Private Finance Initiative

HC Deb 10 February 1999 vol 325 cc287-95 12.59 pm

Mr. Llew Smith (Blaenau Gwent)

When my right hon. Friend the Member for Camberwell and Peckham (Ms Harman) was shadow Health Secretary, she stated: When the private sector is building, owning, managing and running a hospital it has been privatised". I agree with that sentiment. Many organisations that I shall mention later in my speech have said that that position has been realised by the implementation of the private finance initiative, under which public facilities are owned and run by private-sector companies that either lease them back or charge the public authority for providing the service.

Some time ago, Unison, which is the largest public service trade union and has considerable expertise on the subject, warned that the PFI was the latest Conservative scheme for privatisation and argued: Under the PFI the private sector pays for replacing or refurbishing public assets, such as computer systems or a new hospital, and is given a very long contract to operate the assets or to run the associated services and the jobs involved are transferred to the private company. The private sector recoups the money it has spent through a charge for the services it provides. We have heard the views of my right hon. Friend the Member for Camberwell and Peckham and of Unison, the major trade union within the public services. Will Hutton, the editor of The Observer, has done considerable research on the subject. He concluded that the PFI is becoming the means of literally privatising the state and called for it to be scrapped". So there is unity and agreement between my right hon. Friend the Member for Camberwell and Peckham, Unison, the editor of The Observer and me. That is quite an achievement on a Wednesday morning.

As someone who is neither old nor new Labour, but just Labour and who represents Blaenau Gwent, the birthplace of the national health service, I would have expected a Labour Government to scrap the PFI, which, understandably, was introduced by the Tory Government, who hated the idea of public service. Yet instead, the present Government are increasingly putting our future into the hands of PFIs.

Other Opposition parties also supported Labour's position in opposition and in government. Surely a Labour Government, whose party constitution describes itself as "Democratic Socialist", should value public services and seek to extend their role in society, recognising that they enhance life chances in communities such as mine.

If the Minister is not willing to accept the views of my right hon. Friend the Member for Camberwell and Peckham, Unison, Will Hutton or me, perhaps he will accept the report of the Treasury task force on PFI, which states: The PFI transforms Government Departments and Agencies from being owners and operators of assets into purchasers of services from the private sector. PFI firms become long term providers of services rather than simply upfront asset builders, combining the responsibilities of designing, building, financing and operating the assets in order to deliver the services demanded by the public sector. Given the views of such a wide group of people and organisations, it is not surprising that the Trades Union Congress also condemned PFI in principle, instructing the General Council to campaign for the ending of PFI … and to press the Government to reinstate proper capital funding to ensure the future infrastructure of the public services in a way that does not damage jobs and services. Indeed, I remember a Labour policy document in 1995 describing PFIs as "creeping privatisation" and, as always, I support the position of my party. However, now it appears that the PFI is being presented as some kind of miracle cure to overcome the problems of financing our public services.

Peter Riplett, former group economist of Tarmac and hardly a member of the hard left, or even the campaign group, recognised that the initiative will cost taxpayers much more in the long term than the traditional system of paying for the public investment, either out of current tax revenues or from borrowing". The reason is obvious. The cost of obtaining the funds from the private sector will not be as low as the Government could borrow from the national loan fund which comes with Government guarantees, is backed by tax revenues and borrowing and is inevitably and intuitively the cheapest way of raising funds.

Once again, if the Minister rejects my opinion and that of Peter Riplett, perhaps he will listen to Graham Watts of the Construction Industry Council, who estimated that an average hospital project could cost the final selected bidder as much as 4.3 per cent. of the total project value. As I said, that is because it costs far more for the private sector than for the public sector to borrow money because of higher interest rates and the need to make a higher rate of return.

The financing of the PFI can also have serious implications for public bodies such as local authorities. That was recognised in the Audit Commission report entitled "Taking the Initiative—A framework for purchasing under the Private Finance Initiative". It discusses the long period of contract in PFI on public bodies and argues that it could restrict the future flexibility of the body to determine the way the services are provided". It continues: Not only is this commitment likely to limit the ability to switch resources in the future but, in the event of the need to cut spending, the PFI contract payment is likely to be protected from any cutbacks. The corollary is that non-PFI expenditure may have to carry proportionately deeper cuts. Putting aside all those criticisms, we are expected to believe that the PFI was intended to be additional to public provisions, yet the Tory Government left us in no doubt that they intended to substitute for publicly financed capital expenditure, enabling them to cut the capital budget.

