Q147 Chairman: Welcome to the Economic Affairs Committee. This is the third public hearing of our inquiry into private finance projects. Copies of the Members' entries in the register of interests and of interests declared as relevant to this inquiry are available for the public and witnesses. I should declare an interest as a member of the supervisory board of Siemens AG. Siemens Business Services entered into a partnership with National Savings & Investments in 1999. Ms Anderson, Mr Sutherland and Mr Rylatt, thank you for coming to give evidence on behalf of the CBI and thank you for your written evidence in advance. I have to ask you if you could speak reasonably clearly and slowly, both for the benefit of the shorthand writer and for the webcast. Do any of you wish to make any opening statements or shall we go straight into questions?
Ms Anderson: We would just like to introduce ourselves and perhaps if I could make a few brief opening remarks?
Q148 Chairman: Of course.
Mr Rylatt: Good afternoon. My name is Ian Rylatt and I am managing director of Balfour Beatty Capital, which is the investment part of Balfour Beatty Group, which manages all of their PFI investments. We currently have 30 investments around the UK in a range of projects, with schools, hospitals, roads and infrastructure projects. We manage something like 120 schools, just to give you an idea of one of the sectors in which we operate. We employ about 6,500 people in our PFI activities and in a typical year probably about a million members of the general public will probably use one of our facilities that we manage, just to give you an indication of the scale of the business.
Mr Sutherland: Dougie Sutherland; I am managing director of Interserve Investments-a very similar business as to that which Ian set out. We have done work within the schools, health and prison sector and we have about 33 investments in those sectors. I started doing this about 15 years ago when I was with the Private Finance Panel and the Treasury Taskforce, which were Treasury quangoes originally and then changed their name to taskforce about 15 years ago; and I have been in the private sector for about 10 years.
Mr Sutherland: I am Susan Anderson; I am Director of Public Services at CBI. In the CBI we have a strong interest in ensuring that we have high quality public services. As you see, we have members who are responsible for delivering public services, both in the private sector and in the third sector. The thing that I would want to emphasise is that we think that the public, the private and the voluntary sectors all have something to contribute in terms of providing high quality public services. We think that there has been a strong history in the UK of having successful private/ public partnerships, and I think this has helped successive governments to secure good quality outcomes and indeed value for money. There are always new partnerships developing and I think we have got better in terms of our collaborative partnerships over the last years. I do think that PFI has been a cornerstone of successive governments' policies and strategy to improve and update the country's infrastructure, whether it is our roads, our hospitals or our schools, and I think we have delivered really successful outcomes. The Treasury in the past has described PFIs as small but important-it is only around 10%, 15% of gross public investment each year. It is maturing but the thing that we would want to emphasise is that it is certainly not the only way to deliver good infrastructure and good services but it has had considerable success over the years and we think that there are many aspects, which we are happy to elucidate, that distinguish it from conventional procurement and to ensure and mean that it is an efficient mechanism in order to deliver improved outcomes but also value for the taxpayer. We do think it is appropriate to consider the evidence, so that is why we were very happy to provide written evidence and why we are very happy, with some degree of trepidation, to answer any questions that you might care to throw at us today. Thank you.
Q149 Chairman: Thank you very much. Perhaps we can start with that part of your evidence. You suggest there that the bundling of investment and infrastructure and service delivery as being one of the most important, if not the most important feature of PFI. Could that not be achieved under conventional procurement, i.e. bundling of delivery of, say, a building and the maintenance of that building?
Ms Anderson: If I might first say I do not think we think it is the only benefit-we think it is one of the key benefits. So if we take it in the round the thing that I would want to emphasise is that it is about long term value and sustainability. If you are focusing attention on the whole life of the contract, looking at the best value over that whole life, then I think PFI is really an efficient way of delivering that. For example, in schools, having a biomass boiler that might be more expensive in the short term but provide better value for money and indeed more efficient outcomes over the longer term; or whether it is a health centre that you can factor in redesign over the longer term that is a real benefit. Sharing the costs is really important; and sharing risks in order to succeed is important. I do think that the whole increasing accountability and transparency are really important aspects of PFI. But in terms of integration of design and delivery, I think the fact that you are bringing together the partners at a very early stage in the planning for a project, that you are setting very clear and coherent goals at the beginning of that project-goals that are in fact based on achieving desired outcomes-is important; and the collaboration that you get around service delivery and maintenance and indeed de-commissioning, and the fact that all those things are planned in from the start ensure that PFI is a good model. If we compare it to conventional procurement, if I particularly look at the example of schools, what tended to happen in the past is that local authorities would cut back on maintenance when the going got tough, and the fact that you are factoring in maintenance and cleaning sustainability from the start ensures that that is going to be maintained over the lifetime of that school. And the same could be said for hospitals. The opportunity to also factor in soft services, such as staff training, curriculum re-development, all those things are also an important aspect, and again, I would come back to say being focused on the outcomes, which after all is better education, better educational outcomes. So I am not saying that those cannot be taken into account in a conventional procurement but I think what PFI does enables us to lock in some of those benefits from the start.
Q150 Chairman: What we are fishing for is what is truly attributable to the fact that the funding is private rather than public? In some areas you can see what that might be; you can see some transfer of financial risk but not necessarily of operational risk, and you can imagine that there might be some additional due diligence by having third parties who are bringing the finance to the table. But it is not clear, for example in terms of the bundling or indeed many of the operational activities, that you could not procure in a public environment to achieve many of the same results as can be achieved from the PFI. So can you make a clear distinction between what is attributable to private funding as distinct from public funding?
Mr Rylatt: I think I can because for both Interserve and Balfour Beatty we deliver projects through conventional means as well as PFIs, so we are experienced in delivering through both routes. Really it is the choice for the customer which route they want to take because there are benefits associated with one and there are benefits associated with the other. For me the fundamental difference is that the PFI requires us to take very much a whole life cost approach to an asset-it is not just about the construction, the design and the price of the construction, it also about the facilities management and the maintenance. It is much more about the total through life cost in designing a building not just that is going to work day one but which is going to work in 30 years' time, where the maintenance cost of that building is optimised with the construction cost; and asks the private sector to take the risk on that, which really says almost, "Put your money where your mouth is. If you say you can deliver a building and design a building with the lowest overall cost which meets over the performance requirements I need and also ask us to invest in it and take a risk on delivering that outcome over a 30-year period", and I think it is quite a fundamental difference.
Mr Sutherland: Behaviourally, if you go out to the more traditional approach there is no question of behaviour and people are tempted to buy the lowest capital project because of cash constraints. That is probably one of the real differences-you are actually asking a slightly different question and you are not being constrained in your decision-making by the short term budgeting problem that you would face. So if you went out without the finance when it came to making a decision it is likely that a department would choose one with the lowest capital and then worry about the ongoing costs which happen after its triennial later. In PFI you take that decision away actually, so you generally make a decision-you have to make a decision on what is the best over the life.
Chairman: Perhaps we may come back to this when we talk about the possibly of a National Infrastructure Bank.