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Seventh Standing Committee
on Delegated Legislation
Wednesday 13 March 2002
Mr. Roger Gale
Local Government Finance (England)
Special Grant Report (No. 90) (HC 611)
The Chairman: Good afternoon, ladies and gentlemen. Hon. Members may, if they wish, remove their jackets, although I suspect that it is more likely that they will want to put on fur coats. We have tried to do something about the heating. I suspect that the Room will warm up just as our proceedings come to an end.
The Parliamentary Under-Secretary of State for Transport, Local Government and the Regions (Dr. Alan Whitehead): I beg to move,
That the Committee has considered the Local Government Finance (England) Special Grant Report (No.90) (HC 611).
I am delighted to be serving with you today, Mr. Gale, and I hope that I can add a little to the warmth of the Room.
Mr. Malcolm Moss (North-East Cambridgeshire): More hot air.
Dr. Whitehead: I guessed that that might be the rejoinder to my kind offer to help with the heating. It is a cross that one has to bear.
The report seeks Parliament's approval to pay revenue support for another year for schemes endorsed under the private finance initiative. It is, of necessity, a fairly technical document, which is why I arranged for the Chairman and all Committee members to receive an informal guide that explains in ordinary language why such revenue support is paid, how authorities qualify for support and how it is paid through a special grant. I hope that everyone found this helpful.
In liaison with local government, we have recently reviewed the method of calculating grant. As a result, we are proposing some small but important changes, which are introduced in the report. The revisions will simplify the formula and make it fairer for authorities. This improvement to the system is a positive response to authorities' suggestions. It is another example of the deregulatory approach to which we are strongly committed, and which was the theme of last December's White Paper ''Strong Local LeadershipQuality Public Services''.
As hon. Members will know, the Government are committed to using public-private partnerships in a variety of forms wherever that promotes best value in the delivery of public services. The report demonstrates our continuing commitment to those partnerships. It will allow us to pay grant to local
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authorities that have satisfied us that their projects will improve local services and offer better value than other procurement options.
Since taking office, we have encouraged local authorities to explore PFI in a growing range of service areas. We have made extensive changes to the regulations that control authorities' capital financing arrangements and have removed some technical obstacles that had stood in the way of PFI deals. We believe that we have achieved our aim of establishing PFI as one of the mainstream procurement options for local government.
Mr. Don Foster (Bath): Since the words that the Minister is using are identical to those that were used a year ago, would it not save the Committee's time if he simply referred us to the speech that was made then?
Dr. Whitehead: I thank the hon. Gentleman for that kind suggestion. I am in the hands of the Committee as to whether it wishes me to do that. Committee members might, however, wish me to set out why we are allocating grants in the way that we are doing this yearsome changes have taken place and it is important that those should be put before the Committee for discussion. It is true, and will be so in future years, that speeches on such occasions will sound similar. However, it is important to have a proper opportunity to discuss these matters.
Mr. Moss: Speaking as one who did not attend the sitting at which this was discussed last year, I should be most grateful if the Minister would continue to give us the benefit of his speech.
As a Northern Ireland Office Minister, I had responsibilities for the health service and environment, and I attempted to advance the private finance initiative, which was a Conservative innovation, as the Minister will no doubt acknowledge. However, I found that there were obstacles in the way of delivering, principally because the private sector was not prepared to take on the level of risk that we deemed appropriate. He said that he was removing obstacles to enable more PFI cases to progress. Does that mean that the private sector is taking less of a risk than is deemed appropriate? What is the Government stacking up in the future in terms of repayments under PFI for taxpayers in the next 30 or 40 years?
Dr. Whitehead: As the hon. Gentleman knows, the transfer of risk to the company or private organisation that may be involved in taking part in a PFI arrangement is included in the estimated cost. The risk that is transferred to the private organisation is appraised in deciding whether to take the PFI route or to follow a more traditional council capital borrowing route. Under those circumstances, the risk factor may be the determining factor in deciding whether the PFI deal or the traditional procurement method gives better value for money.
The risk factor is an integral part of the examination of the process. It is not the case that artificial inducements have been provided to lessen the risk to the company involved. What is the case, however, is that PFI is now an established mainstream choice for
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capital funding for local authorities. It is based on an understanding by local authorities and the companies involved about the size of the risk factor and how that factor is incorporated into the sums and financed over the years.
