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Baroness Amos: My Lords, from memory—and I shall write to the noble Earl if I have got this wrong—I think that to date we have registered over 1 million people. We are hoping to register 10 million. This is being done through eight regional centres at present and then the focus will be on rural areas. The UK has contributed significantly to that process. I shall write to the noble Earl and put a copy of my letter in the Library of the House.

Lord Renton: My Lords, Al'Qaeda is still assumed to be based in Afghanistan. Would not any further participation in improving Afghanistan by the United States and ourselves help to suppress Al'Qaeda?

Baroness Amos: My Lords, there is continuing concern about the activities of Taliban forces and Al'Qaeda in Afghanistan. This is a major threat and we are working closely not only with our US colleagues on this but also with Pakistan and other countries in the region.

Baroness Williams of Crosby: My Lords, is the Minister aware that the proportion of women in the voters registered so far is very low? Can she say whether this is being given any degree of priority and whether the people doing the registration are encouraged to try to persuade women to take part in the political process?

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Baroness Amos: My Lords, we have been concerned about the low numbers of women being registered. We were very pleased with the outcome of the constitutional talks, as a result of which 25 per cent of the Members of the national Parliament will be women and equal rights for women have been enshrined. We shall continue to work to try to improve the number of women who are registered but, particularly in the rural areas where registration has not yet taken place, we are concerned that this may be a major problem.

Lord Tomlinson: My Lords, my noble friend mentioned the impressive economic growth in Afghanistan. Does she know what proportion of that economic growth relates to the re-emergence of the drugs trade in Afghanistan? What does she see as the inter-relationship between the emergence of money from drugs and the insecurity that clearly exists in that country?

Baroness Amos: My Lords, there is clearly a relationship between the re-emergence of drugs and the security situation but it is not the only problem. I am not able directly to answer my noble friend's question with respect to economic growth. I can say that we think that the livelihoods of 20 to 30 per cent of rural Afghans are at least partially dependent on growing opium poppies so we have must find some form of alternative livelihood. Our strategy is to try to get rid of opium production, to work with the Afghans to improve their interception of drugs and, at the same time, to work to provide alternative livelihoods.

Lord King of Bridgwater: My Lords—

Lord Mackie of Benshie: My Lords—

Lord King of Bridgwater: My Lords, I think that it is our turn.

In view of the obvious interest that the House has shown in these issues, and in view of the importance of the commitment that we have made as a country to Afghanistan and Iraq, is the Minister satisfied that enough is being done to keep people properly informed on current progress in both those important countries? Will she consider whether there are better ways in which the House and the country could be more regularly informed on progress in the range of issues in which there is great interest?

Baroness Amos: My Lords, I am very happy to talk to noble Lords about whether there are alternative ways in which we can keep noble Lords informed. A great deal of information is available on the DfID website. I regularly draw the attention of noble Lords to it. We do not print it off and put it in the Library of the House, but I can look at whether that would be helpful to noble Lords. My right honourable friend Hilary Benn frequently makes Written Statements on this issue in another place that I then sign off in this House. If there are other ways in which noble Lords would like to be kept informed, I would be happy to hear of them.

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Lord Mackie of Benshie: My Lords, can the Minister give us any information about the formation of a national army under the central government? I understand that it has been bedevilled by recruits joining and then deserting. Has this anything to do with them not being paid enough or not being paid regularly? If so, could they not be funded from an international fund that would, perhaps, ensure that they would stay?

Baroness Amos: My Lords, there are two ways in which we are seeking to support the Afghans with the development of a national army. First, there is a process of demobilisation from the forces that currently exist and reintegration, which particularly tries to get rid of the weaponry that is still around in Afghanistan. Secondly, there is a process of security sector reform that looks not just at the army but also at the police and other law enforcement agencies. It is important that the Afghans are taking these matters into their own hands.

Business of the House: Recess Dates

3.16 p.m.

Lord Grocott: My Lords, with permission, I should like to make a brief statement on recess dates. In October last year, I said that, subject to progress of business, the House would rise for the Easter Recess on Thursday, 8 April and return on Monday, 19 April. I also gave details of recess dates up to October this year, which was perhaps a brave, if not foolhardy, thing to do. But it is something that I intend to do my utmost to try to adhere to. I also said that we would try and get as close as possible to Commons recess dates, for all sorts of useful reasons. As the House may have noticed, the Commons have since announced different recess dates. They have extended the Easter Recess to give it another week. I would dearly like to match that. I can say that there has been some progress in the right direction and I am able to inform the House that, subject, as ever, to the progress of business, this House will rise on Tuesday, 6 April and it will return, as previously announced, on Monday, 19 April.

Tobacco Smoking (Public Places and Workplaces) Bill [HL]

Lord Faulkner of Worcester: My Lords, I beg to introduce a Bill to limit tobacco smoking in public places, including workplaces, and for connected purposes. I beg to move that this Bill be now read a first time.

Moved, That the Bill be now read a first time.—(Lord Faulkner of Worcester.)

On Question, Bill read a first time, and ordered to be printed.

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Business of the House: Debates this Day

3.18 p.m.

Baroness Amos: My Lords, I beg to move the Motion standing in my name on the Order Paper.

Moved, That the debates on the Motions in the names of the Lord Skidelsky and the Lord Sutherland of Houndwood set down for today shall each be limited to 2½ hours.

On Question, Motion agreed to.

Energy Bill [HL]

3. 19 p.m.

Lord Whitty: My Lords, I beg to move the Motion standing in my name on the Order Paper.

Moved, That the amendments for the Report stage be marshalled and considered in the following order:

Clauses 1 and 2,

Schedule 1,

Clauses 3 to 11,

Schedule 2,

Clauses 12 and 13,

Schedule 3,

Clauses 14 to 27,

Schedule 4,

Clauses 28 to 35,

Schedule 5,

Clause 36,

Schedule 6,

Clauses 37 to 41,

Schedule 7,

Clause 42,

Schedule 8,

Clause 43,

Schedule 9,

Clauses 44 to 47,

Schedule 10,

Clauses 48 and 49,

Schedule 11,

Clauses 50 to 57,

Schedule 12,

Clauses 58 and 59,

Schedule 13,

Clauses 60 to 65,

Schedule 14,

Clauses 66 to 71,

Schedule 15,

Clauses 72 to 87,

Schedule 16,

Clauses 88 to 115,

Schedule 17,

Clauses 116 to 118,

Schedule 18,

Clauses 119 and 120,

Schedule 19,

Clauses 121 to 136,

Schedules 20 and 21,

Clauses 137 to 150,

Schedule 22,

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Clauses 151 to 168,

Schedule 23,

Clause 169.—(Lord Whitty.)

On Question, Motion agreed to.

Public/Private Partnerships

3.19 p.m.

Lord Skidelsky rose to call attention to the role of public/private partnerships in improving the performance of the public sector; and to move for Papers.

The noble Lord said: My Lords, I am delighted to have won the Cross-Bench ballot for this debate, which introduces a topic that I think is important not only in the politics of this country but in the politics of most developed countries in the world.

In the beginning there was capitalism; then there was socialism; now there is the Third Way. At least that is the version of history dearest to the heart of new Labour. At the heart of the Third Way is public/private partnership, or PPP as I shall call it. It is the latest of the attempts to overcome the old divide between capital and labour, the private and the public: to get everyone humming the same tune, contributing to the grand harmony. I once asked the Prime Minister whether he was a Hegelian. He looked a bit startled. But it is, in truth, an effort at a new synthesis, a way of overcoming the old divisions which ramify in our minds.

Public/private partnership challenges both conventional market economics and our political tradition. Conventional economics suggest the need for a fairly small set of public goods provided through the tax system as complementing, and even underpinning, a market economy. In the British political tradition there is a rigid separation of the public and the private sectors, with different chains of accountability. The public sector is accountable to Ministers, who, through Parliament, are accountable to the public. In the private sector, the chain runs from managers to shareholders and, through market competition, to consumers. The public sector is supposed to meet social demand, the private sector individual demand. In the private sector, profit is supposed to be the spur to activity; in the public sector it is something called service, or the "public service ethic". Even in the post-war mixed economy the two sectors were kept separate, with different logics and different incentives. PPP claims to overcome this divide, hence its claim to be a genuine Third Way.

What is PPP? It is an umbrella term covering a large variety of efforts to forge partnerships between public and private sectors in delivering goods and services. Both sectors are deemed to be stakeholders in a giant enterprise called Great Britain. The IPPR sees PPP as a,


    "risk-sharing relationship based on an agreed aspiration between the public and private (including voluntary) sectors to bring about a desired public policy outcome".

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In the notion of an "agreed aspiration" lies much of the attraction, and perhaps naivety, of PPP.

In practice PPP is somewhat narrower than that. Its key principle—and this is what I want to emphasise—is that the Government buy goods and services from the private sector rather than producing them themselves. As one commentator writes:


    "Governments have increasingly asked non profit and for profit enterprises to carry out their politically-mandated objectives".

The Government set the goals, using private enterprise as the tool. The philosophy underlying this approach is portentously known as the "purchaser-provider split". The public have come to expect that certain services will be collectively paid for through taxes. But there is no reason why the Government should produce these services themselves if they can outsource them. The private sector provides, the public sector pays.

An alternative application of the purchaser-provider split is that of the "internal market". Here the purchaser, the buyer, need not be a public agency buying services on behalf of the consumer, but the consumer himself or herself, equipped with the buying power to choose between different providers. The purest example of this approach is that of the voucher. Its advantage is that it adds consumer choice to the public-private mix. The voucher in its pure form has almost never been tried in this country but the principle that public money follows consumer choice has made headway in both the NHS and the public education sector, though not so far, as far as I know, in the Prison Service. The principle of the internal market, then, is that we do not privatise supply; we try to privatise demand.

One can trace the history of this grand synthesis from the 1980s. It began with "contracting out", when the Thatcher government forced local authorities and nationalised industries to put out to tender services hitherto provided by public sector workforces. Notable examples were street cleaning, refuse collection, school meals, railway catering and hospital laundries. Even Her Majesty's School Inspectorate was outsourced at that time. Then, housing associations were created to build and manage housing estates on behalf of local authorities. Charities were subsidised to run services such as long-term health care. Finally, in 1992, came the private finance initiative, or PFI, whereby the public sector contracted with private companies to design, build, maintain, and in some cases operate public assets such as schools, hospitals, prisons and roads for a period of up to 30 years.

The dominant motive behind all these activities was the desire to provide an improved service at reduced cost—the El Dorado of cash-strapped governments—by engaging the self-interest and business skills of the private sector, and the philanthropic motives of the voluntary sector. Governments were forced to respond both to growing fiscal problems and to growing public dissatisfaction with the public services. Cynically, one may say that outsourcing was seen as the royal road to downsizing, or simply disciplining, mutinous public

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sector workforces. The private finance initiative added a more specific motive to this drive: to improve the presentation of the public accounts.