It is not surprising that the Treasury Committee concluded: In our view the PFI is now being treated by the Government as substantial. It is enabling the Government to cut capital budgets in future plans. As that was the conclusion of the Treasury Committee in respect of the Tory Government, how could the position be different under the present Government, who for their first two years in office have retained the same public expenditure plans?

Let us be in no doubt that the PFI is not providing a public service; it is about making money and profits by cutting the service provided or the costs involved. For example, eventually fewer staff are employed—on inferior pay and conditions. New staff are not protected by the agreements that applied previously.

Allyson Pollock, in an article published in the British Medical Journal, states that her research shows that PFI schemes are characterised by a marked reduction in available bed capacity of about 25 to 30 per cent. An example of the deterioration in service was given by Will Hutton, who stated in The Observer: PFI hospitals have adopted very high throughput ratios to compensate for their dramatic bed reductions that imply no spare capacity whatsoever. The Welsh Institute for Social Health and Care recently produced a preliminary examination of three PFI projects in Wales including the new hospital at Mount Pleasant, Chepstow, in the constituency of my hon. Friend the Member for Monmouth (Mr. Edwards). It stated that a private consortium was chosen to design and build the facility on the sight of the former Mount Pleasant hospital. The trust granted the consortium a peppercorn lease for the land and paid an advance capital sum of £3.2 million to the consortium in order to reduce the annual revenue cost of renting the facility. Without that capital advance, the annual charge would have been £1.2 million. With the advance, the consortium will receive £756,000 per annum, to make the facility available.

The report went on to say that, as part of the overall deal, the NHS was able to release land—27 acres in all—at St. Lawrence hospital and at Mount Pleasant hospital. By selling the land directly on the open market, the NHS was able to make £440,000 per acre. Consequently, that cash was available to the national health service.

The report said that the outline building case for the new build at Mount Pleasant estimated that the cost would be £13.7 million to provide an 84-bed unit with minor treatment, X-ray, community deal and out-patient facilities. Thus—this is the important point—the income from the land sold, which was equivalent to £11.8 million of the assumed capital cost of the public sector comparator, would have financed 86 per cent. of the new build cost if the trust had been allowed to retain it.

The scheme therefore did not have to take the PFI route to acquire most of the necessary capital funds, as the land equity was almost sufficient to provide them. Moreover, under the rules currently operating in the national health service, most of the income—less the £3.2 million advance payment—was forwarded to the Welsh Office, presumably to be used in other parts of the NHS. The Welsh Office should examine that practice, and consider changing it.

Before entering the Chamber today, I was speaking to a fellow hon. Member, who approached me and said that a school in his constituency was being built under the PFI. He said that the project's legal costs were about £45,000. His community did not benefit from that money, although I suppose that the lawyers did. The people in his community lost a benefit, as two teachers could have been employed with that £45,000. The Labour Government—who have a different set of priorities from the previous Government—must appreciate that £45,000 spent on two teachers is better than the same sum paid out to a set of lawyers.

Loss of accountability is another problem with the PFI. Often, information on PFIs is withheld because of excuses of commercial confidentiality. We all know that commercial confidentiality is often used as an excuse in preventing the public from finding out what is happening in certain areas.

If there is a problem with a PFI contract, who will be responsible for dealing with it, especially if the firm originally involved in the project and holding the equity is sold on to another company? Accountability is affected also if a council's cash and other assets are transferred to a company gaining control of a PFI project. For how long will contracts be monitored, especially if a council has lost many of its own staff to the company taking over a PFI?

Why have successive Governments been so eager to support the PFI? Unison and the Welsh Institute for Health and Social Care agree that there are two main reasons for the support. The first is the requirement to reduce the public sector borrowing requirement, so that we can meet the Maastricht criteria. Governments hope that the PFI will remove investment from the public sector balance sheet. Therefore, as a community, we are expected to forgo services so that we may fulfil the Maastricht criteria. It is therefore not surprising that some hon. Members continue to oppose Britain's entry into the single currency.

The second reason for Governments' support of the PFI is their desire to introduce market-type incentives into public services, as a means of improving productivity. Most people welcome improved productivity. However, the type of productivity increases that I have mentioned today and that has been documented by many researchers in hospitals and other establishments receiving PFI funding has been achieved only to the detriment of the person—the patient, for example—using the service.

