Q81 Chairman: So you have a budget, as it were, for PFI?
Mr Buxton: What happens is that the government makes available PFI credits for certain types of projects. For example, there are PFI credits specifically set aside for an investment in building new schools. If a local authority wants to build a school and to receive a subsidy for building the school, then in a sense it does not have a choice, it can only use the PFI route because there is no conventional capital subsidy available for building a school. The only route is through the PFI credits and that means that the local authority is forced to use those credits if it wants to take advantage of the capital subsidy. I think what we are suggesting is that if there were a level playing field the capital subsidy element would potentially be available for a range of alternative funding mechanisms and not just for a PFI mechanism.
Q82 Lord Eatwell: That is intriguing because I was about to ask you about the main contribution that private finance has made to local authority delivery and it sounds to me as if the main contribution is that it gives you the chance of capturing a subsidy. Is that fair or is there some other wider contribution than the fact that you can capture a subsidy in this particular way?
Mr Buxton: Let us assume that there was capital subsidy available, or no capital subsidy available equally for conventional procurement and for a private finance initiative. If we start with that assumption and then we say given the level playing ground does PFI offer certain advantages, I think the answer to that question would be, yes, it offers certain advantages but it also has certain drawbacks and, therefore, you actually need to look at each project on a case by case basis. The main advantage of a PFI project is that it gives you a higher degree of certainty over build costs and subsequent maintenance costs on a classic PFI scheme and that is where the concept of risk transfer comes in. We are not talking about a transfer of the whole risk. We are not talking, for example, about the contractor taking on the risk that all the children will or will not all get five GCSEs. What we are talking about is the construction cost risk and the subsequent maintenance cost risk because those are priced in at the beginning of the contract on a relatively fixed and determined basis.
Q83 Lord Eatwell: That is the biggest advantage and you said that we have to balance this against the disadvantages. What is the biggest disadvantage?
Mr Buxton: The disadvantage is that obviously you are tied into a commitment over that period of time. For example, if we take something like school maintenance, historically a local authority would have been able to take a decision about whether or not to spend money on school maintenance. At any particular year it could have decided not to invest in school maintenance but actually to spend some money on some other form of service provision. The disadvantage of that is that might lead to under maintained schools which over a long period of time would require further investment. So there is a slight loss of flexibility but, as I say, there are benefits. The other factor is that in the pricing mechanism for PFI contracts at the moment a private contractor who is borrowing to finance will probably be paying slightly more than a typical local authority for borrowing. Therefore, you need to weigh up the benefits and the disadvantages on an individual project basis.
Q84 Lord Eatwell: So in capital terms the project is more expensive?
Mr Buxton: Not necessarily.
Q85 Lord Eatwell: From your point of view it is less flexible.
Mr Buxton: It may not be more expensive, that depends on the potential cost overrun issue. Historically public sector projects have had large cost overruns. The information collected by the National Audit Office suggests that private finance projects are actually more disciplined in terms of the financial angle and, therefore, there is a trade-off.
Q86 Chairman: Would it be possible to set aside the source of funds issue and have exactly the same contractual arrangement, possibly with the same company, for the whole life contract which might have been a PFI or might be an ordinary public sector one?
Councillor Kemp: I think it is important that we recognise, particularly as it is only 10% of the funding, that PFI is a way to create a particular relationship between the public and private sectors. There has always been that relationship. For example, we have never built our own schools, we have always contracted to buy a school. What we need to be more imaginative about is how to create those relationships and, if I can put it further, how to create the partnerships within which the public and private sectors can work to the best advantage. If we can create effective partnerships in a long-term relationship then some of those problems with rigidity and lack of flexibility might disappear. We are very keen on partnerships and have the contract second. One of the problems is that PFI methodology leads you straight to the contract before you develop the relationship.
Q87 Lord Levene of Portsoken: I am sorry to labour this point, but having been involved in one of the early iterations of this whole programme, which was called Competing for Quality, which Lord MacGregor may remember, the whole object of the exercise was to have this element of competition. In other words, you had the in-house team who could do this and you would have outside providers, PFI or PPP, to do so. Are you saying that there are projects now where that choice is lost to you, that you do not have the ability to choose between the public sector doing the job itself and the private sector doing it as an alternative and you are just dictated to as to which way you have to go?
Mr Buxton: I think some of those decisions have actually been taken at a programme level. For example, if you take the schools programme that has been subject to a very thorough value for money review at the whole of the programme level and, therefore, individual projects are financed within the context of that programme. Individual projects still have to demonstrate that they meet the value for money criteria, but at the moment if you are seeking to build a new school then if you want the capital subsidy that goes with that effectively that requires a PFI approach.
