PFI AS A MEANS OF OBTAINING EXTRA
INVESTMENT
18. There is no doubt that the original justification
for PFI in the Autumn Statement of 1992 was that it would enable
more investment to take place. The phrase "any privately
financed project which can be operated profitably will be allowed
to proceed" applies most obviously to projects paid for by
the users. Proposals such as new road and rail links (including
the Channel Tunnel rail link) were mentioned in the statement.
In addition, however, the possibility of roads designed, built
and operated by contractors and paid for by the Government by
fees "relating to their use" was mentioned in the statement:
the Chancellor said that the money "contributed by the private
sector" would represent "additional resources"
in the area concerned.[32]
19. When we asked the current Chief Secretary how
he measured the success of PFI, he mentioned both value for money
and "the acceleration of flow of projects that we have been
able to bring forward". He pointed to the increase in hospital
building as "a spectacular acceleration in national capital
investment, and PFI should share the credit for that".[33]
Similarly, the document Public Private Partnerships: The Government's
Approach emphasises that the Government "is using private
finance and other types of public private partnerships to add
to and complement this additional public sector investment [announced
in the July 1998 Comprehensive Spending Review] ... This can relieve
the pressure on public finances, allowing Government to concentrate
resources on other public services". The document also states
that the Government's approach is "to use PPPs where they
provide better value compared to public sector investment"[34]
By contrast, the Treasury Taskforce document Partnerships for
Prosperity of November 1997 emphasised value for money more:
"The PFI is not about
borrowing money from the private sector ... PFI is all about creating
a structure in which improved value for money is achieved through
private sector innovation and management skills delivering significant
performance improvement and efficiency savings."[35]
Similarly the CBI said that "better value for
money must be the reason for choosing PFI over conventional capital
procurement ... shifting Government expenditure from capital to
current is a consequence of PFI—neither good nor bad itself
in fiscal terms ..."; they welcomed the way in which the
argument had shifted from "drawing in extra money" to
value for money.[36]
They also said, however, that a feature of PFI was that it could
be "conducive to boosting investment by replacing 'lumpy'
public capital spending with a steady stream of service payments".[37]
Effect of the Government's Fiscal
Rules
20. In summer 1998 the current Government introduced
a new fiscal framework, at the centre of which were two fiscal
rules which apply over the economic cycle, rather than in any
particular year. The rules are intended to govern fiscal policy
during the current Parliament:
(a) the golden
rule: the Government will borrow only to invest and not to
fund current spending;
(b) the sustainable
investment rule: net public sector debt as a proportion of
Gross Domestic Product (GDP) will be held at a "stable and
prudent" level, which is defined by the Treasury as being
less than 40 per cent.
These rules reflect the Government's view that "a
key component to the new approach to fiscal policy is to distinguish
between current and capital spending."[38]
21. In a working paper published by the IPPR's Commission
on Public-Private Partnerships, Mr Peter Robinson points out that
conventional investment by the Government would be categorised
as capital expenditure, and would therefore not affect the golden
rule; it would, however, have implications for the sustainable
investment rule to the extent that it caused net public sector
debt to exceed 40 per cent of GDP over the economic cycle. However,
if the total investment for PFI investment planned for 1999-2002
of £11 billion[39]
was instead carried out conventionally, this would add little
more than one percentage point to the ratio of public sector net
debt to GDP. This would not put the sustainable investment rule
at risk, as the debt ratio is forecast to be significantly less
than 40 per cent in these years.[40]
22. The Treasury say that in the past there has been
a "bias against [public sector] investment, which often constituted
an easier (though short-term) target for spending cuts".[41]
The TUC suggested that the Government should adopt the General
Government Financial Deficit (GGFD) as their measure of public
sector borrowing, as it excludes net borrowing by the public sector
for investment purposes.[42]
23. When the aim was to reduce the Public Sector
Borrowing Requirement—particularly when there was a large
deficit—PFI was an attractive means of increasing investment.
However, the new fiscal framework has made it easier to provide
publicly-funded investment, because such investment has no effect
on the golden rule, and could be increased significantly without
exceeding the Chancellor's chosen guideline that debt should not
exceed 40 per cent of GDP. In the new framework, the case for
PFI as the main means of obtaining extra investment is very much
weaker. The main justification should now be the prospect of obtaining
better value for money.
9 A few projects mentioned in this Report-mainly toll
roads-were approved on lines similar to PFI in the 1980s and early
1990s. Back
10 Sixth
Report, 1995-96, The Private Finance Initiative, HC 146.