That is a somewhat technical matter, but it is important in understanding the evolution of public/private partnership. I am not just talking about getting a chunk of investment off budget by getting private consortia to raise the capital themselves. That, of course, was an attractive route for governments trying to improve satisfaction with the public services without raising politically unpopular taxes or incurring deficits which frightened the markets. I am also talking about the need to improve public sector productivity. The conventional wisdom used to be that public sector activities were inherently unproductive because they were so labour intensive. Therefore, national accounts priced inputs, not outputs. The consequence was that any increase in the public sector wages bill automatically showed up as an increase in the share of public spending in GDP. That was a nightmare for any government trying to control public spending, and especially for the Thatcher and Major governments who were trying to find room for tax cuts as well. However, it was also a nightmare for a Labour Government trying to justify increases in public spending by improvements in public services.

PFI was a device that promised to overcome that problem. The Government set private firms performance targets, leaving them free to choose the mix of inputs necessary to deliver the government objectives. Innovation is therefore built into the tendering process. The key argument is that PFI transfers risk. Because its own capital is at stake, a private consortium will deliver projects quicker and at a lower unit cost than a government department. Further, the long-term nature of the contract means that the contractor is forced to integrate design, building, maintenance and, if need be, the running of the facility into a single profit-making scheme. To put it simply: he is forced to design and build facilities whose running costs are likely to be less than those of a government department. The public realise they are getting better value for money and warm to the public sector. At least that is the theory.

How has it worked out in practice? Contracts under the public finance initiative are expected to account for an estimated 5 billion of public sector investment this year, which is about 11 per cent of the total. The Treasury does not expect that to increase. In fact, however, that presentation is misleading. Strip away depreciation and asset sales, and PFI accounts for about a quarter of public sector investment; and in some areas it is much higher. For example, 64 out of 68 hospitals built or ordered since 1997 have been under PFI contracts. Practically the whole of the new generation of our public infrastructure—hospitals, schools, roads, prisons, railways—is being built through PFI. Private companies such as Group 4 and Securicor not only build but also run prisons. Although technically owned by the Government and known as Her Majesty's Prison Service—I believe that it still is—they are to all intents and purposes in the private sector, operating under licence. In the United

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States there is the "charter" school movement whereby private companies or groups of parents are licensed and given a "charter" to run publicly funded schools. Early signs are that it will be one of the next developments of PPP.

The long-term benefits of PPP are still unknown because no one knows whether any of the private finance initiative projects will make a profit. It may be that, as in the railway boom of the 1840s, a new infrastructure for this country will have been built at a loss in a burst of fashionable enthusiasm. The main finding so far is that PFI has drastically reduced overruns on time and budgets compared with a conventional procurement process, but it has not achieved significant cost savings. That may partly be due to the cost of the tendering process itself. The main benefit of PPP as a whole may simply be that it raises the learning curve of the public sector. The threat of bringing in private contractors is itself a stimulus to innovation by public sector providers.

I turn briefly to some problems and then a couple of further possibilities. The first problem—it is a very serious one—is the blurring of accountability. When something goes wrong, who is responsible? I refer to unexpected events and new technologies that were not built into the original plan. The temptation for each side to blame the other, for risk transfer to become blame transfer, will become irresistible. Who is responsible to the consumer as a consumer in this rather cosy bipartisan partnership between two groups of producers?

Then there is the problem of bureaucracy. Every act of outsourcing requires a new act of regulation. This accounts for the paradox that the shrinking of state ownership and provision has led to a big increase in regulation. PPP is not the only cause of this, but I judge it to be an important contributory factor. That increase in regulation reflects the ambiguity in the purposes of PPP. Are the motives for it fiscal window dressing or more efficient services—value for money? Or is it an attempt to achieve, or at least not jeopardise, wider social aims such as fairness and uniform provision?

I turn in conclusion to a couple of ideas currently being developed for widening the ambit of public/private partnership. The first is the concept of public value. This is an attempt to allow for the increased value of government activities beyond the material benefits people receive from paying taxes; in other words, to allow for immeasurables. It is very hard to build immeasurables into cost/benefit analysis, but they are there. Government activity adds value. It can also subtract from value. So how do we get a grip on this in the context of public/private partnerships?

The other PPP development that seems to have a future is co-payment. We have already experienced this in top-up fees for university students but it will probably become more general. In a co-payment system, the purchaser/provider split remains, but the purchasers are divided between the Government and private consumers. Arthur Seldon has recently advocated the extension of that principle to state education.

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The suggestion that the state and the private sector working together can create more aggregate value than the sum of the values of their separate parts is, as I have tried to indicate, both attractive and troublesome. The question remains whether PPP is a genuine innovation in our political economy or an unstable halfway house between further steps towards privatisation or the renationalisation of public services. It is certainly food for thought. I beg to move for Papers.

3.35 p.m.

Lord Oakeshott of Seagrove Bay: My Lords, on behalf of the House I thank the noble Lord, Lord Skidelsky, very much for opening this debate with his fascinating tour d'horizon, which was both philosophical and practical. Following his grand synthesis, I shall move from the general to the particular. In so doing, I declare an interest both as an economist and as an investment manager with a particular interest in commercial property.

As the noble Lord said, PPP and PFI deals are all about risk—what risks are really transferred irrevocably from the public to the private sector, is the taxpayer paying a fair price for laying off those risks and is the process open enough for Parliament and public to get the straight answers they need to measure and judge these deals?

Today I want to explore one PPP deal in particular detail; that is, the outsourcing of the Inland Revenue's and Customs and Excise's property and facilities management to an offshore company called Mapeley Steps. In my view it shows how PPPs can increase, not reduce, risk for the taxpayer when they go wrong. It gives a salutary warning why these vast public spending commitments in PPPs and PFIs, often for up to 30 years ahead, must be open to proper public scrutiny.

I start—returning to the philosophical for a moment—by stating firmly for the record that we on these Benches hold no ideological torch either for or against PPPs. We believe that free trade and free markets work much better than protectionism and regulation. We want public services to be delivered as efficiently and as reliably as possible, giving the highest quality at the lowest cost. Big, bureaucratic public organisations can be sadly lacking in project management or specialist technical skills; too often in the past the rule has been, the bigger the public construction project, the longer the delay and the bigger the cost overrun.

But to get better bakers baking better bread you do not always have to give them the bakery for the next 20 or 30 years. Just as the public sector often lacks the skills to manage big projects, it also lacks the equally scarce skills needed to manage a PPP or PFI bidding process professionally and to drive the hardest bargain possible with the bidders in a truly competitive, not a cosy, tender. Too often, in early PFI contracts in particular, private contractors have taken the taxpayer to the cleaners, setting up thinly capitalised single

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purpose vehicles leaving most of the risk in practice in the public sector, with enormous windfall profits if interest rates move the right way and non-existent, or minimal, clawback or profit sharing arrangements. Too often the deals have been set up so that it was heads the PFI contractor wins, tails the taxpayer loses.

Too often in one or two cases such as Mapeley, I am afraid to say, a cover-up has also followed the initial cock-up. That example is not some remote school or hospital trust; it is right at the centre of government. In the Mapeley Steps PFI, the Inland Revenue and Customs and Excise sold off 600 properties to offshore shelf companies registered in a tax haven and controlled by foreign investors. There has been much interest in the tax side of things, stamp duty and so on, but that is not what I am focusing on today. I am focusing on the risk and what risk was or was not transferred. In March 2001, the Revenue and Customs and Excise signed a 20-year PFI contract with Mapeley. By December, Mapeley said that it had a serious cash flow problem and asked for an extra settlement to bail it out. The departments were then concerned that the contract, on which the ink was barely dry, could collapse, with very substantial additional costs if they had to take the properties back. Civil servants then issued letters of comfort to the PFI contractor to enable it to refinance without, as it happens, telling Ministers.

Complex negotiations of that sort can all too easily create a climate of collusion between the public purchaser and the private supplier when things go wrong. No wonder the Treasury Committee of the House of Commons concluded, in its report last year, that in this case the financial crisis at the contractor and the potential consequences of the company going bust undermined the long-stated objective of transferring risk to the private sector.

What happened in the case—it is a classic property market operation—is that Mapeley took out the valuable freehold properties, put them in one company and transferred it to Bermuda, and left the long-term facilities management contract and the short leasehold properties, many of which were liabilities, in a company called Mapeley Steps Contractors, the rump company with the PFI contract. In plain English, the Inland Revenue let the man behind Mapeley, a gentleman called George Soros, get the British taxpayer over a barrel.

That is a pretty salutary example of how things can go wrong. I am also concerned about the more recent deal to extend the outsourcing contract for the DWP for jobcentres with Trillium. That is not because we are not talking about a substantial British company that has loan securities, but because I saw very little sign of a competitive tender when the contract was extended or of the competitive tension about which the PAC has talked. To me, it looked rather cosy, and it did not seem that the procurers had properly priced the two quite separate aspects of the contract, one of which was the sale of a lot of freehold property. With a lease of 10 or 15 years to the Government, that property is in very considerable demand and has a very high value

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at the moment. The separate issue was the facilities management contract. That was not properly analysed.

I have also raised similar concerns in the House in the past about the highly stretched finances of the likes of Amey and Jarvis, which were bidding for London Underground. Those were brushed off at the time by the noble Lord, Lord McIntosh. Since then, Amey has had to be rescued by a very low takeover bid when it was on the edge of bankruptcy, and most of its PPP interests have been sold off in the secondary market. That process flew very much in the face of Recommendation 12 from the latest report of the Public Accounts Committee, which suggested that:


    "Before shortlisting potential bidders departments must be satisfied as to their financial and technical competence and their performance on other government projects".

It is obviously important that a PPP be a long-term relationship, and again, in such cases, there is now an active secondary market in PPP interests. Whatever is said at the beginning, people find out a year or two on that they are dealing with a very different supplier of the services.

PPPs can and do work well in areas where bidding systems are well established; where procurers have played themselves in, if I can put it that way; particularly where a new building is a key part of the service to be delivered; and where there is a culture of openness and transparency about the process. The best example is in the NHS, as the recent IPPR report made clear. In other areas, such as local authorities and schools, that report said that much was shrouded in secrecy.

We on these Benches take a highly pragmatic approach to PPPs. They can be useful to bring in private sector discipline, and to tie private contractors and to fix price contracts without overruns. However, the risks are enormous and, in many cases, the public sector is incapable of assessing them properly. We see the benefits of new PPP investments today, but we will know the real costs only in a decade's time.