Q88 Lord Levene of Portsoken: Can I ask you a different question, if I may? Is there sufficient understanding within local authorities and a sufficient level of expertise to be able to manage the project of that nature when it is not being carried out in-house but is being carried out by a private sector contractor or consortium?
Councillor Kemp: In my view there is. In a large authority like my own-I am a Liverpool City Councillor-we are regularly procuring big contracts in a variety of ways and we have in-house knowledge. For smaller councils and very high specialist projects we have traditionally had 4ps, an agency, which is partly paid for by the government and partly paid for by the user and we have now linked up with Partnerships UK to create a new organisation in the Local Partnerships, so that expertise is available across the piece. To follow up partly on your last question, things have moved on in the last 12 to 15 years and very few councils, for example, now have their own architects' department in the way that they used to. It is a question of where we procure the private sector in to help us and in what format rather than we do it in-house or externally.
Mr Buxton: If I may add to that. I think that if a local authority is going to be building a new school the skills that it requires are going to be very similar regardless of which contractual route it chooses to go down. For example, if you are planning a new school you need to be able to think about long-term time horizons and scenario planning. You need to engage with the service users, the teaching community. You need to think about the different types of things that you want the school to do and its links with the rest of community infrastructure. All of those issues I would argue have to be considered whether you are using a conventional procurement route or a PFI route and, therefore, actually the issue for me is not so much do local authorities have the skills to do PFI but do local authorities have the skills to do large-scale procurement, which is a slightly broader question. I would entirely endorse what Councillor Kemp has said. I think the major authorities will have that expertise in-house and some of the smaller local authorities will need to rely on some external expertise, which is where an organisation such as Local Partnerships, which is partly owned by the Local Government Association, has been deliberately set up to provide that support to those authorities who do not have that expertise in-house.
Q89 Lord Paul: In your experience have the private finance projects delivered value for money?
Mr Buxton: I think in general that the answer has to be yes. I think the National Audit Office have themselves done a number of studies of the delivery of private financial projects. They have, for example, shown that private finance projects do deliver to time slightly better than conventional procurement. They have also found that private finance projects deliver on budget slightly better than conventional procurement. I would, however, have to stress that the differences between private finance projects and conventionally procured projects is not enormous, so we are not saying that this is an absolutely one-sided argument, that private finance projects always deliver on time and on budget because there are a percentage that do not, but it is a slightly higher percentage than we find with conventionally procured projects. I think on balance, looking at the trends over the last few years, we can say that private finance projects have delivered what they were expected to deliver. Clearly the critical issue, and this again applies as much to conventional procurement as to PFI procurement, is if the local authority does not really understand and have a clear vision for what it is seeking to procure, the limitations are going to be in that initial conceptualisation. Do you want a school that simply sits there and is used by students during school hours or do you want a school that is part of the community infrastructure? That is the critical issue from my perspective. Again, when you are thinking about a school and we are building something that has to be there for 25, 30 years or longer, do we understand what we are going to require out of the school in 25 or 30 years' time? I think those are some of the complex issues, but I would argue that they are the same issues for conventional procurement as for PFI procurement.
Q90 Chairman: Can I push that slightly further back to my earlier question and that is in principle at any rate the nature of the contract, whether it is a PFI contract or a conventional public contract, could be precisely the same and the only difference would be the sources of funds, so wherein lies the benefit from a different source of funds if both sources were unconstrained? Obviously if one is constrained and the other is not-
Councillor Kemp: It is not necessarily a different source of funds, it is a different route to funds possibly from the same source. If we went for a prudential borrowing route it would cut out one element of that process. Not a very large part of the process because, as Richard says, the importance for the local authority is to understand what it wants to procure, so a lot of the checks that go into a PFI route would be done by a local authority choosing any route. It would make things a little easier. For example, we can borrow money more cheaply than a private sector organisation can, but so can other partners. For example, I chair a housing association and we can also borrow more cheaply than the standard private sector. We have a £100 million fund to invest and in one part of the northwest we are building a health centre. There is no reason why we could not build a school taking advantage of the lower rates in a community which we understand because we control the housing there to which we could add on our housing association head office for the area, to which we could add on other facilities which we know the local community wants, but those are very difficult to do because if you go through the health route you have a LIFT scheme; if you go through the education route they have bulk bought from a series of providers. It does take out to some extent that local originality and our ability to find savings by being small because the assumption is that you find savings by being big.
Mr Buxton: If I could add, Chairman, typically with a private finance scheme the local authority is only paying when the scheme is delivered, so there is that element of risk transfer. Arguably you could set up forms of slightly different procurement which would rely more on local authority borrowing which could actually come up with a mechanism which would transfer, but essentially the essence of the private finance project is that it is payment on delivery and it is that extra security that the local authority is given that is the key advantage of the private finance contract.