Q36 Chairman: Welcome to the Economic Affairs Committee, Mr Brooks, we are delighted to have you here. Thank you for your written submission. Perhaps you could introduce your colleagues at the time they are going to speak. I always have to ask if you could speak as clearly as possible for the benefit of the shorthand writer and the webcast. Do you want to make an opening statement or would you like to go straight into questions?
Mr Brooks: I would like to make one very short opening statement because Mr Sinton has mentioned to me that you have a rather out of date CV for me, which still has me down as a Treasury civil servant. To put the matter beyond doubt I should record that I am not a British civil servant and have not been for three and a half years. I spend all my time in the service of the European Investment Bank.
Q37 Chairman: Thank you very much. Perhaps I can start off with a question on terminology. PFI
, PPP and Private Participation in Infrastructure are all terms that are used but what do you mean by PPP in the European Investment Bank? How, if at all, does that differ from any other terms or acronyms I have mentioned or any other usage? Mr Brooks: Lord Chairman, you are right to say there are a number of confusing acronyms in this area. We do not find it particularly helpful to draw any particular distinctions between the various bits of alphabet soup. When we talk about PPP we are referring to a wide range of arrangements under which the private sector is engaged in delivering strategic public services, normally through participation in investment in infrastructure. The main driver, in our view, for adopting this sort of arrangement should be simply value for money and the ability to blend the private skills in the delivery of public policy objectives with the public sector skills in defining those objectives. For us, this complex of initials is about service delivery with the risks shared between the public and private sectors in a way that we hope benefits everyone.
Q38 Chairman: You in the EIB finance not just risk sharing arrangements but also direct public procurement, is that not right?
Mr Brooks: Indeed.
Chairman: I think we will come back to that later. That is quite useful.
Q39 Lord MacGregor of Pulham Market: This is a very broad question to begin with, particularly since you have referred to "a wide range of arrangements". In your view, what are the key characteristics that contribute to the success or otherwise of the approach? I realise with a wide range of arrangements that is a difficult one, but in particular if we take the UK context and the way in which it has developed in the UK for example.
Mr Brooks: We have a lot of experience in doing PPP-type arrangements across Europe and certainly in the UK, as you saw from the annex to our submission, including, I must say, some quite complicated ones which we will no doubt talk about later. And for us the key thing is that successful PPPs have to have a good focus on what the outputs required are and concentrate, in particular, on delivering those outputs rather than focusing too much on particular inputs. For us, it follows from this that to have a successful PPP you really need a project where the desired outputs are capable of being well-specified and determined at the beginning so that people know exactly what they are getting into and know the various risks that are to be shared amongst the parties. I think that is the key for a successful potential PPP project. Then, in the execution of this, to ensure that the project is actually successful, I think it is desirable, and perhaps necessary, that the public sector's requirements are well-specified and thought out in advance so that there can be a good discussion with the potential providers about exactly what is to be provided, without the project evolving during the course of the competition. The next point I would draw to your attention to is that part of the theory behind the PPP process is to engage the private sector financiers as guardians, if you like, of the project and to incentivise them-by putting their money at risk-to take a particular interest in the way the project is specified. It seems to me that three factors are key: can you specify sufficiently well what the project is to enable a proper contract to be drawn up; can you identify the risks in that process so that financiers and the project promoters can price it appropriately; and is there whole of life consideration? I think this last issue is also very important. One of the advantages of the PPP is that we see an ability to keep the infrastructure intact throughout the lifetime of the project rather than, as has so often happened (all over the world frankly) huge expenditure upfront and no attention to the maintenance thereafter and the need for another major change 20 years down the track. So a commitment from the public sector to ensure that the maintenance of the assets is attended to over the life of the project is important. That is what we look for when we get into a project: is it well-specified, can the risks be established and priced, are our financing partners adequately incentivised to scrutinise the project and pay attention to it throughout its life, and is there sufficient attention being paid to the whole life of the project and not just the initial construction phase of the project.
Q40 Lord Forsyth of Drumlean: Mr Brooks, Dr Stone indicated to us earlier that one of the advantages of PFI
was that very careful diligence would be done and very careful preparation would be done in the tender process and so on. You have emphasised value for money but value for money for me implies competition. I wonder if there is sufficient competition given the costs involved in preparing the tenders and also whether you think that there are enough players in the game? I am pretty conscious of the recent OFT investigation in putting that thought to you. Mr Brooks: I think you are right that there has to be competition for it to work. The idea is to find the best project specification so that we always have some competition to drive that out. There is competition at a number of different levels. You want some competition between the contractors who are going to build it and you want some competition between the financiers who are going to finance it. After all, there are two aspects here. Clearly most recently the competition at the financing stage has been less than it used to be, and no doubt we will be discussing that during the course of the afternoon. I think the UK has a very open process in looking for suitable contractors and amongst the European countries I would say it has been very open in that respect. Some of the contractors are perhaps not as strong as elsewhere, which may affect the project, but I think this is a good time for me to introduce Mrs Cheryl Fisher who has dealt with the actual delivery of many of the UK PPP projects that the EIB has been involved in financing, both, for example, the extremely complicated and large Manchester Waste project which closed recently, but also the Building Schools for the Future programme, which we are part-financing and which is an entirely different sort of PPP. I think it would be helpful to take her views on her knowledge of these projects and whether she views the competition as adequate.
Mrs Fisher: I would echo what Simon said. I work not only in the UK but also for the French and the Benelux and the Irish markets, and I would say that the UK market is the most open PPP market of all the countries in which I work, by which I mean that you find many more bidders competing for these projects from other countries in the UK than I find when I look at French projects where there are fewer overseas companies bidding. From that perspective I think the UK market does benefit from quite a high level of competition amongst contractors, so for example you will find Scanska from Sweden, you will have Vinci from France and you will have Spanish contractors as well, so I think there is quite a good international mix of contractors quite active in the UK market that I do not see everywhere. I would start by making that point. Anecdotally there is a suggestion that the introduction of the Competitive Dialogue has reduced the number of contractors who are interested in bidding for some of the smaller projects in particular because of the high level of bid costs that they are now incurring as a result of having to put in fully priced bids at the final stage. I do not have hard evidence for that, as I say it is primarily anecdotal conversations with contractors who are saying they are not so active any more, but, nevertheless, I think we are still seeing among the projects in which we are involved good competition on the contractors' side, by which I mean at least three contracting companies who are actively looking to win a contract. I would say that the EIB is in the very unique position of seeing all bids for a project because EIB supports a project and does not support an individual contractor when it offers finance for the projects, so we are able to see across all of those offers that are going in and I think again based on that view of the projects we see quite a lot of competition and bidders are quite active in trying to get the best price, both from their funders and also honing their price as they come up to the final bidding stages. Again as Simon says, I think the competition for the financing is reducing in the UK, there are fewer funders available. In the smaller-sized projects that is less of an issue, there are still funders available for them but for the larger projects where we no longer have capital market funding I think that we have seen a substantive reduction in the level of competition amongst funders. That has had an impact. I think the thing that has had an impact however is less about the competition which has led to an increase in risk pricing but the fact that all funders have had an increase in liquidity costs, essentially as a result of the credit crisis, and I think that is what has driven the pricing up and the lack of funders has let to a slowness in delivery and a decrease in the speed with which projects close rather than a massive change in the sorts of financing terms that are actually being offered as a result of lack of competition. It is more the liquidity issues that banks have at the moment which have increased their cost of funding rather than the actual lack of competition has increased the cost of funding for various projects.