3.44 p.m.

Lord Brooke of Alverthorpe: My Lords, I, too, want to express my gratitude to the noble Lord, Lord Skidelsky, for initiating the debate in his usual stimulating manner, and to the noble Lord, Lord Oakeshott of Seagrove Bay, for bringing a particular viewpoint from his own experience for us to consider. Similarly, the debate gives me an opportunity to bring to the House some direct personal experiences of one PPP, NATS Ltd. I have been a non-executive director of NATS since it was formed in July 2001, so I declare an interest. Also, I want to share with noble Lords a number of conclusions that I and others who have looked at the PPP have drawn, and to raise a few questions.

When the PPP was launched—not without some opposition and controversy—Her Majesty's Government retained a 49 per cent stake. The Airline Group was the preferred strategic partner, selected on the basis of a not-for-commercial return, its key return

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being that it hoped for increasing efficiency and a more cost-effective operation. It gained a 46 per cent stake initially, and the remaining 5 per cent of the shares went to NATS employees. Those are currently non-tradable and not on the market. A good question for the Minister therefore might be whether the Government intend to leave the shares in that position ad infinitum, or whether there might not be some ideas about floating them.

The immediate principal beneficiary at the launch of the PPP, gaining more than 700 million in receipts, was the Exchequer. In spite of press reports and allegations of government bail-outs since—NATS ran fairly quickly into some financial difficulties—there has actually been relatively little support from the Government. We have taken a loan of 30 million, repayable at commercial interest rates. Subsequently, there has been an additional financial injection of 65 million, conditional on our matching that figure from the private sector. In the event, that match came from BAA, which now has a 4 per cent stake, thereby reducing the Airline Group's interest to 42 per cent.

The Exchequer has still done pretty well out of the exercise, and has retained well over 600 million from it. We now none the less have, as I will seek to demonstrate, an improved public service beyond what we could have expected if NATS' status had not changed into a PPP. However, NATS has had its problems, as I would not deny. Within six weeks of its formation, we were faced with the consequences of September 11 in the USA, when there was an unprecedented decline in air traffic. That was particularly damaging from NATS' point of view, as the major portion of our income comes from north transatlantic flights—it is our major income earner.

The Airline Group had also borrowed extensively from the banks to fund its stake purchase in NATS, and to provide the long-term capital expenditure programme that it was required to deliver—around 1 billion through to 2010–11. Its own airline businesses were, however, badly hit by the loss of air traffic following September 11. The first lesson to be drawn in my opinion is therefore that PPPs—fragile plants that some of them may be—should not be over-geared with debt. That picks up the point of the noble Lord, Lord Oakeshott. Put another way, if we are dealing directly with the Treasury, the Treasury similarly should not be greedy.

The second lesson is that PPPs must make certain that, in modelling their financial structure, they have been tested against the worst possible scenarios. The NATS PPP had been modelled against 19 adverse scenarios, including the Gulf War of the early 1990s. However, none had the severity of the consequences that we faced after September 11. Thirdly, it is worth pondering whether strategic partners should come solely from the industry within which the PPP will operate. Certainly one gains great industry know-how and insight from that, but might not there be a case for greater diversification and spreading the risk wider than has been the case with the NATS PPP?

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The Government's objectives for the NATS PPP were, principally: to enhance UK aviation safety by separating service provision from regulation; to provide NATS with greater project management and commercial expertise than it had had hitherto—it had long records of embarking on major projects and of major misses on timetabling and costs; to ensure access to adequate capital without recourse to public sector borrowing; and to move to incentive and performance-based regulation to replace the former "cost-plus" regime, which had operated for many years and led to allegations that the UK air traffic service charged the highest prices in Europe.

In particular, we needed more investment to meet projected traffic growth, leaving September 11 aside. Without September 11, the anticipation was of unfettered growth of a minimum order of 5 per cent per annum running through as far as we could see. Most European air traffic service providers and their USA counterparts have difficulties with investments similar to ours. Programmes are cut when there are budgeting problems in the public service. That has bedevilled all air traffic service providers. Prior to PPP, that had always been the case in the UK.

However, soon with privatisation we had similar problems to those that we had experienced in the past under public service. Therefore, we had to embark on a politically sensitive, complicated and lengthy financial restructuring. I can report to the House that the PPC—I will not make promises but I will read the phrase—is now "financially robust and independent" following the composite solution change and bond refinancing exercise that was undertaken last year.

The composite solution, as I mentioned earlier, involved the entry of BAA as a 4 per cent shareholder and the recasting of the CAA regulatory cost regime. Under the public service ownership practice, it was RPI-plus. After the PPP, we embarked upon an RPI minus 4 per cent regime to cut charges. That was a most ambitious programme, but it was not sustainable with the September 11 traffic downturn. Happily, the CAA regulator was prepared to make adjustments to RPI minus 2 per cent.

The consequence has been that in the past three years NATS has been the only provider to reduce prices. All our comparitors in the rest of Europe have increased theirs. That is quite a measure of progress in the light of our previous history.

What other progress has been made? Safety has remained paramount, although it was regrettable that there was an incident at Manchester airport two weeks ago. It is currently being investigated, but NATS has introduced more stringent safety measures than have existed hitherto. During the past two years, despite the growth in the density of low frills air traffic, we have seen a reduction in recorded incidents.

Significant improvements have been made in delay performance. The average delay per flight attributed to NATS was 0.7 minutes in 2003, to be viewed against a performance in 2002 of 2.6 minutes and an internal target for 2003 of 1.5 minutes. We have almost halved

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the target we set ourselves, which is an amazing performance. There has been an increase in the overall number of flights at 3.9 per cent. We are handling more flights with less money coming in because fewer have been on the north Atlantic run.

There has been a reduction in planned spending of 200 million as part of the regulatory regime approach. That would never have occurred under the previous public sector arrangements. Furthermore, as we have settled the bonding issue, that has triggered the release of the almost 1 billion investment plan I mentioned that will run to 2012. That will entail the complete replacement of the old legacy systems and a reorganisation into two main centres—one at Swanwick and one in Scotland—with the introduction of additional emergency standby facilities. It is difficult to contemplate that under the public service we could have had a programme running from 2004 to 2012 without interference in one form or another with the flow of funds.

The PPP has a new strategic mindset, much of which would never have been possible previously. In particular, it is developing a collaborative programme with Spanish and German counterparts and it is seeking a leading role in the development of the European single sky policy. Many in Europe and in the States are watching our unique model. Much work still remains to be done—culture changes do not come overnight. We need to develop greater staff involvement and commitment to the concept. I would like to see the 5 per cent staff stake in shares increased. Will the Government maintain their 49 per cent stake, or do they have ideas about changing that? It can go down to 25 per cent. Would they contemplate looking for means whereby staff involvement and commitment could be further increased by finding methods of transferring shares to them?

There are other intriguing questions about lines of accountability, which have already been touched on, and shareholders' responsibility. Who really bears most risk? Should NATS be quite so heavily regulated by the CAA or could there be a lighter touch? I pick up the point made by the noble Lord, Lord Skidelsky, about the growth of regulation. The UK airlines were given greater opportunities for self-regulation with limited CAA interference. Why should that not apply to the National Air Traffic Services?

After a rocky start, this is one PPP that is now working well. It is well funded with a good, sound long-term investment plan and it is a model perhaps for others to follow. My view is that each PPP must look at its own entity and decisions must be taken by government and their partners in the light of circumstances in which they find themselves. They should be customised to meet those circumstances. Overall, this PPP has worked well and is working well. It is increasing the provision of better public service, which in my opinion would have been the case had it continued down the same old route.

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3.56 p.m.

Lord Selsdon: My Lords, I am doubly grateful to the noble Lord, Lord Skidelsky, first, for introducing the debate and, secondly, for in an all-too-brief 16-minute speech giving me the exact essay for which I have looked for a long time to explain what we are talking about today.

I suffer from several disadvantages. I have spent most of my life in the financial sector, rather like the mosquito with one foot on the land and one in the muddy water of public finance, experiencing the tide going in and out, bogs and difficult problems on the way. I started in the days of BOT—build, operate and transfer—the Bosporus Bridge. Other buildings and activities came about, often with aid funds. There was then BOOT and DCFO—design, construct, finance and operate. Everyone seemed to invent a new word or phrase and no one could explain to me what it was all about.

We knew Her Majesty's Government—and I hope that "Her Majesty" will always remain in front of it—will always have to obtain the best deal. But the problem with the public sector is that, in general, it has a different culture from the private sector. That was often demonstrated when senior officials from the public sector went into executive jobs in industry to watch their industrial company rapidly decline. That culture needs bridging and some of the concepts advanced and the learning curves are significant.

I declare an interest. I am a senior non-executive director of Gleesons and we undertake many PFI and PPP projects. I spent part of this morning with my colleagues, including my chairman who is chairman of the major contractor's group, discussing what had gone right, what had gone wrong, what the Government should do, and what we and others should do.

While we may talk about PPP being risk-sharing or a partnership, in reality PPP is the Government's attempt to transfer the risk completely. That is a misrepresentation of the truth, whereas PFI is more of a risk-sharing exercise. The term "alliance" is beginning to be advanced. I have spent recent weeks on the continent of Europe discussing with local authorities in Germany and elsewhere how the British example could be used to develop and manage public investment in the social sector. Then I thought to myself, "Wait a moment! The Government, and much to my surprise a Labour Government, have almost adopted what might originally have been Conservative or Liberal clothes".

The Government have a problem because they have promised the electorate that so much must be built and operated within a narrow time-frame. Here, I do not believe that there is any difference between the political parties but questions do arise in relation to the mechanism. What can we learn about it? As has already been indicated, PFI seems a more effective way of dealing with the issue, but we must understand that contracting is a risk business and does not usually involve capital; it involves working capital and working with one's client's money. In general, contractors cannot take big equity risks unless they have an equity group behind them.

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I turn to the different areas that we are discussing: schools, hospitals, roads, railways, prisons and secure centres, where PFI runs right across the board. I shall begin with the hospital sector and the mechanisms that have been advanced successfully under what is known as "Procure 21". The Government seem to have different ways of procuring everything. I have been asked to suggest that, even from these Benches, and high though I may be at the moment, it would be far better to have greater centralism. The PSA, the Ministry of Building and Public Works and—dare I say it?—the Duchy of Cornwall and the Crown Estate have had years of procurement experience. They knew every trick in the book. You knew that it would be a long, uphill battle when negotiating with them but, when you had signed your agreement, they were as strong an ally as you could wish to have and, perhaps to a certain extent, a little more of an ally than is the case today.