The Government's reply to this Report was published as our Fourth
Special Report, 1995-96, HC 513. Back
11 In
addition to PFI, PPPs include part privatisation, "the
introduction of private sector ownership into businesses that
are currently state-owned, using the full range of possible structures
(whether by flotation or the introduction of a strategic partner),
with sales of either a majority or a minority stake"; concessions
and franchises, "where a private sector partner takes
on the responsibility for providing a public service, including
maintaining, enhancing or constructing the necessary infrastructure";
and "the wider markets initiative and other partnership
arrangements where private sector expertise and finance are used
to exploit the commercial potential of Government assets (evidence
p 69-70, paras 8-9). See also Q 382. Back
12 For
more about the Ryrie Rules, see Sixth Report, 1995-96, HC 146,
Appendix 17, p 160, by Professor David Heald, the specialist adviser
for that inquiry. Back
13 Official
Report, 12 November 1992,
c 998. See also Cm 2096, Autumn Statement 1992, November
1992, paras 2.111-117. Back
14 "For
PFI projects, for example, this means that the Government no longer
builds roads, it purchases miles of maintained highway ... it
no longer builds prisons, it buys custodial services ... it no
longer always buys computers and software, but pays for managed
IT services." Partnerships for Prosperity, Treasury
Taskforce, November 1997, para 3.07. This report is available
on the Treasury Taskforce website: www.treasuryprojectstaskforce.gov.uk.
The contracting company is often called a "special purpose
vehicle" or SPV (MCG evidence, p 4 para 8). Back
15 Examples
of financially free-standing services: the Second Severn Bridge
and the Dartford River Crossing; of partly subsidised ventures:
the Docklands Light Railway Extension (Partnerships for Prosperity,
para 1.06). Back
16 See
Q 397-8 and Official Report, 27 July 1999, c 400-1W (reproduced
in Appendix 2). Back
17 Evidence,
p 81. Back
18 See
Sixth Report, 1995-96, The Private Finance Initiative,
HC 146, and Government reply, Fourth Special Report, 1995-96,
HC 513. Back
19 Although
the PFI commits the authority to payments for many years ahead,
conventional capital projects also have similar implications for
future current expenditure, notably for maintenance of the asset
and for provision of the service concerned. The difference is
that a PFI contractor will include in its charges the cost of
building the asset and an allowance for its depreciation (see
evidence p 41-2, para 7). However, the Institute for Fiscal Studies
points out that "conventional public-sector-financed projects
are likely to be more flexible, since future governments can choose
to dispose of any unwanted assets" (IFS Green Budget,
January 2000, p 36). The Government collects aggregate figures
for the estimated payments under PFI contracts for the next thirty
years or so and publishes them in the Budget Red Book (evidence
p 70, para 13; see evidence p 55 for a comparison of figures from
the last two Budget reports). Back
20 The
Treasury's written evidence says that the rule "had been
responsible for a lot of ill-conceived projects" (evidence
p 70 para 17). Back
21 HM
Treasury news release 41/97, 8 May 1997. Sir Malcolm was a member
of the Private Finance Panel from 1993 to 1996. Back
22 See
evidence p 76-8 for the recommendations and progress made in implementing
them. Back
23 See
evidence p 78-80. Back
24 See
Partnerships for Prosperity, paras 2.13-19, for more information
about the 4Ps. Back
25 HM
Treasury News Release 187/98, 12 November 1998. Back
26 HM
Treasury, July 1999. This and the Gershon Report (and also the
summary of conclusions from the Bates report) are available on
the Treasury website: www.hmtreasury.gov.uk. Back
27 Modern
Government Modern Procurement,
p 15. Back
28 Evidence
p 91-8. Back
29 Committee
of Public Accounts, Twenty-third Report, Session 1998-99, Getting
Better Value for Money from the Private Finance Initiative,
HC 583 (published 4 July 1999). The Government's reply was included
in Cm 4469 and is reproduced in evidence, p 98. Back
30 National
Audit Office, Examining the value for money of deals under
the Private Finance Initiative, 13 August 1999, HC (1998-99)
739. Back
31 Value
for Money Drivers in the Private Finance Initiative,
A Report by Arthur Andersen and Enterprise LSE, January 2000.
This report is available on the Treasury Taskforce website: www.treasuryprojectstaskforce.gov.uk. Back
32 Official
Report, 12 November 1992,
c 998; Cm 2096, paras 2.111-117. Back
33 Q
289. See also evidence p 69 para 6, quoting the Treasury's summary
of Departmental Investment Strategies. Back
34 HM
Treasury, Public Private Partnerships: The Government's Approach,
March 2000, page 13, paras 18-19. Back
35 Partnerships
for Prosperity, para 3.02. Back
36 Evidence
p 41, para 4; Q 189. Back
37 Evidence
p 41, para 5. Back
38 Economic
and Fiscal Strategy Report 1998, Cm 3978, page 20. See also Q
189 (CBI). Back
39 Evidence
p 70, para 13. Back
40 Peter
Robinson, "PFI and the Public Finances", in The Private
Finance Initiative: Saviour, Villain or Irrelevance?, IPPR,
March 2000; in particular Table 4. See also Pre-Budget Report
1999, Cm 4479, page 142, Chart B1. GDP for 2001-02 is forecast
to be £978 to 988 bn: Cm 4479, page 135, Table A8. See also
written evidence from UNISON on this point (evidence p 58 para
2.2). Back
41 Economic
and Fiscal Strategy Report 1998, Cm 3978, page 20. Back
42 Evidence
p 55. Back
