Q41 Baroness Kingsmill: Governments tend to be able to borrow funds more cheaply than the private sector, so what is your view of the relative benefits of funding from the private or the public sector?
Mr Brooks: It is certainly the case that governments can on average borrow cheaper, certainly in the UK. I think it is important in this connection to be clear what borrowing you are comparing with what. The government, in effect, has access to the entire resources of the British taxpayer. When we are dealing with PPP as a project vehicle the level of risk is much higher because the project only has recourse to its own assets.
Q42 Baroness Kingsmill: Indeed.
Mr Brooks: So when comparing the two levels of pricing it is important to compare like with like. I think one of the benefits of the PPP system is precisely that it reveals the inherent riskiness of the project and in effect puts a price on that, which is related to the difference between the gilts rate and the price of funds that the product itself can attract. A large part of that is in the risk pricing. That extra risk has to be covered however the project is financed.
Q43 Baroness Kingsmill: But is it worth it?
Mr Brooks: I think this is an area where we have to rely quite a lot at present on the different structures. The idea behind the PPP structure is precisely to brigade the private sector to make the projects work more efficiently than they would do otherwise. The difficulty here is that one does not do the same project both ways so you never have an exact comparison.
Q44 Baroness Kingsmill: And the private sector has to have some skin in the game to do this.
Mr Brooks: Indeed. But the intention is that this benefit the private sector gets is offset in the public sector by the extra efficiency that is brought to the prosecution of the project in the first place, which is the intention behind it. I think that there is work to be done on trying to hone down the margin that in the end should accrue from PPPs. I think where there are many rather similar projects being done, perhaps schools or something like that, where they might be procured by PPPs or by the conventional manner, then you could in principle start to assemble data and, by averaging over the large numbers of projects, start to form a view about what the pay-off was. I think the difficulty that we must recognise in some of the larger projects in which we have been involved is that they are all one-offs. It is very difficult to separate out particular features from a large project such as, as I mentioned earlier, Manchester Waste or the widening of the M25. It is difficult to separate out precisely what would have happened had this project been procured another way. It is just a very difficult thing to do. I look forward to more research being done on the smaller projects where they are reasonably homogenous. As for the larger projects, it is going to remain very difficult in any particular case to know how big the margin is. I think on this the EPEC has started to do some work, so if I may introduce Tom Barrett who was a major force behind the establishment of the European PPP Expertise Centre which is a consortium of interested parties- public sectors promoters-working on PPPs in Europe, and which is trying to spread best practice. Amongst its work the EPEC Centre has started to look at this very question about whether you can establish how big the cost margin is and the advantages you get from this method.
Mr Barrett: Thank you. I think it is clear both in the United Kingdom as well as in many other Member States that there is a considerable repository of good data, even if it has to be fully mined as yet, in the national audit offices and these have in fact focused very specifically on PPP projects as a new area of public procurement and therefore one that was worthy of particular scrutiny as it developed. What became evident as Member States sought to exchange their notions of good practice was that in fact there was not really a common database, there was not a common dialogue. So with the encouragement of the Member States we took a simple initiative of in effect of creating an expertise centre which really is in fact a group at the moment of 10 or so people coming from different Member States and coming from the Bank with good information, good insights into how the PPP systems work in different Member States. We have thought it worthwhile to actually set up this particular study and it will focus particularly on achieving and measuring value for money, but in general we are working on the data provided by the Member State national audit office systems themselves and therefore it is evidence, I trust, that will be readily accessible and readily verifiable by all of those who wish to look behind the summary of conclusions.
Q45 Chairman: When do you think it will be ready?
Mr Barrett: If we look at the track record of the National Audit Office in the UK it is quite considerable. If we look at the most recent data there are some very broad pictures. Where we look for example at the Dutch, the Spanish and the Germans, we have reasonably strong audit systems that have been relatively thorough in their examination, so I would hope within a 12-month period, as this is the beginning of the project evaluation, we will have something which we will then submit to all of the Member States, because the membership of this European PPP Expertise Centre is comprised of EIB and the Member States and in fact 26 out of the 27, which rather reflects the degree of interest in the problem, as well as the European Commission.
Q46 Baroness Kingsmill: It is going to have to be fairly significant to justify the difference in the cost of the capital, is it not, relatively speaking?
Mr Barrett: As Simon has said in one of his particular comments, value for money is a fundamental of the PPP system, but it is not the only method of counting, even if it is an essential part. I think when we look at the investment requirements and procurement requirements across the Union we are looking at a number of Member State some of whom are obviously significantly less well-developed economically in terms of social infrastructure than the UK is. We are looking at challenges about improvement of infrastructure for the purpose of competitiveness so indeed when it comes to a final calculation of what are the pluses and minuses of the total picture, value for money is a necessary element-and it cannot be justified without that- but there will be other elements on the table as well.
