Q91 Lord Paul: Out of the two, if you had to choose in the first reference, which one would you choose?
Mr Buxton: I would not. I see that conventional procurement and PFI have advantages and disadvantages and it depends what your priority is as a local authority. If you want slightly more flexibility then you do not want to tie yourself to a longer contract. On the other hand, if you want greater price certainty then you may well wish to enter into a PFI contract. It really depends on the nature of what you are trying to deliver. It also depends on the risks that you are trying to avoid. For example, if you are building a leisure centre then actually the private sector is very capable of taking on the whole risk of the occupancy or use of the leisure centre. On the other hand, if you are building a prison what private sector contractor is going to take an occupancy risk on a prison? Clearly they are not. Therefore, this issue of risk transfer, yes there is always an element of risk transfer but it is not the whole risk associated with the entire life of the project. I think sometimes the public perception is that PFI transfers the whole risk. No, most PFI projects concentrate on transferring the construction cost risk and the operational maintenance risk. Some projects can transfer more than that but actually the core risk transfer is around the capital construction cost and the maintenance cost risk. It is not a case of better or worse and I think that is why what we would be arguing for is as neutral and level a playing field as possible so that local authorities can make their own decisions as to the appropriate nature and use of PFI projects. For certain types of projects that is absolutely not the right thing to do.
Q92 Baroness Hamwee: To extend that slightly, as well as asking us, as I assume you are, to back your call for the level playing field, presumably you would like us to say that the greatest flexibility in the type of project would be helpful when government is issuing credits, putting it in rather straightforward terms.
Councillor Kemp: Any local authority has a variety of needs. We deal with things on a themed basis because that is the way ministries do it. We need, in capital as well as revenue projects, to be able to assemble what our communities need and there is often in that context more conflict between local government and Central government delivering mechanisms than there is about our particular route for financing any particular set of circumstances.
Q93 Baroness Hamwee: Can I ask about the longer term impacts using PFI, whether there is any difference between PFI and conventional projects. We have had some evidence from I think it was Sheffield where they say that an emerging issue is that PFI contracts with fixed price or inflation-linked contracts in the public sector funding environment where standstills or even cuts are going to be possible, non-PFI arrangements may be easier to manage down in such an environment.
Mr Buxton: If we take the schools example. Let us say that you go through conventional procurement and you build a school, you expect to maintain it. A school has costs that you have to pay. The issue with conventional procurement is that you can in a bad year choose not to do the same degree of maintenance on the school and, therefore, you have a slightly greater degree of flexibility. Whether it is a good thing not to do the maintenance on the school I would have to put a question mark there. On one level you can say that the local authority should have the flexibility not to maintain its schools; on the other hand, as a parent I might be saying, "Actually I would prefer a situation where the local authority was really committed to maintaining the school during the life of it because arguably a poorly maintained school is not a conducive environment for learning". We are not arguing PFI is wonderful or PFI is awful, there is a balanced approach to be taken to this and there are arguments for and against. I would accept that one of the challenges, if you have a long term contract, is that your payments are fixed.
Q94 Lord Tugendhat: You have made some very interesting points in answer to a lot of questions within other questions, as it were, but coming back to the point that you have just made, do you believe that some private finance projects are more successful in some public services than others? In other words, are some projects more suitable for PFI than others?
Councillor Kemp: Quite clearly those that are best are ones that you know are going to be there for a long time. You build a road; you build a school, things like that. They are solid, they are going to exist. There might be some questions around the edges about what a school will be doing precisely in 25 years, but those are good long-term things on which we can see the effects. It should not be used for things like IT which change so rapidly. By the time you have actually gone through the process the specification will have moved on. That is where you go for a more flexible partnership. For example, a lot of councils now have set up Joint Venture Companies with their IT provider and that is another way of bringing in finance, of bringing in appropriate private sector expertise in a way that is very readily adaptable to meet continually changing circumstances.
Q95 Lord Tugendhat: I realise that this is not your direct responsibility, but would you feel, therefore, that hospitals are perhaps a less appropriate kind of project because of the very high IT involvement?
Councillor Kemp: It comes back to your view on whether we have hospitals in their current form. In my own city the Health Service is dispensing with its big hospital that was going to last 100 years and creating community facilities around. It is a question of how you would evaluate the risk because you could well have a contract for building and then a different set of contracts in relation to what goes in it. So you have to make a decision on what you think the Health Service is going to be doing in 25 years and say, "Do I want to procure a hospital through that route?"
Q96 Lord Tugendhat: The distinction you have just made is one that could also be made for schools.