Turning to the subject of the hospital programme, the Government decide on the kind of hospital that they want and they hand it over to a trust. In general, the members of the trust do not have much experience of government or of the private sector. Obviously, they disclose their interests and express their own views and they can disrupt the progress of the construction contract quite considerably and cause delays. In addition—I have raised this matter with your Lordships before—many of them fail to realise that technically the trustees are shadow or non-executive directors. In this compensation world, one wonders whether they are aware of the liabilities that they might have if the hospital concerned failed or burnt out someone's eyes, with the ensuing claim that would run through the system. Such uncertainties are difficult to fathom.

The group with which I am connected has built many hospitals. I shall not disclose which ones have lost money, but the experience and the learning curve have been significant. The mechanism is good. However, there have been problems when dealing with UNISON, and perhaps the greatest problem has been the long-standing lack of investment in the health sector. There are also fears relating to issues such as MRSA and the infrastructure behind the hospital.

I move on to the subject of schools and the Building Schools for the Future programme—to some extent, another method of procurement. That has worked, too. Schools have been built quite successfully and quickly but little thought has been given to how useful the infrastructure could be during the school holidays. In some parts of the country, it could be used for temporary homes, for students visiting the country or for tourists. The point is that the infrastructure—the buildings themselves—is not necessarily used throughout a full year.

Moving down the line, we come to the subject of prisons. My group has built two or three detention centres and a high-security prison as PFI projects. Much to my amazement, the cost of building an individual cell was significant but the cost of the security for such a cell was roughly 40,000 per prisoner. In that sector, the five or six security

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companies—several have already been mentioned—are effectively the client and the Government are completely out of the picture. On the other hand, when building schools, one often has to deal with local authorities and governors, who may sometimes wish to disrupt the very objectives that the Government set at the beginning. Therefore, PFI seems to be effective and to work, but the long term has not been thought through.

We move to the phrase "partnering". Partnering is not really PFI or PPP. It tends to occur where a former public utility—a water or power company, which, regrettably, nowadays are often owned by foreign interests such as the French and Germans—sits down together with a contractor and a design company and designs, builds and operates a treatment plant or something of that kind. That works fairly well. However, ultimately, people have yet to work out the value of their long-term investment. A 15 or 20-year investment, particularly for a contractor who must achieve a high turnover on his capital, is long term. The Treasury is about to produce a new paper on the subject of PFI.

In many countries, that type of investment is considered by pension funds to be long term because it is secure and reliable once it is off the ground. If only we could raise the yields on those projects to somewhere around 6 per cent, I am sure that pension funds in this country and the world over would invest in them because they like the security of the public sector having been involved at some time or another.

I come to another technical issue. As the noble Lord, Lord Oakeshott, pointed out, ultimately it all comes down to money. Contractors want to have a good contract and they want to be proud of the results. As an example, my group is building a court somewhere. We were building it for the noble and learned Lord the Lord Chancellor—a very eminent man in a high position—and we thought we had a prime job. Now we are building it for the Secretary of State for Constitutional Affairs—rather lower down in the batting order. Today, I was asked whether the covenant was just as good, but I am happy to know that the building will open on time and I shall write to the noble and learned Lord the Lord Chancellor to ask whether he will open it.

The fear of those in the private sector does not necessarily relate to understanding the Government. Those concerned may be the bankers but certainly not the contractors, who are closely involved in the negotiations. Gradually, as one negotiates on one school and then another, the learning curve becomes shallower and people begin to get to know and to trust each other.

My experience of dealing with the public sector—mainly the long-standing bodies that I mentioned earlier—has always been that they do their job very professionally. However, they have to extract not the last pound of flesh but a deal which they hope will involve no risk in terms of cost overruns and so on. But, ultimately, the sharing must be looked at more closely and technical issues can arise.

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I shall refer to a body called the Urgent Issues Task Force, which my noble friend on the Front Bench will know about. You may be selected as a preferred bidder and will hope to sign a contract. If the Government or the public sector suddenly change their mind, which they are entitled to do, and decide that, instead of going through a PFI project, they will go down the normal, traditional route, you will have to write off, or may be reimbursed for, substantial costs which are incurred between the time you are selected as a preferred bidder and the time the contract is signed. Under current accountancy regulations, you cannot capitalise those costs and therefore you have a major problem. There may even be a balance sheet problem, which affects medium and small-sized contractors. I should be grateful if the Minister would consider that and other issues which I may introduce later privately.

There is a genuine willingness throughout the construction and contracting industries to work in this sector. In general, our group finds that perhaps three-quarters of our business now comes under the heading of "partnering". One likes it because, in general, the risks are fewer and the margins are lower. People who assume that contractors make enormous margins must understand that there are such things as ground conditions and other issues that can cause absolute havoc, let alone the weather.

I am proud to have been involved in this sector. I believe that it is going in the right direction. Much tinkering could be done but, again, although I am a Conservative, I say that if the Government would look a little more at centralism, I believe that that would go down very well. Can they also please bring back the original Ministry of Building and Public Works, which I always saluted when I passed it in the street?

4.8 p.m.

Lord Dahrendorf: My Lords, it is already evident that we have reason to be grateful to the noble Lord, Lord Skidelsky, for having initiated a debate which is clearly informative and stimulating. I want to offer a few observations which come some way between the philosophical remarks of the noble Lord, Lord Skidelsky, and the very practical comments of my noble friend Lord Oakeshott and the noble Lords, Lord Brooke and Lord Selsdon.

I start with the presumption that the notion of a partnership between public agencies and private finance and companies which provide services is attractive. I do not say that because I am a Hegelian; I am emphatically not that. If anything, I am a Kantian who likes clear and clean distinctions rather than fuzzy synthesis.

Having said that, I find the notion attractive that one might combine public interest with efficiency. In any case, the world in which we live is one in which in many cases it has become difficult to distinguish between public and private. My distinguished successor but four as Director of the London School of Economics, Howard Davies, was recently reported to say that we even lack a rigorous taxonomy of the new menagerie of public/private sector life, and I am sure he is right.

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It is also the case that successive Chancellors have been rather enthusiastic about public/private partnerships—the noble Lord, Lord Lamont, introduced the PFI part of that category in 1992; his successor, Kenneth Clarke, took it up and Mr Gordon Brown is a considerable enthusiast for this idea of partnership—or is there perhaps something very slightly suspicious about the enthusiasm of Chancellors for this particular invention in our political world?

I should like to raise a few questions in that regard, to which there may well be satisfactory answers. Indeed, I do not expect all the answers from the Minister today. In a sense I regret our ritual that the initiator of a debate such as this moves for Papers and then withdraws the Motion at the end of the day. I should like to see papers which answer the questions I want to put before the House.

My first question is the familiar and simple one to which the noble Lord, Lord Selsdon, alluded. Is there not a built-in conflict of interest between the values of public service on the one hand and the values of private profit on the other? To put that even more acutely and sharply, does not the extensive use of public/private partnership destroy some of the service values which are part and parcel of a good system of public services? That is not a theoretical question. There may be a satisfactory answer to which the noble Lord, Lord Skidelsky, alluded. It may be the good old answer that there should be a narrow definition of truly public services, which should be "public/public", and a definition which leaves a wide space for private interest and private action but emphasises public services.

I liked the reference that was made to another kind of partnership; that is, the partnership between the public sector or the public interest and the voluntary sector or the philanthropic interest. In some ways, the values of public service and the values of a voluntary sector are closer to each other than those of the public and the private sector. I repeat, I am raising questions to which there may well be a satisfactory answer.

My second question is: can one distinguish between areas of public services in which private finance is useful and others in which it is not or perhaps less so? I used to feel that the distinction could be made between infrastructure and operation, between track and trains. But what I used to feel is evidently irrelevant today because my sense was that there are aspects of the infrastructure of our society which are distinctly public/public and should be public responsibility, whereas operation might be private. What is happening now is almost the opposite. Certainly that is true in the case of PFI. Hospitals are built by private initiatives but run by the NHS. By analogy, the same is true for schools. The question is whether there are other dividing lines.

I was interested in Research Paper 03/79 submitted to the House of Commons on the private finance initiative which states, for example:


    "While road and prison projects have achieved reasonable efficiency gains, projects in other sectors such as schools and hospitals have shown minimal gains".

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The reason given in this research report for this particular difference is that in the former case there is no clear division between core and ancillary services whereas in the latter cases there is such a distinction.

If I am not mistaken, the Government distinguish between projects with a small and a large capital value and regard only the latter as useful candidates for private finance initiative activity. Certainly, there seems to be a relevant question as to whether this distinction or any distinction of this kind can be usefully applied to policy decision.

My third question is almost by the way, but nevertheless I hope will not be regarded as irrelevant. Is it not critically important for effective public services that the possibility of cross-subsidies remains open? There may well be a risk in some cases that private sector interests enter above all where activities are profitable. Railways are an example which have not yet been discussed in any depth. Transport, at any rate, accounts for 60 per cent of all PFIs. So, in some ways transport should be one of our main themes.

Long-distance rail lines may be profitable; commuter travel is not. Is it not more appropriate to have a system in which it is possible to cross-subsidise rather than to privatise one and leave the taxpayer with the other? Indeed, there is a deeper question: should there be profit in public services?

I now come to two or perhaps three questions which take me back to the interests of Chancellors in PPPs and notably PFIs. My fourth question is: Is the private element in PFIs and PPPs additional to public expenditure otherwise decided or is it a substitute for such public expenditure? It is one of those questions which can never be properly answered. It reminds one of the vexing question often asked about European structural funds and what they are used for. Clearly, money that would often not be available now if it had to come from the public purse is sometimes found from private sources, so there must be an assumption that to some extent private finance is a substitute for cash-strapped public funding.

If that is possible—if private money can do the trick—what magic makes it possible? What is so special about the private element? Is it to be understood that taxpayers' money cannot afford what is necessary but also need not do so because private sources are happy to come in?

That leads me to my fifth question, which in some ways is the most difficult. Is the entire PPP/PFI system in some ways a method of saving current expenditure by imposing future burdens and by the same token investment for current expenditure? In other words, is the whole PPP show a game with mirrors?

The case is stated concisely and unambiguously in the summary of the House of Commons research paper to which I referred, one paragraph of which is worth quoting in full:


    "The PFI has meant that more capital projects have been undertaken for a given level of public expenditure and public service capital projects have been brought on stream earlier. As at 4 April 2003 there had been almost 570 PFI deals signed with a total capital value of almost 36 billion. The increased level of activity must be paid for by higher public expenditure in the

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    future, as the stream of payments to the private sector grows. PFI projects signed to date have committed the Government to a stream of revenue payments to private sector contractors between 2003/04 and 2028/29 of over 110 billion"—

as against the current value of 36 billion.