Mr. Moss: I am not sure whether the Minister has answered my question. May I put it more succinctly? Will the eventual cost to the public purse through taxation be greater as a result of the Government's thrust for PFI schemes than it would have been under the normal Treasury capital programme?
Dr. Whitehead: Perhaps, in turn, my answer to the hon. Gentleman's question was not as succinct as it might have been. As he has rephrased his question, I shall rephrase my answer.
The costs that will accrue in terms of capital and interest repayments on the capital borrowed are part of the assessment made during the decision-making process over which course is most appropriate for the local authority. Included in that is an assessment of whether the whole-life cost of the projecttaking into account risk and other factorswill turn out to give better or worse value for money.
I cannot give the hon. Gentleman an answer in terms of bottom-line accounting costs, but he appreciates the difference between offsetting capital liabilities upfront and undertaking what might be likened to a mortgage. If he compared the cost of paying capital upfront for his house and taking out a mortgage, he might find that the two figures were different. However, he might find it more worth his while to appraise how a mortgage would work in relation to his income, and how a capital deal upfront might work given the convenience, the cost and the risk. The two figures might not be exactly the same, but he would have to ask himself what the whole-life effect of that transaction was, and which of the two transactions gave the best value. That calculation of the risk and the whole-life cost would be carried out before any PFI deal was entered into. So, at the start of the PFI deal, the overall cost-benefit of the arrangement would be taken into account.
Since taking office, we have been encouraging local authorities to explore PFI in a growing range of service areas. We have made extensive changes to the regulations that control authorities' capital financing arrangements and have removed some technical obstacles that stood in the way of PFI deals. We now believe that we have achieved our overall aim of establishing PFI as one of the mainstream procurement options for local government. That success is due not only to the changes in the regulations but also to the arrangements that we have set up for the allocation of resources in the local government sector. A key feature is an interdepartmental body called the project review group, which is chaired by the Office of Government Commerce. It meets several times a year to assess thoroughly projects that have requested Government support. Projects endorsed by the group are issued with what are called PFI credits, as part of the formula for calculating the grant. The endorsement of projects offers the authority the
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assurance that it will receive grant and provides the private sector with greater certainty that bids for contracts will prove affordable for the local authority.
We have significantly increased the level of investment supporting PFI projects. So far, PFI credits worth more than £4 billion have been approved and a further £3 billion of investment should be approved over the remainder of the current spending review period. Those are significant sums, which may be different from the sums that the hon. Member for Bath (Mr. Foster) has on the page in front of himjust to make sure that he is keeping up. Hon. Members will be aware, both from work in their constituencies and more generally, that that support is leading to high-quality schemes, which in turn bring much-needed new investment to local areas and help to make PFI a familiar way for local authorities to improve local services.
A further eight projects were endorsed last month, bringing the total number of endorsed local government PFI projects to 183, covering all types of authorities and different parts of the country. The projects cover a wide range of local services, such as new schools, road maintenance, street lighting, community and health care centres, social housing and electronic information networks, and some have been especially innovative in joining up local services in a single location. That shows the adaptability of the PFI approach and the enthusiasm with which local authorities are embracing it.
I shall explain in more detail why we give revenue support for PFI projects through special grant. Authorities that procure capital assets in the traditional way, by borrowing and buyingthis point was anticipated in my reply to the intervention of the hon. Member for North-East Cambridgeshire (Mr. Moss) normally receive Government support towards the costs of borrowing from their revenue support grant. Authorities that opt instead for PFI also face significant ongoing revenue costs, including the regular payments to the PFI contractor. Special grant is intended to cover the capital element of those continuing payments, usually up to 70 or 80 per cent of the overall amount.
In principle, support for PFI projects could be paid through the same machinery that is used for normal revenue support grant for traditional capital programmes funded by borrowing. However, some practical problems are solved by using special grant instead. In particular, the use of special grant ensures that we do not pay grant before an authority starts to make payments to a contractor.
The Government are committed to giving revenue support to those authorities whose PFI schemes have been endorsed. The whole local government finance system is currently under review and December's White Paper outlined our proposals for the future. For the moment, however, we shall continue giving revenue support through the mechanism of special grant. Whatever changes are made in the revenue support distribution system as a result of the review
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will fully take into account all existing PFI commitments when future levels of revenue support are determined.