Q101 Lord Griffiths of Fforestfach: My Lord Chairman, before asking a question I would like to declare an interest as the chairman of what at the time I think was the largest PFI project, namely Trillium, which was the outsourcing property services to the DHSS and then to the DWP and its successor, namely Land Securities Trillium, and at present as an advisor to Telereal Trillium. My question is do you see any benefit in developing alternatives to the current private finance models and, if you do, what would they look like?
Councillor Kemp: The answer is yes and the second answer is we are not sure. We are very clear that in the face of the recession, which is hitting council public sector finances in a variety of ways, we have to form new relationships between the public, private and third sectors. What we are trying to do, and I would be happy to invite one of your Lordships to this, is on 16 November we have some leading members of those three sectors coming together. What we are trying to do is to look again, as I have said before, at partnerships and relationships to make things work.
Traditionally the three sectors relate to each other in one way or another purely on a contractual basis. If we can find more flexible ways of creating long term partnerships which will play to the strengths of the three sectors, that will be very strong. At the moment though we tend to create contracts which appeal to the worst aspects of those because we do not trust each other, so we build in certainty instead of originality and flexibility. We are acutely aware of the need to change, but certainly for most of us it is work in progress which we would be happy to report back to you if those relationships developed that we can define better the new ways.
Mr Buxton: I think it is fair to say that there are already a range of different models that can be used. You have your traditional vanilla-flavoured PFI, clearly the further alternative is conventional local authority procurement. That exists and may well be appropriate under certain circumstances. You then have some of the major government schemes, such as the local education partnerships and LIFT, which are designed at a broader programme level to deliver things. Other ways of doing things might include local authorities entering into some sort of Joint Venture Company and actually directing investing. It may be the local authority giving a session. It may be a local authority doing some form of outsourcing of services. I think there is a range of models and it comes back to the point that Councillor Kemp and I were both making in the beginning that if the playing field is neutral in the sense that if there are subsidies available then potentially any of the existing models might be appropriate depending on the circumstances of the individual project and what you are seeking to achieve. I think increasingly partnerships with third sector organisations and so on are going to be important and how does that fit into some of the programmes that we have at the moment? It is about trying to provide that flexibility.
Q102 Lord Best: I would like to look ahead a bit because we are still in the early years of all these PFI contracts and to draw you a bit on the inflexibility of being boxed into a contract that lasts 25 or 30 years. Although everything comes in on time or on budget on day one-great and there are the gains-is it not likely that almost every public service we can think of will change very dramatically in a much shorter timescale than 25 or longer years? I am familiar with the world of residential care homes and I cannot believe that the same home, even though there is a wonderful contract to maintain it for 25 years, will be required for the same purpose 25 years from now. We are going to do all kinds of things differently. How wise is it? Even schools-and you were mentioning schools as the shining example-can you be sure that we will teach our children in the same way of going to classes and maintaining as is. Is it not going to be fantastically expensive to buy your way out of those contracts later on as a local authority if you do not like what you have got then?
Mr Buxton: I think those are very valid points. It is important to recognise that local authorities enter into 20-year contracts outside what we would regard as a PFI framework. I am familiar with a local authority that sold its residential care homes and gave the contractor who purchased the residential care homes a 20-year contract guaranteeing occupancy of the residential care homes. That happened completely outside this traditional PFI and that was an outsourcing transaction. Was the local authority right to do that? No, I think they were completely wrong. At a time when we are seeking to encourage more people to remain in their own homes a 20-year guaranteed occupancy contract for residential care homes would seem to be a major mistake, regardless of whether you do it by an outsourcing deal or a PFI deal. Schools are a very interesting example. Remember, if we did not have PFI and we would be only be going down conventional procurement we would still be building the school. In other words, you would still end up with that building. The very valid question is what we would require in 25 years' time. I have heard the suggestion-and I am not saying whether this is right or wrong, I am not entirely sure-that what we are doing at the moment with schools, regardless of whether it is PFI or not, is that we are simply building new versions of old schools. So we are simply building something that looks modern, it has new technology but essentially it is the basic fundamental concept that we have had for a very long period of time, which is a place to which a large number of young people go where they are detained during the day time and fed knowledge, information, learning and so on. As a parent I am not uncomfortable with that but if we were to say what is education going to be like in 25 years' time, if we judge by what has been happening in offices-in my own organisation most of my staff are home-based, they travel around to where they need to be, they are linked up electronically in various ways-does this mean that in 25 years we will not need the same type of buildings but we will have a much more networked education? I do not know the answer to that. It is the same question whether or not we are going down a conventional procurement route or a PFI procurement route. We still have to make that decision as to whether we are building a set of buildings. Therefore, I do not actually think the critical issue there is around PFI. I think you are absolutely right to raise the issue but that is why I am saying the same skills are needed whether we go down conventional or PFI procurement because they are skills about scenario planning. What is the educational world going to look like over a longer period of time? The difference is, yes, we are committed to the maintenance aspect but actually that is a relatively minor aspect of the overall contract and one on which most of the contractors do not expect to make a significant profit margin, therefore I see the issue as being broader than just PFI.