These "future liabilities" do not show up in current accounts—and, incidentally, they do not include unexpected burdens on the public purse which may arise when private contractors fail for one reason or another.

That leaves my sixth and final question, which of course is on the question of accountability. Is accountability for this new instrument of public policy sufficient or is there—as the noble Lord, Lord Skidelsky, put it—a "blurring of accountability"? All this is not said to make a case against public private partnerships, but in the hope that we will gain an even clearer understanding of what we are doing and why we are doing it—and perhaps to get an understanding which helps us to evolve an instrument that might well turn out to be more useful than harmful.

4.21 p.m.

Lord St John of Bletso: My Lords, I join in thanking my noble friend Lord Skidelsky for introducing this extremely topical debate. I do not profess to have any personal expertise on the subject, but I am firmly of the belief that PPPs do indeed play—and have played—a very important role in improving the performance of the public sector, particularly in the build out of healthcare, school and university facilities. Sceptics of PPPs and PFIs will naturally refer to the London Underground, which so far has not delivered the improvements in reliability and service that were originally anticipated.

However, rather than speak on the woes of the London Underground and the negative features of PPPs, I wish to confine my remarks to the many hundreds of smaller PFIs which have been very successful in both delivery on budget and on time. In essence, what we all want are high-quality public services, which are built on time and within budget, and where the risk does not fall on the taxpayer but more on the private contractor. The four key elements to the success of PFI—I refer more to PFI than to PPPs—are the design, the build, the finance and the operational skill sets.

It is easy to get bogged down with the academic issues of the control relationship between public and private sector, more specifically on whose balance sheet the asset of the property part of the services should be situated. I shall not elaborate on this point, but my central theme is that public sector infrastructure projects invariably tend to go over budget and over time. In essence what is needed is a combination of the best of the public sector and the best of the private sector. All too often major infrastructure projects fail because of poor management. Here no doubt the private sector invariably tends to have a far more disciplined and financially focused management style. I do not in any way undermine the management style of the public

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sector, but certainly on cost I believe that the private sector is in a far better position to take control of these issues.

As my noble friend Lord Skidelsky very eloquently outlined in his precis of the past, present and future of PPPs, the public sector looks to the private sector for expertise, innovation and management of appropriate risks, so as to improve productivity. So far there have not been many cost savings, but there is scope for far better cost savings. The private sector is invariably better positioned to raise competitive funding in the capital markets.

There are a number of PPP projects, which clearly will have huge benefits for the public sector. I refer to Project Aquatrine, which effectively will transfer the responsibility for the operation and maintenance of the Ministry of Defence's water and wastewater assets and infrastructure to private sector providers. By transferring this environmental risk to the private sector, which certainly is far better positioned to manage it, the MoD will be able to exit a non-core activity and concentrate its efforts on delivering military capability.

PPP will also play a very important role in the build out of future modern schools, utilising higher standards of design and innovation and more importantly delivering these facilities on time and on budget.

Britain has played an important role as a role model for the promotion of PPPs, which have been promoted in many countries around the world. I am not of the opinion that PPPs will be the panacea for the budget constraints of many countries. I refer specifically to the new European Union member states like Poland, the Czech Republic and Hungary. All have a major need to invest in infrastructure and social services to catch up with western Europe. But it is difficult to combine PPP projects with EU structural funds because PPPs obviously cover a longer period than the structural funds are designed for and because interest payments are not eligible for EU funding.

The National Audit Office has made a number of very constructive recommendations on PPPs. In its recent report the NAO made a strong point that public and private sector partners should not enter into a customer/supplier relationship but need to take—in its words—a whole business approach with proper checks and balances showing more transparency and accountability.

I agree with the noble Lord, Lord Oakeshott of Seagrove Bay, that PPPs carry a fair amount of risk. Clearly there is a lot of scope for improvement of PPPs. The tender process—a point mentioned by my noble friend Lord Skidelsky—is very bureaucratic and costly. There is scope for driving down costs in that one area and scope also for greater efficiencies. I welcome the recent move by the Department of Health to batch PPP projects by grouping several PPPs and then putting them out for joint tender. We certainly should expedite and streamline the whole process. However, I remain sceptical on the success of "lifts". I shall not go into the issue of the definition of lifts.

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I should like to see a far more entrepreneurial approach to PPPs. The private sector is best positioned to inject entrepreneurship into private sector projects, which are often very monolithic. I refer to some experience I had in the past when I worked for a large oil company. We used to build service stations and provide service stations as a convenience centre. I certainly believe that in the hospitals for the future there is far more scope for value-add services in the build out of these much needed facilities.

With the public sector currently accounting for just over 40 per cent of UK GDP, I conclude, as I mentioned at the start of my speech, that there is no doubt that PPPs have played, and will continue to play, an important role in improving the performance of the public sector. The system is far from being perfect. There are risks. But the upside, once several of the impediments that your Lordships have already mentioned have been removed, is a win-win for both the public and the private sector.

4.28 p.m.

Lord Haskel: My Lords, I congratulate the noble Lord, Lord Skidelsky, on moving this very topical Motion. Purely as an aside, perhaps I may say that somehow I find his arguments much more persuasive since he moved to the Cross-Benches.

However, I am not sure that I agree with the noble Lord that the private finance initiative is part of the Third Way. The private finance initiative arose out of need. It has been around a long time; rather longer than the Third Way. In the private sector 15 or 20 years ago creative accounting was very much in fashion. At the same time, the public sector was starved of investment—cash-strapped, as the noble Lord, Lord Dahrendorf, put it. The creative accountants argued that if the investment was contracted to the private sector, it need not be limited by the PSBR, which the noble Lord, Lord Skidelsky, mentioned. The rate of investment could be speeded up.

At that time, the public sector used the knowledge and experience of the private sector, but when a project was completed the private sector then walked away. To retain the private sector's management skills and involvement, long-term contracts of 20 or 30 years would be needed to bind it into the contract. If, in addition, the private sector could be persuaded to accept some of the risk, the entrepreneurial drive of the private sector, about which the noble Lord, Lord St John, spoke so eloquently, combined with the public service ethos of the public sector, would give us better opportunities of raising the level and quality of public infrastructure.

That is the theory out of which the private finance initiative was born. I agree with the noble Lord, Lord Skidelsky, that it is too early to say whether it works in practice. I do not think that any project has gone its full term. I have no objection to it in principle, as it must be right to use all our resources to provide the public with the most cost-effective infrastructure, and that must assist in the performance of the public sector. Neither do I think that it is privatisation by

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another name, so long as it is made clear that the project's first priority is the public sector. Where the project is clear and the risks are clearly defined, especially when things go wrong, as the noble Lord, Lord Oakeshott, pointed out, PFI projects can work, particularly where they relate to new construction of schools, hospitals, regenerating urban houses, bridges and flood defences. There is a powerful incentive for all sides to work together and to understand clearly what each is expected to do and what each will be paid for. I agree with the noble Lord, Lord Selsdon, that many more projects can be started because they do not rely entirely on public money, and the public benefits.

Problems arise where those deals go beyond the provision of infrastructure and move into the provision of services as opposed to infrastructure. They arise because it becomes more difficult to reconcile the need of the private sector to create shareholder value with the state's need to put the public first. The private sector operates in a market; the state must look after the public interest. I join the noble Lord, Lord Dahrendorf, in asking whether there can be a partnership between the two. Can the invisible hand of the market also be a helping hand to the public? It probably can. I agree with other noble Lords that a lot of thought must be given to the way in which such partnerships are set up and managed.

There was a time when Labour believed that public service required public ownership. That was because people thought that a market economy prospered only at the expense of a fair society. It was John Smith who persuaded us that a market economy and a fair society were not in conflict. They went together; they were the same side of the coin. Since then, a lot of thought has gone into the role and limits of the state and markets in providing the public interest. A year ago my right honourable friend the Chancellor of the Exchequer, in a truly seminal speech to the Social Market Foundation, laid out the relationship, as he saw it, between individuals, markets and the state in meeting the interests of the public.

That relationship is absolutely crucial and central to the way in which public services will be delivered. Services such as healthcare, education and the funding and management of universities are very much influenced by it. The noble Lord, Lord Dahrendorf, mentioned transport. I agree with him that it should be included. That is why it is no accident that the kind of public and private partnerships that work best are current areas of intense political controversy and great public concern. Some noble Lords may have been present at the current series of seminars on that question, run by the Smith Institute—the one named after John Smith, not Adam Smith. I declare an interest as chair of the trustees.

It seems that public/private partnerships will work only where the role of the market is fully understood and acknowledged. That is because the role of the market will define where to draw the line between the public and the private interests in those partnerships. I think that the Minister will agree with me—and I pray in aid the most reverend Primate the Archbishop of Canterbury and the Chief Rabbi—that where the

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market plays a role in human relationships, we all find it unacceptable. It is unacceptable because there is imperfect information; the market ignores morality; and the outcome is uncertain and can be catastrophic. That applies in human services such as health, and it is why I think that public/private partnerships have no role to play in the delivery of medical services but certainly have a role to play in providing the infrastructure.

On the other hand, the private sector can provide human services such as professional and skills training. Even though it is a public service, there is an element of competition in the delivery, so markets can do their work. The outcomes can be measured and judged so that the public can assess that it is getting what it needs and at what cost.

In between these two extremes market control mechanisms must be built. Other noble Lords have mentioned regulation. Regulators decide whether the public is paying a fair price for gas, water or electricity, because it would be wasteful to have real competition—one cannot simply duplicate the wires and pipes. But, in practice, there are problems: as the operators know much more about the business, regulators become their captives, and they are dependent on the operators for information. If there are accidents or failures, the regulator is often blamed by the public, even though he or she can do nothing about it. It is not easy; lack of competition denies the regulator the opportunity of market testing.

Companies themselves can do more to make such partnerships work. Businesses active in delivering public services can build in their own controls and make public service part of their ethos. They can do that by accepting obligations in their corporate governance and corporate responsibility culture that go beyond normal trading and exchange. So one has firms such as the British Airports Authority, a quoted company, which is responsible on the one hand for delivering a commercial service to airlines and on the other for delivering a service to the public. Companies such as BAA virtually regulate themselves. They decide on the boundary between the market and public service. To me, that is the kind of public/private partnership that works well.

Additional business risks are associated with the management of those public service issues—social and ethical risks. Investors and investment fund managers are becoming increasingly interested in that. In response, companies are starting to report on those issues in the same manner in which they report on the assessment of financial and trading risks. The Company Law Review is looking at the issue. Perhaps the Minister can say whether the Government propose to make that kind of reporting mandatory.