Q47 Baroness Kingsmill: I suppose what I am getting at is the conventional procurement package could be one way of getting theses sort of infrastructure projects off the ground, could it not, with the capital provided by the governments? The PPP and PFI projects are a particular form of that and one is just trying to get some sense not necessarily of value for money but to get some sense of how big the benefits are to justify what would look on the surface to be greater cost.
Mr Barrett: Fully accepting your point, I think many Member States have looked at this question of utilisation of PPPs from a number of additional perspectives, one for example being the introduction of additional construction capacity. That for example in the United Kingdom was a rather pertinent concern at one particular stage. A second has been the ability to find export markets for national contractors. That too has been relevant; the ability of contractors to put capital behind some of these investments, and indeed to undertake a change in their own infrastructure. Certain of the contracting industries within the Union are noted for what we call strength of capital. They have the capacity to take risk, to do research and development and to innovate in the type of projects they do. Other countries have been more marked by very thin capital support. So perhaps I am in a sense enlarging your question in saying that while value for money is part of the vital oxygen, it is not the only issue and that therefore when we look, as we do, at the medium to long-term requirements in certain areas where private capital can be engaged, we have say well is this a useful addition tool. The words I am using rather carefully are "additional tool", not a substitute for public procurement, and therefore the whole debate turns around whether or not it has been used appropriately in the circumstances. If one refers to, for example, some of the significant environmental investments that are foreseen in this country alone, one has to say that that must come within a public policy framework and therefore how are we to achieve that type of investment scale, which is considerably greater if these estimates are true, than anything we have previously undertaken.
Q48 Lord Forsyth of Drumlean: May I take up a very small point that Mr Brooks made. Perhaps I misunderstood you but when Baroness Kingsmill asked about why pay the premium on interest charges that comes from funding it privately as opposed to directly by government, I thought you said that an advantage of the process was that it would make people assess the risks more carefully, but is that not a bit like saying to someone, "Actually you can take out your mortgage on the basis of a lower credit rating and it will be a very much more expensive mortgage but it will make you appreciate what a risk you are taking in buying this house"? It seems a perverse argument. Perhaps I have misunderstood or I have characterised what you were saying wrongly.
Mr Brooks: It was not my intention to say quite that. What I wanted to refer to is that when one compares the price of funding through gilts, which is a general charge on government resources and which is not tied to a particular project, with the price of funding a particular project where the funders have recourse only to the assets of that project, the difference in price largely reflects the difference in risk. If, for example, it were to be the case that the public sector were to guarantee this individual project so that the credit risk then became the risk of the public sector, then of course the price of this project would collapse to be the same price as gilts. It is important to bear in mind that the difference in price you see reflects the very real difference in risk that the funders face and to reflect on the fact that you want the funders to be at risk in the PPPs because it is their concern to get their money back that makes them manage the project properly from their perspective. I think that this is a key difference in the two ways of procurement. If one were fully confident that the public sector was just as expert as everybody else in specifying a project, not allowing mission creep, identifying the risks, drawing up the contracts-suppose those two things were entirely equivalent-the incentive on the funders, such as ourselves, to monitor and watch over the project is rather different when it is a sovereign risk from what it is if the risk is entirely concerned with the project in a free-standing way. I think a key bit of getting value out of PPPs is to brigade people like us to follow the project very carefully.
Q49 Lord Eatwell: Could I just follow up on that. I am getting very puzzled here. I can see the issue whereby PPPs may bring resources into the transition countries of Eastern Europe who do not have the resources available to do so, but that issue does not apply to the UK.
Mr Brooks: Indeed.
Q50 Lord Eatwell: I can also see that it might bring management skills in that context which may or may not apply in the UK in terms of procurement management. The third item which is addressed is this issue of risk transfer, that somehow risk is transferred from the public sector to the private sector which is taking the risk. I do not understand this at all. If you have got a prison, the prison has got to stay there. If the private contractor goes bust or in another way defaults on their charge, their activity, the public sector has got to pick it up, it has got to run it. If it is supplying water, the public sector has to guarantee that supply of water because these are public services, and so I think this notion of transfer of risk to the private sector is a complete myth, is it not?
Mr Brooks: It does not feel like that because it is our money at risk.
Mrs Fisher: Yes.
Mr Brooks: And if you think about the situation we are in, when one of these projects fails we take, and therefore our shareholders take, a real loss. I would argue that it is the fear of that loss that forces us-