Private Finance Initiative: Contractor Insolvency (Hansard, 14 July 2004)

§ Lord Newby
asked Her Majesty's Government:
What contingency plans they have for the continued provision of public services by a major private finance initiative contractor in the event that such contractor becomes insolvent.

§ The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord McIntosh of Haringey):
My Lords, there are provisions included in PFI contracts that are specifically designed to safeguard the public sector against situations such as contractor insolvency. Where a private sector party cannot meet his obligations, it is the responsibility of other shareholders or credit providers to replace him. In the last resort, the Government have the right to terminate failing PFI contracts with substantial losses to the consortium concerned.

§ Lord Newby:
My Lords, does the Minister agree that if a major PFI contractor such as Jarvis were to go under, some combination of government and other public bodies would have to pick up the pieces; for example to secure the completion of student halls of residence currently under construction for the next academic year? Does that not demonstrate that in reality the Government continue to bear much of the risks of those contracts?

§ Lord McIntosh of Haringey:
No, my Lords. If Jarvis or any other contractor were to fail in its obligations, it is, as I said in my Answer, the responsibility of the other members of the consortium to, as the noble Lord said, pick up the pieces. Of the schools contracts which Jarvis has, only one is Jarvis alone. That is for only three schools and is worth £19 million. All the others have at least Barclays behind them. I do not think that the noble Lord, Lord Newby, will suggest that Barclays will not be able to take up the responsibilities which are imposed on it by the PFI contracts.

§ Lord St John of Bletso:
My Lords, are not most PFI contracts through special purpose companies, which, if properly managed, should isolate 90 per cent of the problem if the contractor becomes insolvent?

§ Lord McIntosh of Haringey:
Yes, my Lords. But it is not 90 per cent; it is 100 per cent. The worst that could happen is that if one member of a consortium became insolvent, there could be delays before the other members of the consortium took up his obligations, which they must do and which is in their interests. The purpose is that all the shareholders in a special purpose vehicle, to which the noble Lord, Lord St John, refers, have the incentives to complete on time and to adequate quality built in upfront in the contract.

§ Baroness Noakes:
My Lords, given that the number of contractors involved in major PFI contracts is 1251 relatively small, do the Government have procedures for monitoring their financial health so as to be ahead of the game? If not, why not?

§ Lord McIntosh of Haringey:
My Lords, value-for-money analyses are made. I see the point behind the question of the noble Baroness, Lady Noakes. It is true that in previous years we had a public sector comparator which was an assessment of the kind the noble Baroness seeks. But that was brought in rather late and therefore it was not the kind of evaluation for which she rightly asks. The value-for-money studies which are now carried out, and which continue to be carried out by the National Audit Office, give exactly the assurance the noble Baroness seeks.

§ Lord Oakeshott of Seagrove Bay:
My Lords, in view of the widespread public concern about the financial position of Jarvis plc, can the Minister tell us what, on a look-through basis, is the total exposure of the public sector to Jarvis plc contracts?

§ Lord McIntosh of Haringey:
My Lords, it would not be appropriate for me to comment from the Dispatch Box on the finances of Jarvis Plc. On the issue of public exposure, my answers have made it clear that the exposure is of the other members of the consortiums, rather than of the public sector.

§ Lord Bradshaw:
My Lords, is the Minister really satisfied that the refinancing of PFI deals, which is quite common, amply safeguards the public sector, and that it receives a fair share of the better refinancing, which is available when a scheme is completed?

§ Lord McIntosh of Haringey:
Yes, my Lords. The financing of a private finance initiative contract is a matter of legitimate risk. They are about risk management and those who undertake such contracts undertake a risk. If they can then lessen their risk by refinancing, it is legitimate that they should take some part of the benefit of that. But the contracts that have been in place since 2002 ensure that the public sector takes 50 per cent of the benefit of any refinancing.

§ Lord Selsdon:
My Lords, how many PFI projects have been successfully completed and how many have failed? May I remind the Minister that the Government have done a good job because they have succeeded in what we would call "risk transfer"?

§ Lord McIntosh of Haringey:
My Lords, I am grateful for the final remark of the noble Lord, Lord Selsdon. If I were to give the detailed answer to his question, I would keep the House for a very long time. The answers are available on the Treasury website.