Councillor Kemp: Absolutely.
Mr Buxton: That is absolutely the critical point, that PFI for a hospital could be everything from simply doing the building and maintaining the building, all the way ultimately through to actually running all the medical staff. The issue is where do you draw the line if you are going down that route? Do you include all the medical equipment; do you include ancillary staff; do you include medical staff? What is the limit? There is scope. This is an area where it is possible to make different decisions and it is not a case of there has to be one answer. Clearly there will be some government programmes where they will choose a particular strategic direction, but PFI does not force you to choose, within that spectrum you can actually make choices.
Q97 Lord Tugendhat: One final question. Within your association is it your experience that different local authorities have made a range of very different choices on the same issue or is there, broadly speaking, a mainstream view?
Councillor Kemp: I would rather turn that slightly on its head. I would find it difficult to discern whether Lib-Dem, Labour or Tory authorities went one way, or urban or rural authorities. By and large most local authorities are extremely pragmatic and that is why we are looking for the level playing field. We have to have a relationship with the private sector for a lot of these activities. As I said before, we have never built a school. Although we have said it is a council property we have never built it. So the question is how do we enter that relationship. I think we would find it very difficult to come up with an authoritative answer to your question because I have never seen such differences as I go around the country.
Q98 Baroness Kingsmill: I am stuck with the boring question, actually! That is, could you elaborate on the accounting treatment of private finance projects?
Mr Buxton: I think from a local authority perspective the critical issue for a local authority is the impact on the council tax. That is the real issue. The reality is that it does not make a great deal of difference whether you go down a PFI route or a conventional procurement route. If you have built a school the school is going to need to be paid for. You are either going to be borrowing money to build the school and be paying that money back, or you are going to be paying a private contractor a unitary charge for the use of that school. The impact on the council tax is broadly neutral, and I think that is the issue from the local authority perspective: is there going to be a significance difference in impact on the council tax and the answer is broadly speaking it does not make a great deal of difference which route you go down in terms of the impact on the council tax because the council tax is about what you are actually spending rather than a set of relatively arcane accounting rules about whether something is or is not on balance sheet. The question for local authorities is what is the impact on the council tax and not what does the balance sheet look like.
Q99 Baroness Kingsmill: I am delighted to hear that! So how prepared do you think local authorities are for IFRS?
Mr Buxton: I think the National Audit Office is actually doing a piece of work on this at the moment and it is proposing to come out in the New Year with a statement. My understanding talking to colleagues in local government is that no major problems at this stage are anticipated. That is my broad indication, although I have to say that that is based on a relatively limited sample of discussions with colleagues at the Local Government Association. As I say, I think the National Audit Office will be coming out with more definitive guidance on this topic either at the end of this year or early next year.
Councillor Kemp: It is interesting for me to compare what I do as a Housing Association Chair, which is in my view a public sector body, where I am acutely aware of the balance sheet because I use the balance sheet as a tool to borrow more money and do more things, and the concept of a balance sheet in local government. I do not have a clue what the net assets of Liverpool City Council are because I only look at the revenue consequences. If we moved further into the field of prudential borrowing then that would have to change. Perhaps that is one of the things that the changes will make us more aware of. If I have got assets how can I best use them to use more money in the way that the private sector does? So I think those changes are useful. How or where councillors are aware of these issues I am not sure, but we have always had officers to guide us.
Q100 Baroness Kingsmill: What about the credit crunch, has that impacted?
Mr Buxton: The evidence at the moment is that the interest rates that we are having to pay on some of the major schemes that have closed recently are slightly higher than the interest rates that we had perhaps a year or two ago. I think long-term I would expect the interest rate gap to diminish, but at the moment schemes are working out slightly more expensive than they were so, yes, there has been an impact. Secondly, for some of the most complex schemes we have to rely on some additional funding sources and the Treasury is now actually making funding available and the European Investment Bank. Schemes that would have relied 100% on finance from the commercial banks for some of the most complex schemes, and I am thinking, for example, of the Manchester Waste Project, has had to rely on Treasury and European Investment Bank funding. Clearly that funding has to be repaid, it is not a grant, it is investment. Actually just securing the level of investment on the very biggest of the projects has in the last year or so been more difficult. On the other hand, the latest evidence suggests that in the course of the last three or four months, compared with this time last year, a significantly higher proportion of schemes are closing and, therefore, the situation does appear to be easing. Yes, there has been an issue and still is a little bit of an issue but I would expect the situation to continue to improve over the course of the next year or two.