Councillor Kemp: If you were to look at it in the long-term, that is one of the reasons I am really in favour of local flexibility. If you can imagine a school which capital asset was controlled by a local organisation which knew the patch it was responsive to, it still ends up with a school, but if you can build the other things in then the ability to move it around and make it more flexible would be much enhanced. As someone who has gone round and tried to convert old schools into other uses, because we have lots of them in Liverpool that are listed buildings, one of the problems is that once you build something with classrooms designed for people to move around every three-quarters of an hour, you have designed a particular type of building and they do not convert very well to anything else, even if they are lovely listed buildings.
Q103 Lord MacGregor of Pulham Market: It has been suggested that private finance models have not been overly successful in providing innovation and delivery. Would you like to comment on that general view in relation to local authority PFIs?
Councillor Kemp: First of all, I think we should set this against what I believe is a massive change in local government over the last 12 to 15 years. I have been a councillor a long time and in my view local government is now operating at as high a level as I have ever known it. The importance of that to your question is that that also means that local government is more imaginative, innovative and more pragmatic than it has ever been before. That means that when it goes to providers, whichever route-and we are fairly neutral about this-it is coming up with a more innovative specification where it is able to. Where it is not able to then we will just procure a school, as we have discussed before. So I think that local government is engaging with the private sector in ways that we would not have dreamed of 12 years go, and it is that coming together, that bringing together the best skills of both, which I think is feeding innovation, but not a PFI route per se.
Mr Buxton: Again, I think it comes back in part to the more general issue around procurement and in part the creativity and skills of the team that is leading the procurement process. PFI can produce innovation, as can conventional procurement, but it actually needs a leadership that wants to challenge and develop. To give you a specific example, I think in the waste sector at the moment some of the waste PFI projects are actually very innovative. Specifically, the recent example is Manchester Waste, which is a £640 million project and they are actually using waste to produce solid fuel and the solid fuel is then used to actually produce energy. This is something that has been developed through the PFI process. In waste we have got contractors who are looking at biofuels coming out of waste and so on. So I think that there is real innovation going on there. We can point to a number of community type projects where you actually have health facilities and libraries and CABs and youth clubs in the same centre. Yes, you could probably have produced the same innovation with conventional procurement but the skill is in the team that sits behind that and says, "Yes, we want to make this a community project. Yes, we understand the needs of our community. Yes, our elected members are fully engaged. Yes, we have teams of people who are working with the community to get their input." I think if you do that then you can actually generate innovation both with PFI and conventional procurement.
Q104 Lord MacGregor of Pulham Market: Yes, because the example you have given on biofuels, bio-mass and bioenergy and so on could happen within the conventional field as well because the innovation and inventiveness is in relation to the project rather than the financing.
Mr Buxton: I think that is right.
Q105 Lord MacGregor of Pulham Market: Just listening to you in the whole of this session it seems to me to some extent that the whole PFI issue is different for local authorities compared with Central Government. There have been criticisms that PFI has been used in Central Government to get projects moving faster than the old conventional arrangements-off balance sheet financing, if you like, and so on. That does not seem to apply in the local authority area, not least because of the constraint and impact on council tax. You are really saying that it is just one model among a number that should be used but it does not have an effect on big capital projects going ahead faster than they would otherwise.
Mr Buxton: Except to the extent that Central Government determines that certain types of projects may only proceed through the PFI credit mechanism. I am sure that was understood in your question.
Q106 Lord MacGregor of Pulham Market: Yes, it was.
Mr Buxton: I just wanted to make that clear for the record.
Q107 Lord MacGregor of Pulham Market: If that was not there, all the school projects were PFI, then you would want the level playing field.
Mr Buxton: Absolutely.
Q108 Lord MacGregor of Pulham Market: That is really the message you are trying to convey.
Mr Buxton: Yes, indeed.
Q109 Chairman: Let me ask it in a slightly different way to be absolutely clear. If the hidden hand of the Treasury said that rather than having 10 or 15% of the local authority expenditure in this area being PFI you could double it if you wanted to, would that make any difference?
Councillor Kemp: It would depend on the types of projects, as we said before, that any council was dealing with at any one time because there are some types of projects that we do not think that would apply to. In general terms it could increase or go down but as long as we could relate it to what was particularly needed in our own individual circumstances.
Q110 Chairman: I was not suggesting that they mandated you should, but if you had the freedom to double it would that make any difference to your investment programme?
Councillor Kemp: No, I do not think it would.