I should like to think that all the concerns expressed by the organisations that I have mentioned today are unfounded, but I do not believe that they are. My position is identical to the position taken by Labour in 1995, when we said that the PFI was equivalent to "creeping privatisation". I therefore support the TUC's campaign to end the PFI.

I want a Labour Government who defend public services and believe in the concept of service. Public services enhance the life chances of our communities, and not the life chances of a few people who think of public service as a way of making money—profits—at the community's expense. We are asking the Government to put people before profit.

1.16 pm

The Parliamentary Under-Secretary of State for Wales (Mr. Jon Owen Jones)

I thank my hon. Friend the Member for Blaenau Gwent (Mr. Smith) for raising an important subject, and for doing so with his customary good humour and gentle use of irony. His speech was not only well researched but heartfelt. I also welcome the opportunity of replying to the debate, as it gives me a chance to outline the Government's progress on the private finance initiative, our further plans for its reform, and our wider commitment to developing public-private partnerships.

My hon. Friend the Member for Blaenau Gwent said in his speech that he is particularly concerned about the effect and use of the PFI in the health sector. I know that he will not object—and I trust that you will not, Mr. Deputy Speaker—if I use this opportunity, as a Health Minister, to announce that I am today establishing a group under the chairmanship of Professor Ian Cameron, provost and vice-chancellor of the university of Wales college of medicine, to examine meningococcal infection in Wales.

The chief medical officer in Wales will nominate individuals with appropriate experience and knowledge to serve in the group, which the National Meningitis Trust and the Meningitis Research Foundation will be asked to join. I shall be asking Professor Cameron to report to me on the matter as soon as possible.

I thank you, Mr. Deputy Speaker, for allowing me to make that announcement.

Since the Government were elected to office, in May 1997, we have revitalised the PFI, so that we can now rightly say that it is a key tool in helping to provide effective and good-value public services. Since the general election, we have signed £4 billion-worth of PFI deals and have made the PFI work in sectors, such as health, in which it had not worked before.

We estimate that, by the end of 1999, private sector investment in PFI projects will account for about 14 per cent. of overall public sector investment. Accompanying the turnaround has been an upsurge in confidence, both in the public and private sectors, that the PFI can deliver the goods. We are now seeing its benefits spread to other parts of the public service, such as our schools.

The Government are working closely with local government to use the PFI to improve public services. The Welsh Office has made PFI credits available, amounting to £150 million, to enable our six local authority pathfinder schemes to begin. The schemes were chosen to provide templates for future projects in Wales, and we anticipate that the first deals will be signed in the next few months. Additionally, we have recently announced another £120 million of credit that will be made available, and have invited Welsh local authorities to make proposals on their next wave of PFI projects.

The transport sector led the way in the PFI. It is worth remembering that, a decade ago, my right hon. Friend the Deputy Prime Minister was first in proposing the type of public-private partnership arrangements that are now delivering the goods in transport. Schemes in progress include the chunnel high-speed rail link and dualling of the A55 across Anglesey. The Government are proud of our record on PFI, and we have been able to get it moving.

When we came to office, we were prepared to take tough decisions. For instance, in the NHS in England, we established a system to prioritise PFI projects to break the logjam that had been allowed to build up. Health service need now dictates which PFI projects get the go-ahead and, to date, 25 new hospital developments have been given the green light as part of the biggest hospital programme in the history of the NHS. Work on nine is already under way.

In Wales, we have made significant progress in getting PFI in health off the ground. Deals with a capital value of over £30 million have now been signed for projects ranging from staff residences and clinical waste disposal through to operating theatres and renal units.

We are particularly proud that, through the PFI, the people of Chepstow will soon benefit from a new, purpose-built community hospital, replacing old, out-dated and worn-out accommodation.

Mr. Huw Edwards (Monmouth)

I thank my hon. Friend the Member for Blaenau Gwent (Mr. Smith) for expressing the reservations that many people have had about PFI, and which some of us had when Labour was in opposition. Will my hon. Friend the Minister accept that the people of Chepstow, having seen delay after delay, are grateful that the Government are ensuring that the problems associated with PFI under the previous Government have been resolved to some degree, and that there will be a new hospital in Chepstow? Will he assure us that PFI will not be associated with a significant—or minor—deterioration in the pay and conditions of staff working in hospitals?