In spite of all that, some have suggested that it is too difficult to combine the public and private interest in traditional companies, and that a new kind of hybrid company needs to be invented. So-called social enterprises are appearing. They are a kind of public/private enterprise. They compete in the marketplace and are there to make a profit, but their purposes are

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social and include regenerating inner-city neighbourhoods or combating rural decline by bringing in jobs and investment. Another good example is Social Firms UK, which helps create businesses that give disabled people a route into normal employment. Perhaps because they are owned by their employees, users or clients, by the local community or even by charities, it is easier for them to be managed with their social objectives in mind. Another great advantage is that they are small and local. They too are public/private partnerships that appear to work.

With careful thought about the role of the market, public/private partnerships can combine the dynamism of markets with the promotion of the public interest. There are several questions: which area of public interest is best served by the market—the noble Lord, Lord Dahrendorf, asked that question—which aspects of public policy are best governed by free market forces of supply and demand; and how do the Government make sure that such partnerships are consistent with equality, fairness, opportunity and security? I hope that my noble friend the Minister can tell us.

4.41 p.m.

Lord Tanlaw: My Lords, like many other noble Lords who have spoken, I am grateful to my noble friend Lord Skidelsky for instigating the debate. Taking part in the debate, I feel pretty well out of my depth, because the issue on which I wish to question the Minister is something that provides no direct or discernible benefit to the public, creates no profits and requires huge, long-term financing. I refer, of course, to space and space projects. Such projects have been underfunded in this country because they do not have access to PPP or any of the other things. The parameters of risk management and the attitude to health and safety and to political expediency are completely different in the public and private sides of space projects.

Politicians are more inclined to react to rather than anticipate events because their events horizons are always bound by the date of the next election. Therefore, party managers from all political parties attempt to create public investment programmes that will have a time-frame of no more than four to five years. Anything outside those parameters is not usually government-financed, unless it is considered beneficial for re-election strategies. Space programmes, which, more often than not, span a decade, rather than the lifetime of a government, fall into that category. The European Space Agency's current Rosetta programme to intercept and analyse the structure of a comet is a case in point. It took 18 years to gestate and will take another 10 years to execute. Nevertheless, the results from it may have an extraordinary effect on all our thinking about how we look on our place in the universe of the past, present and future. In this thoughtful debate instigated by my noble friend, I want to ask how long-term space programmes will fit into the category of public/private

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funding. What role can the public and private sectors play in the development and encouragement of space science in the next 30 years or so?

Last week, I attended a most interesting seminar at the Royal Society, hosted by the lateral thinking Demos organisation. It was entitled "Masters of the Universe" and was about science, politics and the new space race to Mars by 2030 between NASA and the ESA, with possible late entries from China and Russia. Noble Lords will be aware that, on 14 January, President Bush threw down his space gauntlet to the world, when he proclaimed:


    "today, we set a new course for America's space program. We will give NASA a new focus and vision for future exploration. We will build new ships to carry men forward into the universe, to gain a new foothold on the moon, and to prepare for new journeys to worlds beyond our own".

Those are stirring words. They are also expensive words for the American taxpayer and for the European taxpayer, if we take up the gauntlet.

President Bush went on to say:


    "Mankind is drawn to the heavens for the same reason we were once drawn into unknown lands and across the open sea . . . So let us continue the journey".

Those are striking words. I believe that we should take up the gauntlet in any way that we can. However, like a number of Peers who have been Members of this House and some who still are, I have ancestors who gave their life to exploring and developing the "unknown lands" of the Far East, in the interests of private trade. Navigational equipment at that time was basic, and their craft often proved frail against the elements that they encountered in the course of their journeys, but they persevered. They were not civil servants and were not publicly funded. They were usually employees of the East India Company.

The brave men and women astronauts of today are not much better equipped to face the harsh realities of outer space in ships that have proved on re-entry to be no more than insulated eggshells. The high cost of NASA's space vehicles for the future will be the result of trying to achieve 100 per cent success, without further loss of human life. That will be difficult, while there are severe payload restrictions due to having to launch from the terrestrial surface with chemical rockets. Safety must be a top priority wherever public funds are concerned or where national pride is at stake. Historically, the private sector has been prepared to take greater risks for monetary reward. There is no political fall-out when there is failure or loss of life in their endeavours. Therefore, it goes without saying that the private sector could stand a better chance of achievements in space at less cost than government-sponsored projects.

It is difficult to combine private and public finance. What will be the rules on something as fundamental as health and safety and something as fundamental—and dangerous—as travelling in space? What are the parameters for the new ships that the President of the United States will call on? Will they use nuclear power for propulsion and for power in space, to get off either the surface of the Earth or the surface of the Moon? Many people do not like the idea of nuclear power and

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do not want to put money into anything that has something nuclear in it. There will be problems if the Government do not wish to pursue the nuclear power programme, which is being run down here on Earth in this country. There are strong political views on the matter. How will finance be put together to create a safe rocket ship?

How can we address the issue in this country, which has a record of investment in space projects that is worse than Belgium's, in spite of the good fortune of having a qualified Minister for Science in charge? When Mr Kenneth Clarke was Minister for Space in a previous administration, he succinctly summed up his party's attitude to investment in the European Space Agency when he asked:


    "Why should we pay to put a Frenchman on the Moon?".

That is a good question. Why should the British taxpayer do that? I ask—a letter in the Daily Telegraph asked the same thing—"Why should we put a Frenchman on the Moon? Why not put a British citizen on the Moon?".

In spite of all the good talk from the Government, there is no finance to do anything like that at the moment. The insular attitude of both major political parties is understandable in the light of the wide time-frames involved. However, it is not understandable in terms of British business opportunities or of firing the imagination of young people to take up the many different aspects of space science as school subjects. What is the point of taking up astrobiology, when we do not have anybody likely to go into space and are merely spectators? The exciting ESA Aurora project, involving robotic and human space flight, will take about 30 years to complete in two main parts. As I understand it, there is no direct British involvement so far, in spite of the fact that 30 other countries have signed up for it. Are we to remain as disinterested onlookers on what could be the most important European project of the century with huge potential benefits to British industry and education? I hope not. But the British National Space Council (BNSC) seems to think so. In its 69-page document entitled, UK Space Strategy 2003-2006 and beyond, its conclusions are clearly set out:


    "Previous administrations decided not to maintain capabilities associated with launchers or human spaceflight. The Government will periodically assess areas of space development . . . taking account of affordability and competing claims for investment".

Those words are about as inspiring as a cost accountant's old balance sheet. Will young people take up science or anything connected with space sciences at school when they know that no money will be put into them? In future, they will not be engaged even as civil servants; currently, we have some of the best and most professional civil servants in space science. Where will young people divert their energies?

I have mentioned the Aurora project, on which a decision is to be made shortly. We have all heard of Beagle 2, the amazing work of Professor Pillinger and its sad failure. But it was not a failure: it was a highly technical device that was under-funded and manufactured under appalling time-restricted conditions. There is a possibility that a Beagle 3 could

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be developed and be part of the Aurora project. Who will finance that? Will it be the Government or the British taxpayer? Will private individuals finance it?

I ask that again because the Mail on Sunday published a list of 300 private individuals who are very rich indeed. I am not very good at arithmetic, but I added up the figures and those 300 people are worth about 150 billion. As has happened in the United States and elsewhere, would it not excite people who have made their money brilliantly through hard work and effort to put money into space projects? They have made enough money to make them comfortable here on Earth and might like to be involved in something as exciting as the new space projects. They should be encouraged to do so.

NASA has given up the search for extraterrestrial intelligence—the SETI programme. That has been taken up by a private and very rich individual from the Microsoft empire. There are others who have made their money and would spend millions to go on tours in space.

I shall go right back in time. As I said, I am quite out of depth on the economics of the debate. But, I dream that my grandchildren and great-grandchildren might be given an opportunity, such as the issuing of letters patent as happened in the old days, to explore the regions of space by private voyagers and private merchant venturers.

It has not been said before, but it has been said by another Lord who was a Member of this House. In his poem, Locksley Hall, Alfred Lord Tennyson wrote:


    "For I dipt into the future, far as human eye could see,

Saw the Vision of the world, and all the wonder that would be; Saw the heavens fill with commerce, argosies of magic sails, Pilots of the purple twilight dropping down with costly bales". I hope that we can find either public or private finance to make those dreams a reality.

4.54 p.m.

Lord Smith of Clifton: My Lords, the noble Lord, Lord Skidelsky, merits our gratitude, as many noble Lords have remarked, for proposing this debate and for his exposition of the history and theory of the concept. It is a timely debate. The last and only parliamentary debate on the subject of PFI/PPP, as far as I can discover, was that initiated by the honourable Member for North West Leicestershire in another place on 17 July 2001.

Since then, of course, PPP schemes have expanded geometrically and it is appropriate that the record of performance should again be assessed. This short debate cannot be a substitute for the detailed analysis that is really needed; that would require a major scrutiny. But at least those of your Lordships who have participated in this debate have helped keep the issue alive, although I must confess that at times I thought it risked sounding like a revivalist meeting of the PFI faithful. As my noble friend Lord Dahrendorf indicated, the record of PFI/PPP has been very mixed.

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As the noble Lord, Lord Skidelsky, observed, virtually all of the new developments in health, education, transport, the emergency services, government computerisation and defence have been financed through PPP schemes. That followed the edict of the Chancellor of the Exchequer. In terms reminiscent of Mrs Thatcher, he proclaimed, "there was no alternative". Furthermore, Gordon Brown asserted that any criticisms or even considerations of other options were "ideological", as though his edict was not!

The vehemence with which Mr Bob Riley's proposal for using a bond issue to finance the refurbishment of London Transport—a far cheaper option than PPP—was strenuously resisted illustrates the degree to which PPP had become a dogma. Since Ken Livingstone has now been hastily installed as the official Labour candidate for Mayor of London, there have been welcome signs that the Treasury will allow bonds to be used to fund future London Underground projects. As the noble Lord, Lord Brooke of Alverthorpe, remarked, the Treasury has already approved the use of bonds to finance further NATS' developments, as we on these Benches urged at the outset when the NATS PPP was proposed, and that is welcome.

It is difficult to make a precise audit of the overall costs and benefits of PPP schemes since 1997. There have been some major failures, ranging from the Hull Gipsyville estate refurbishment to the Skye Bridge construction where only 500,000 was contributed by the contractors to the total cost of 25 million, and for this peppercorn rent they are likely to reap 88 million in profit.

The new hospitals in North Durham and Carlisle revealed major faults. Inevitably, poor examples attract publicity while successful ones are not reported, although we have had some rosy accounts today. In truth, there has been too large a catalogue of PPP disasters. It has proved a very costly learning curve and, to repeat what the noble Lord, Lord Skidelsky, said, we are still learning.

