free lunch and, since 1997, the Government have tried to fashion a programme that uses private finance to supplement public investment, not to replace it; that mobilises private sector expertise and experience to serve the public interest; and that sets the incentives for the public and private sectors to serve the interests of taxpayers and citizens.
The schools example is instructive in that respect. In 1996–97, public investment in the schools infrastructure totalled some £700 million. Next year, in 2005–06, it will be more than £5 billion, with 75 per cent. of it provided conventionally and 25 per cent. in the form of PFI credit. The hon. Gentleman mentioned the "Building Schools for the Future" programme. That is worth more than £2 billion a year, about half of which will be PFI and half conventional procurement.
Over seven years, more than £7 billion has gone into school repairs, helping schools around the country. The conception of public-private partnership—PPP—fundamentally changed key aspects of the relationship between the public and private sectors. At the heart of that shift is the idea of the public sector as an intelligent customer of private services. The Government have had a commitment to use public-private partnerships, including projects that were procured under the PFI, to improve the standard of school buildings, as a matter of pragmatism—I believe that the hon. Gentleman used that word—not ideology.
Such action transforms Departments, agencies and local authorities from being simply the owners and operators of assets into the purchasers of services. The public sector is required critically to examine the full cost of owning an asset throughout its life, not only the initial cost of buying it. That also changes the way in which the private sector thinks about providing the assets. Private firms become long-term providers of services rather than simply asset builders. The private sector can no longer simply walk away from the buildings once they are built.
I believe that the hon. Gentleman acknowledges that the local authority is the key partner of the private sector in the schools sector. The local authority advertises, negotiates and signs the contract and is subsequently responsible for operating the contract over its life. Local authorities determine whether to undertake a PFI project. However, we recognise that the contracts are long term and therefore different from conventional procurement projects. The Department for Education and Skills and the Treasury have provided and continue to provide substantial support to local authorities that undertake those projects. We also monitor the PFI projects throughout the country.
The public-private partnerships enable the public sector to use private sector resources to deliver elements of services that the latter, through its skills and expertise, is best placed to provide through a structure in which the private sector puts its capital at risk so that it is paid only when it delivers. I understand that, in the case that the hon. Gentleman raised, delivery has not happened and shortly I want to deal with those circumstances and the sanctions that the public sector has at its disposal when the private sector does not deliver.
The structure of risk transfer gives the private sector powerful incentives to innovate, and especially to deliver projects on time and to budget, to manage risks more effectively, to maintain assets and provide the specified quality of service for the length of the contract. It is striking that almost 90 per cent. of PFI projects are delivered on time, while under traditional procurement methods, 70 per cent. of projects came in late. Of course, there are benefits to customers, users and taxpayers but they cannot and should not be bought at any price. We, as the public sector, must ensure that when we enter into long-term contracts, we continue to receive value for money for the project's duration.
The Government's approach is that the PFI should be used only when it can deliver value for money, which cannot be secured at the expense of the terms and conditions of the work force or good design. We are committed to ensuring a level playing field between different procurement routes and we are clear that value for money should be the only criterion that is used to choose between them.
The total cost of the asset over its life is key to assessing the value for money of a PFI project. That is good public sector practice, whether spending under conventional procurement methods or the PFI. The cost includes the essential services that are required to maintain the asset's value, such as maintenance and repair. In the past, those costs were often excluded from investment appraisals, with the result that opportunities to invest in the design of the building to prevent later maintenance expenditure were overlooked and assets not properly maintained.
In contrast, at the end of a PFI contract—typically, 25 years—the school is returned to the local authority or governing body, fit for further use. In addition to analysing the whole life cost of the asset, through the appropriate allocation of risk, the PFI ensures that the private sector partner has strong incentives to deliver the services that the public sector requires.
In PFI projects, the private sector does not get paid until the building is complete and the services are being delivered at the required level. Under PFI, the public sector is guaranteed the specified service. If that is not provided, financial penalties result.
The hon. Gentleman accurately cited figures for the number of PFI projects that are either open or in train. In 40 schemes, pupils, teachers and head teachers are receiving services. We are trying to learn the lessons of improving procurement and management of PFI projects by local authorities. That is especially important, as our investment in the school estate increases, to ensure that every pound spent is well spent. The hon. Gentleman mentioned the lessons that have been learned in the past five to 10 years. Lessons are being learned on organising contracts, the need to bear down on legal and contracting expenses, the importance of high competence on the public sector side of the negotiating table in putting the contracts together and the need to ensure protection of public money.