Mr. Jones

I am pleased to hear my hon. Friend's remarks. My father is a constituent of his and lives near the hospital site, and I know that the people of Chepstow have waited too long for the hospital to be developed. I can assure him that staff will be covered by the Transfer of Undertakings (Protection of Employment) Regulations 1981—TUPE—to safeguard their interests in any transfer of employment.

Mr. Llew Smith

Does the Minister accept that the question is not whether there should be a new hospital in Chepstow? Obviously, we all welcome that. The question is whether the hospital should be funded by public money or by PFI. Can the Minister explain why it needed to be a PFI project when 86 per cent. of the money could have been raised from the sale of the land? Is he saying that the conditions of staff in the long term will be protected, and that new staff will receive similar protection? Does he accept that this is privatisation of public services—a point we accepted as a party in 1995?

Mr. Jones

My hon. Friend made a number of those points in his speech, and I intend to address them in my speech if I am able to move on. The Chepstow PFI project was judged to be value for money with the land value included, and the treatment of the land in the deal was cleared by the Treasury.

The University hospital of Wales has been quick to grasp the opportunities that partnership can offer. Patients, visitors and staff are able to get on to the site and park much more easily thanks to a multi-storey car park and access road constructed through the PFI. A new entrance, concourse and reception area—again, built through the PFI—has improved enormously the environment and facilities for all users of the site, and has corrected long-standing problems dating back to the original design of the hospital.

The PFI is also helping the NHS to become increasingly energy-efficient. A significant number of NHS trusts are now entering into energy management contracts with specialist service providers and obtaining substantial savings which can then be reinvested in direct patient care. These important and valuable developments would have been very difficult, if not impossible, to achieve without partnership under PFI, and would have required us to divert scarce resources away from other health priorities.

The previous Administration, under the right hon. Member for Wokingham (Mr. Redwood), actually took capital money away from the NHS in Wales and left us a legacy of aging and poorly equipped hospitals. We are working hard to restore our capacity to fund new capital developments in those cases where the PFI cannot offer a solution. However, as the schemes prove, the PFI can provide real and valuable alternatives and can offer excellent value for money. It also enables us to address urgent priorities now, rather than have important schemes wait until new public funds can be found.

Mr. Harry Barnes (North-East Derbyshire)

Will my hon. Friend give way?

Mr. Jones

No, I will not give way. I have only another five minutes to complete my speech.

For the future, negotiations are now well advanced with private sector partners on proposals to provide new hospitals to serve Neath and Port Talbot, and in western Cardiff. Elsewhere in Wales, the national health service continues to explore the potential for the PFI to help deliver new buildings and high-quality services.

We have been able to make PFI work because we have been prepared to take head-on some of the logistical problems that bedevilled PFI in the past. One of our first actions was to appoint Sir Malcolm Bates to review the PFI process. He did an excellent job in analysing problems and, more importantly, finding solutions. Since Sir Malcolm reported, we have fully implemented all of his recommendations.

In addition, we have been able to make PFI work because we have recognised the importance of getting the interests of staff right when evaluating bids and contracts. Openness between bidders, trade unions and staff is an essential part of the PFI. PFI is not a secret process. That is why we have published guidelines on the consultation of staff and other interested bodies, as well as requiring the publication of key business cases and PFI documents.

Mr. Llew Smith

Answer the question, Jon.

Mr. Jones

Perhaps I am not answering the question in the way that my hon. Friend would like. If my hon. Friend is ideologically opposed to the whole concept of PFI, there is nothing that I, as a Minister, can say that will satisfy him. The Government have ensured that the maximum transparency and fairness is incorporated into the way in which the negotiations take place.

There is always room for improvement, and the Government recognise that. We will be taking action to make PFI deals easier to complete. We are now looking at how to streamline the process of putting a PFI deal together. There is little doubt that both time and money can be saved by having standard template contracts. We published draft guidance on standard model clauses this month. Next month, we will publish guidance on accounting treatment that will help determine the level of risk transfer that will deliver best value for money.

We have also asked Sir Malcolm Bates to take a second look at the PFI—and public-private partnerships more generally—to see how the Government can further refine our approach. That is because each project is different. That fact is a reflection of the different problems and priorities in different settings.

We want to improve public services, to get better value for money, to provide incentives for effective business management, to correct underinvestment, and to optimise capital investment flow. That diversity calls for the development of a new approach to enable the public and private sectors to work together. The Government will be taking a lead in that process in the months ahead.