In winding up the debate from these Benches, I shall concentrate on some of the broader questions that have been posed. First and foremost perhaps, is the taxpayer getting value for money, bearing in mind that PPPs are generally the most expensive option in cash terms? Do the Government have the capacity to conclude tightly negotiated deals? Thank goodness that in future the Government have decided not to finance any more IT projects through PPP schemes because they proved disastrous. What has been the record of Partnerships UK, the government lead agency in this area? Can the Minister say how the Government are seeking to improve the procurement capacity in these highly complex deals than has been the case so far?

My noble friend Lord Dahrendorf and other noble Lords mentioned the issue of openness and public accountability. These schemes take a long time to negotiate. The University College Hospital rebuild was a classic example of where the original plan had to be aborted and everything had to be started again. The

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bidding process was extremely costly. If the rumours are true, the rebuild of St Mary's Hospital, Paddington, will cost far above the original estimates. Indeed, already costs for preparing tenders appear to have spiralled out of control.

The chief executive of Kent County Council went on record last month. In an interview with the magazine, Public Private Finance, he made his disillusion clear about PFI/PPP:


    "Our experience is that it takes far too long to negotiate, the economic benefits are doubtful and it ties the council up in long-term and inflexible obligations".

Similarly, as my noble friend Lord Oakeshott reported on the IPPR study by Labour's leading think-tank, PPP schemes are too often shrouded in secrecy. It is still common practice for an unacceptable amount of information to be withheld. Although the National Health Service seems to be better in this regard, it is clear that education authorities and local authorities have much further to go in this direction. "Commercial confidentiality" is too often employed as an excuse for cover up. There must be much more transparency in future tendering processes and contracts concluded.

Then, again, there is the question of how far PPP funds are to be publicly recorded. They are a form of off-balance-sheet accounting. Can the Minister say how much money has gone into PPP projects since 1997 to date, and how high is this sum expected to rise by, say, 2010? Future generations are now in hock to repay these debts and the room for manoeuvre on the part of future Chancellors will be very constrained. As my noble friend Lord Dahrendorf suggested, the crunch will come when public spending transfers from capital to current spending on a large scale. That point is not far off.

Can this level of funding, increasing as it is all the time, be sustained, and when will the ceiling be reached? How do the Government ensure that these 30-year contracts will be fully complied with over time? Already contractors have incurred penalties for non-compliance. Can the Minister tell us how many have been fined, and what is the total to date? PPPs have long since overtaken task forces as the main domestic emblem of this Government, but there has been no resolution of many of the issues that PPPs have raised.

Last year in the Financial Times, Mr James Strachan, chairman of the Audit Commission, sounded a general warning about the Government's approach towards public services. It was moving from,


    "command and control and a battery of targets, to pouring billions of pounds of public assets and funds into highly nascent structures"—

not all of which, he implied, will prove fit for purpose. This applied to foundation hospitals, primary care trusts, the new regional housing boards, PPPs and RDAs. There was a real risk that,


    "it is going to end in tears".

Of that list, PPPs are seen as among the most vulnerable and it remains an open question whether it was wise to go down the PPP route as extensively as has been the case.

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PPPs were meant to secure, among other claims, the advantages of the inculcation of private sector techniques into the renewal of public infrastructure. The record to date reveals a very chequered history.

5.3 p.m.

Baroness Noakes: My Lords, I am glad that the noble Lord, Lord Skidelsky, has given us the opportunity today to debate the role of public/private partnerships in public sector performance. This is an important and interesting topic in its own right, as the noble Lord's own speech and those of many other noble Lords amply demonstrated. My noble friend Lord Selsdon demonstrated many of the practical issues that arise from PPPs and PFIs, and I hope that I will not disappoint him if I do not try to deal with the Urgent Issues Task Force and its views on accounting for it. Instead I should like to shift my emphasis to the key issue of how the performance of the public sector links to the important issue of the delivery of public services.

In 1997 the Government were elected on the promise to deliver improved public services. Since that year we have had over 60 stealth taxes. On the Chancellor's calculations, the forecast tax burden is set to rise to over 38 per cent. On that basis, the public is entitled to look for improved public services, but the truth is that they have not improved commensurately with the money that has been put into them.

NHS spending has gone up by 37 per cent, but acute sector activity has increased by only 5 per cent. While waiting lists have reduced, the average experience of patients in terms of waiting times has deteriorated—the mean waiting time has increased from 43 days to 50 days just since 1999. And pretty well everybody except the Government thinks that NHS productivity has fallen.

In the public sector more widely we have seen a massive expansion of public sector employment, but to little effect. Schools are not performing massively better. Our streets are not safer and our transport system is certainly not any better. The man in the street, whose taxes have been paying for these, knows that public services have not improved. Indeed, that is what the polls have shown. Against that background of failure in public sector performance and in public service delivery, it is important to take time to examine the role of public/private partnerships.

Let me start by affirming for the record that noble Lords on these Benches believe that the private sector has an important role to play in the delivery of services in the public sector. We have long favoured the contracting-out of services whenever the private sector can do it better. It was my party, when in government, that invented the private finance initiative. My noble friend Lord Lamont set the ball rolling in 1992, and following that my right honourable friend Kenneth Clarke pushed it forward. I was pleased to play a small part myself as a founder member of his Private Finance Panel, set up in 1993.

The private finance initiative, as we conceived it, was a way of harnessing the private sector's skills of risk management, innovation and cost-effective

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service delivery. Our aim was better and cheaper public services, to which the noble Lord, Lord Skidelsky, referred. We actively sought new ways of involving the private sector, not only in infrastructure projects, but also, for example, in the building and management of the delivery of services in prisons. We opened up the issues of how the private sector could contribute to the provision of services and facilities in the NHS and in schools. My party bequeathed not only a healthy economy to the Labour Party in 1997, but also the firm foundations of a successful private finance initiative.

It is our belief that if that momentum had been sustained, PFIs could have been a major force for the delivery of public services on an improved basis. This required real innovation. The noble Lord, Lord Skidelsky, referred to innovation as being a necessary part of the PFI and PPPs. It also required the boundary of service provision between the public and private sectors to be challenged and changed.

What has happened since 1997? The Government have massively expanded the PFI. The Treasury's website shows that since 1997 the capital value of PFI deals has been over 30 billion. At one level we are extremely pleased with that because imitation is the sincerest form of flattery.

But at another level we have some real concerns that the PFI has not been used to improve the delivery of public services as we had intended. In practice, it has been used as a device to get borrowing off the public sector balance sheet. We estimate that around 100 billion has been excluded from the Chancellor's borrowing figures and, like the Institute for Fiscal Studies, we believe that if PFI debts are counted properly, the Chancellor's golden rule is very likely to be breached.

As I have said, we saw innovation at the heart of the PFI. If there has been innovation since 1997, it has been in the complex financing structures that underpin the average PFI deal and not in the way that services are delivered. When I covered the health brief on these Benches, I visited some PFI hospitals. One of the strong messages that I got was that innovation was simply not emerging from the way that the PFI was being pursued. That may be the key to the lack of efficiency gains identified by the noble Lord, Lord Dahrendorf.

We all sign up to the proposition that PFI deals must represent value for money to the taxpayer. This has been examined several times—for example, by the NAO. We agree completely with the noble Lord, Lord St John of Bletso, that PFI has generally delivered projects on time and on budget in stark contrast to the public sector's performance before we introduced PFI.

I always had doubts about why the public sector could not achieve the same result through hard-nosed and well specified procurement contracts but there are still too many runaway projects, such as the Scottish Parliament building, which tell me that PFI does indeed add something that the public sector would not achieve by itself.

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Whether all of these projects will deliver value for money in the long term is, in my view, an open question. The noble Lord, Lord Haskel, echoed that scepticism. As he pointed out, it is, unfortunately, not a question that can be answered until we have many more years of experience of how these PFI contracts work out in practice.

Much depends on the effectiveness of the long-term maintenance obligations. The public sector is paying today for the long-term costs of delivering fully maintained buildings and we have yet to see whether PFI will actually deliver assets that are maintained to the high standards that have been specified. If it does not do so, we should be well aware that at the heart of PFI arrangements are thinly capitalised special purpose vehicles which may not be up to bearing the strain of things going wrong, as the noble Lord, Lord Oakeshott, reminded us.

Another area that can be judged only in the long term is how well contracts can deliver reconfigurations to meet the changing needs of service delivery. Clearly contracts cannot specify what we do not know today, but we do know that some areas of service provision are likely to be subject to major change. For example, we are fairly sure that health services will be delivered differently in 15 years' time. But we do not know exactly and, therefore, what impact that will have on PFI contracts.

One of the things I learnt from my days as a seller of services is that, with a tight basic contract, the real profits are made through contract variations. That is when one has the upper hand in negotiating. We can but speculate as to what will happen to the cost of PFI contracts when they have to be renegotiated to meet changing needs, but my money is on rising costs and declining value for money.

I have spent my time talking about the private finance initiative, but that is only part of public/private partnerships. PPPs are a bit of an enigma. The Government have helpfully given a description of the different types of PPP in their publications but I detect some muddled thinking. To prepare for today's debate I checked some of the Government's websites and found quite a wide variation in usage. For example, the DfES website describes a school project in Ellesmere Port as a PPP, notwithstanding that it is wholly financed by a combination of DfES and ODPM money. I am not sure which one of those is meant to be the public or private part of that partnership. DfID's website takes one to a hilarious quiz, which talks about a water project in New York in the year 1800, featuring private sector corruption, and describes it as a PPP. If the noble Lord, Lord Tanlaw, gets his way and space exploration manages to get to Mars and brings back a visitor for us, I do not think he would find any of this easy to understand.

The Government usually describe partial privatisations and the wider markets initiative as PPPs. Whether these have made any contribution to the performance of the public sector is a moot point. They include the partial privatisation of NATS, to which the noble Lord, Lord Brooke, referred in some

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detail. It was very interesting but I do not believe that we can regard it as a shining example of a PPP, certainly in its early days.

Often the term PPP is used to cover up the bailing-out of private sector projects, such as the Channel Tunnel rail link. I, for one, wait with bated breath to see whether the next bail-out PPP is the Channel Tunnel itself.

I wish that we could identify a clear contribution to public sector performance through public/private partnerships, but the way in which the Government have developed PPPs and PFI do not lead to that conclusion. They are often no more than a device to raise money for the Chancellor or to keep liabilities off his balance sheet. PPPs talk the language of partnership but financial expedience is their driving force. It is a pity that the Government have squandered their inheritance.

5.15 p.m.

The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord McIntosh of Haringey): My Lords, I am grateful to the noble Lord, Lord Skidelsky, for introducing this subject and for doing so in such a wide-ranging and philosophical way. He is a living example of the fact that if you do not believe in jet lag you do not actually have it. It was an impressive introduction. It has led to a very good debate, for which I am grateful.