The hon. Gentleman also referred to the importance of standardising contracts, or at least of having standard contracts. He will be pleased to hear that, to aid the process of contracting, we recently issued standards for schools' PFI contracts, to help local authorities coming to the negotiating table to finalise such deals.
Given the hon. Gentleman's description of events, it would obviously be wrong of me to pretend that everything always goes right in PFI projects, just as it would be wrong to pretend that things always go right in conventional procurement projects. We can make the case, however, that the public sector has stronger sanctions in relation to PFI projects than it does under conventional spend. PFI contracts have contingencies built into them to ensure that, when things do go wrong, either they are put right, or the private sector faces a financial penalty.
In most PFI contracts, there is more than one shareholder and, critically, a backing group of lending banks with the financial resources to deal with a situation in which a party to the contract has financial difficulties. For PFI contracts in construction, in the event of a construction company being unable to fulfil its responsibilities, it is the responsibility of the banks and other shareholders to replace the contractor with another firm. The cost of doing so will fall on the consortium. If it fails to meet that cost, the procuring authority can terminate the contract, at a significant cost to the consortium.
If a building contractor encounters serious difficulties, there will be inevitable problems in the procurement of the project, whatever procurement method has been used. In PFI contracts, however, mechanisms are in place to ensure that the banks and shareholders have strong incentives to remedy the situation. It is important to draw a contrast between this and conventional procurement, in which the public sector would be left without such a safeguard. At the end of the day, if everything else fails, the local authority has the final sanction of terminating the contract and providing the services itself.
As we know, a number of projects are in difficulty as a result of the widely publicised financial problems of Jarvis. I am sure that the hon. Gentleman realises that it would be wholly inappropriate for me to comment on the situation relating to that company. I can, however, comment on the situation in Richmond, and on the Trafalgar school in particular. As he said, the scheme in Richmond involves six fully serviced primary schools through a single contract. He was also right to say that a £50 million project is on the small side when it comes to PFI deals. The contract is for two new schools and four expanded and remodelled schools, and was signed in June 2002. I understand that, in the main, construction work has been completed at four of the six schools.
A note that I have here tells me that high-quality information and communications technology specification has been a particular feature of this contract, along with flexible classrooms and improved community assets, and that the use of interactive whiteboard technology is having a special impact on the learning experience of the young people involved. That is obviously good to hear. In addition, the working environment for pupils and staff has been much improved.
However, at the Trafalgar infant and junior schools, a number of items of work, including on the kitchens and the external landscaping, have still to be finished. They have been delayed for some time, and some of the resulting difficulties were brought home to us by the pupils' description of this unacceptable situation through their school council. While the schools might be able to occupy their new buildings, it is obviously unacceptable that they cannot use facilities such as the outdoor play area or the kitchen as they would like to.
The contract that the authority signed with Jarvis has clauses to cover non-performance and it is up to the authority to invoke those terms. It has, therefore—appropriately, in my view—withheld part of the unitary charge, due to deadlines not being met and progress not being made. We have been informed that there is close co-operation between the local education authority and senior debt and equity providers involved in the project—as well as with Partnerships UK, the national body that handles many of these projects for central Government—in an attempt to resolve the outstanding matters. Those discussions have reached a relatively advanced stage, with a view to restarting the works.
I completely understand the hon. Gentleman's view that there needs to be real urgency in this process, because every day that goes by is another day of anxiety and annoyance for the teachers and pupils who cannot use their facilities to the full. I am sure that the mere fact that we are holding this debate will make the point to all the parties concerned that a significant educational loss is resulting from the difficulties that have arisen. I know that the hon. Gentleman is also in touch with the LEA, to whom he has copied various letters that he wrote to the Secretary of State to make his points. It seems to me, however, that the authority is on the case, and I hope to see progress.
The Government are committed to effective public-private partnerships because they can produce clear benefits in the delivery of public services. They can deliver assets that are of high quality, available on time and on budget, and services of an agreed standard. When assets are delivered late or services are poor, the penalties that we have discussed will apply.
We are also determined to learn from our experience of PFI projects to ensure that as we proceed with major investment every pound spent results in high educational standards, whether lessons are taught in schools built through the PFI scheme or schools built through conventional spend.
I look forward to discussing these and other matters with the hon. Gentleman in the future.
Question put and agreed to.
Adjourned accordingly at five minutes to Eleven o'clock.