My response to the debate has to start with the point made by the noble Lord, Lord Haskel, that this arises out of need. In other words, what is the problem that has to be addressed by the various forms of interaction between private and public finance? If, as we do, we have an objective to deliver world-class public services, we have to have substantial increases in investment—and, of course, matching reforms—to deliver services that meet public expectations in this country.

Investment in public services had been on a declining trend since the 1970s. That meant falling standards in schools, hospitals and other public service assets and we needed to address the legacy of neglect which we inherited in 1997. There were backlogs of school repairs estimated at 7 billion; maintenance backlogs in the National Health Service of more than 3 billion; and, of course, as everyone can see—even if they do not go to schools or hospitals—huge, long-term neglect of the transport infrastructure.

What was the reaction? It certainly was not to substitute public finance initiatives or public/private partnerships for public investment. We have provided for a massive increase in the investment being delivered to schools, hospitals, public transport and the public sector estate. The total investment in public services stands at more than 40 billion—compared with 23 billion in 1997—and it will continue to rise to more than 48 billion in 2005–06. So that is the answer to the fourth question of the noble Lord, Lord Dahrendorf. He will appreciate that I cannot take his questions in order—they were very acute questions—but I shall try to deal with as many of them as I can. But certainly PFI or PPP are not substitutes for public investment.

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I want to make two modest points about the balance between public investment and private investment. First, as I said, the vast majority—more than 85 per cent—of the increased investment is conventionally procured public investment which does not use private finance. Therefore, in answer to the second question of the noble Lord, Lord Dahrendorf, it is incumbent on us to look carefully at those factors which distinguish cases where more private investment is appropriate and those where less private investment is appropriate.

On the whole, PPP is a modest addition to the investment policy of the Government. My second point is that there is no contrast between the ideals and values in public service as is suggested. After all, in everything we do in the public service we are using privately produced goods and services. All the inputs—the pens, the computers, the construction work—has always been private, and there is no change in that. The difference introduced by PPP is that some of the output—in other words, after the construction phase, the continuing maintenance and availability for use of these public sector assets—is now in the private sector as well. The ownership, of course, remains in the public sector. The difference, I suggest, is that the private sector is now being required to take responsibility for what it does rather than simply selling it to the public sector and walking away. That is my answer to the first question of the noble Lord, Lord Dahrendorf.

We have to look, coldly and objectively, at that minority of public investment which is appropriate for private sector involvement and that which is not, and whether we are making that judgment correctly. The evidence shows that major PFI investment projects have been completed in time in almost 90 per cent of cases. In every case, the public sector has paid what it expected to pay, whereas in traditional procurement, three-quarters of the projects were late and three-quarters over budget. That gives rise to the question: why are we still using traditional procurement methods? I think the noble Baroness, Lady Noakes, should be attempting to answer that question—it is a profound issue which we inherited from her government.

I have used the quotation before from Jeremy Coleman, the Assistant Auditor-General of the NAO because it is so vivid. He said that,


    "the evidence is that on the whole PFI deals deliver to time and to budget. You get what you want, you get it when you want it and it costs you what you thought it was going to cost".

Of course, it is right that we should be looking in detail at the boundaries between projects which are suitable for PPP and PFI and those which are not. One of the issues clearly is the long-term benefits of having the responsibility for maintenance and operation in the hands of those who made the capital investment. The noble Lord, Lord Oakeshott, made that point very effectively. It is true that in many cases we simply do not know because not enough years have passed for us to be able to tell. But I do not think we can draw the conclusions of the noble Lord, Lord Smith, about it, even if we cannot track through the 25 or 30 years' subsequent life of PFI projects, and we are not able to

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give useful answers to his question about individual projects. Because we are responsible financially, we give an estimate of the future obligations for 25 years, and we have done for some time. That is contained in Table C20 of the Red Book. We are not shying away from that.

What kinds of projects have a serious risk both to contractors and ultimately to the private financiers which can be transferred from the public sector with benefit to the public sector? If a PPP project goes wrong, the private financiers would have to replace the contractor, knowing that there would be no payments until the service was online. That, as has been said by a number of speakers, contrasts with the soft budget constraint of traditional public procurement. I will not go as far as some of the Ministry of Defence's examples, but it is clear that there is a tip-over point. With a soft budget constraint, you get to the stage where, however much goes wrong, you cannot afford to cancel the project.

That is what we are trying to avoid with PPP. The analysis given by the noble Lord, Lord Selsdon, was particularly important. He is right in pointing out that contractors cannot take big equity risks—it has to be for the financiers behind them. Therefore, you are restricted with PFI and PPP to those projects in which there is a market for the ultimate financial risk. We have abandoned PFI on information technology projects, for example, because there is no such market.

Even if we do not go down to the far end of the maintenance period, the experience of construction costs is that, according to the NAO, only 8 per cent of PFI projects are more than two months late, which contrasts with the 1999 figures of 73 per cent being late.

There has not been much discussion, oddly, of value for money. There is a range of possible value for money criteria and National Audit Office research shows that three-quarters of public sector clients described the performance of their PFIs as satisfactory or better. That contrasts rather favourably with the previous situation.

I have accepted that we have made mistakes. I have accepted that we have made mistakes in IT projects, and the noble Lord, Lord Smith, welcomed that. The fast change in the sector makes it hard to define the outputs, therefore making it hard to do the risk transfer which is necessary.

The other example, which relates to accusations of bureaucracy, concerns projects worth less than 20 million. There is no doubt that in the early days of PFI, the time taken by lawyers and accountants in drawing up contracts was excessive. That would continue to be the case if we went on doing it for smaller projects, so we have cut those out of the system.

We have taken steps to deal with excessive bureaucracy and expense. We set up Partnerships UK to provide private sector expertise to the public sector which has the responsibility of commissioning PFI projects. We set up CABE—the Commission for Architecture and the Built Environment—to look at

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the role of design in improving the efficiency of buildings. The Office of Government Commerce has been doing that as well. Generally speaking, standardisation of projects will reduce bureaucracy and the initial costs.

There have been criticisms this afternoon of standards of accounting and reporting PFI liabilities. I reject outright the repeated criticism from the noble Baroness, Lady Noakes, that we are trying to do it to get it off balance sheet. If we were, we were pretty bad at it, because 57 per cent of these projects are on balance sheet. It is always a little arcane how the national statistician and the National Audit Office can legitimately, in accordance with their own rules, produce two different criteria. I have had difficulty in explaining it to the House before. However, this really is not a serious consideration. The independent Comptroller and Auditor-General, in his general report for 2001–02 said,


    "where he considers that the liabilities arising from financing arrangements are not correctly reflected in the financial statements of the bodies that he audits then he will qualify his opinion and report to Parliament accordingly".

However, he goes on to say:


    "He has not yet had the need to do so".

I think that is as clear an exoneration from that charge as it is possible to have.

There have been a number of criticisms of particular projects. I do not think I can deal with them all, but I will try to deal with some. The first was the criticism of the noble Lord, Lord Oakeshott, of the Inland Revenue, Customs and Excise Mapeley Steps project. He has been reading Private Eye as intensively as I have. You do not go into a project of that kind expecting to have to produce a letter of comfort within 12 months of entering it. So, clearly, something was not as intended. However, I do not think that the noble Lord can deny that there has been fairly intensive public scrutiny or that new guidance has been issued, including model procurement clauses that relate to the issues in the Mapeley Steps case. In particular, they provide that in future we shall not allow offshore tax avoidance structures for PFI projects.

I cannot accept the criticisms that the noble Lord, Lord Smith, made, either about Paddington Hospital, where the project has not yet gone out to the market—so he is a little bit premature—or of the bond issue alternative for the Tube that he is recommending, and which Ken Livingstone used to recommend before he took responsibility for those matters. After all, there is no risk transfer in a bond issue, and no one will deny that there is risk transfer for those operating the Tube PFI.

I was interested and encouraged by what the noble Lord, Lord Brooke of Alverthorpe, said about the NATS project, which bore out many of the things that I have said. We have no present plans to change the share structure of NATS. I do not know that I have an answer to his other question about whether employee shares are to be traded in future; I do not believe so, but if I am wrong I shall write to him.

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Let us consider the actual record of better delivery of services by the PFI programme. It has expanded, along with public investment. In 1997–98, PFI investment was worth 1.5 billion; in 2002–03, it will deliver investment worth 4.6 billion. We have signed projects worth 35.5 billion with 32.1 billion since 1997. Those have included health projects worth 3.2 billion; 1.9 billion of schools projects; and investment in transport worth 20.5 billion. We have delivered 34 new hospitals and 119 new health schemes; 239 new and refurbished schools; 23 new roads and public transport schemes; 47 new fire and police stations, courts and prisons. When a PFI has proved successful—and I repeat, when and only when it has proved successful—we are expanding it.

The noble Lord, Lord Selsdon, went through the sectors rather effectively. In health, projects worth 6.5 billion are planned to sign by 2005–06, with 11 new hospitals being built and 44 more redeveloped. In education, we have already planned 1.5 billion in investment, to redevelop or refurbish 278 schools and deliver 45 new schools. In housing, 28 projects will deliver capital investment worth more than 800 million by 2005–06.

If there are possibilities of going into further new markets, we shall examine them. There is the Deputy Prime Minister's sustainable community plan, to deliver urban regeneration and investment in growth areas. There is waste and recycling, for which the characteristics of our programme mean that PFI could offer significant value-for-money gains. There is investment in social housing, and continued investment in the prison estate. I believe that there are many more.

That is a long way from what we inherited in 1997. I remind the House that, in that year, the previous government demanded universal testing of PFI opportunities for all public investment projects. That was a totally extravagant bureaucratic process that was entirely unjustified by the results. In contrast, by being selective and imaginative and by looking at the results—after all, there have been 34 National Audit Office reports on PFI since 1997; there is no shortage of public scrutiny—we are on the way to making a modest—and I have always said "modest"—but real improvement to the quality of public services in this country. It is important that we should see that as a complement to a massive and comprehensive public investment programme, delivering the infrastructure of public services on time, to budget, with quality locked in for the long term.

5.35 p.m.

Lord Skidelsky: My Lords, there has been a wide though not uncritical acceptance of the value of PPP, and I hope that we shall be able to return to the topic as it unfolds and develops. It remains only for me to say how grateful I am to those noble Lords who have taken part in the debate, with their wealth of intellectual and political acumen and technical and practical experience. I also thank those who have had

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the fortitude and interest to sit through the debate without taking part. I beg leave to withdraw the Motion for Papers.

Motion for Papers, by leave, withdrawn.


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