Q541 Chairman: Without necessarily having the money at risk in terms of the debt financing.
Ms Mingay: You can. It is just a matter of scale and whether you get the right incentives. I am sure it can be done but it has to be thought through case by case.
Q542 Chairman: Are there any other reactions to that one?
Mr Thompson: We do whole life costing for a significant portion of all our procurements, so whether they are privately financed or traditionally financed through Treasury funds. As I said in answer to an earlier question, the disciplines which we had originally applied in PFI we have then brought across to non PFI procurement. We have those disciplines in both sides of our procurement.
Q543 Lord Eatwell: It has been suggested to us that there are some projects, and the London Underground has figured prominently in these discussions, that are simply too big to do as private finance projects. Is there something about large projects that makes them particularly difficult to control or difficult to manage effectively to a private finance initiative? Does size matter?
Ms Mingay: Large projects are difficult to control whether they are in the public sector or the private sector. Because inherently they are complex, they have a lot of interface and have a lot of risk to manage, it does not matter whether it is private or public. The NAO's November 2009 Report on commercial skills for complex procurements brought this out. Large projects are more difficult but it is not to say that they are incapable of doing it. You mentioned Metronet. The main cause of Metronet's failure was of poor corporate governance and leadership. It is fair to say that the complexity as much as the size was probably a contributory factor in its ability to deliver some of its obligations. When we look forwards and we think about Crossrail and where we are working through starting to develop that project, that is an example of a large project where the difficulty not only lies in the scale but also in the complexity, the interfaces with London Underground and with Network Rail. The resulting impact on the private sector provider to manage all that risk we just felt was too much. Whilst it has not been a good candidate for PFI and we have drawn upon some of our experiences elsewhere to say, "No, that is not one we want to do that way," we have taken some of the techniques that we have used in PFI, through contractualising agreements between sponsors, between the delivery agent and through risk management processes, and put them into effectively a public sector context, as well as saying- because on these very large projects you often have projects within projects-that there are elements where private finance can be incorporated into the deal. Again in Crossrail it is the rolling stock and the construction of the Canary Wharf Station being done by the private sector, where the rest is being done publicly. Irrespective of whether it is conventional or PFI, the strong need for commercial skills on the public side again is something that the NAO Report highlighted and it is something that we would echo, irrespective of whether we procure it as a PFI or conventionally.
Mr Coates: It is not a statement that is true of health, where some of the most complex and difficult projects we have ever undertaken have been PFI projects. Bart's and the London, which is over £1 billion and probably the largest single health project ever undertaken in the NHS, comes to mind, and Manchester, which is always in the "too difficult" box for public procurement, has now been successfully delivered and opened.
Mr Thompson: I am not sure if there are some that are simply too big. The biggest deal was for £13 billion, but the bigger the deal gets and the more complicated it gets, the more interfaces it has, the more risks it is carrying, the more difficult it is to finance. I think it is just the scale of projects.
Q544 Baroness Kingsmill: A previous witness did suggest that PFI can distort health policy; for example, it being an easy thing to do to get a PFI project off the ground to make a large hospital, but once that large hospital is in progress, if health needs in the area change, you might rather have small clinics or walk-in clinics or things like that. Could you comment on that as a downside?
Mr Coates: I saw that in the transcript and I confess I did not fully understand the logic in it. If you take as a given that no matter how it is borrowed or who borrows the money, the Government broadly has to borrow money to build assets, be it through Treasury gilts or through PFI lending, then any decision to build a large asset, if you change your mind very quickly afterwards, leaves an enormous tail of liabilities that have to be paid for by the taxpayer. With PFI these are much more visible to the Trust because they can still see the payments going out to the bank, but in gilts, as I am sure you realise, it goes into the consolidated fund and it becomes easy to forget about, it becomes part of an accounting loss that you do not ever have to face up to individual departments. The answer to the question is that any decision to build a large asset in any particular location is prone to the problem that you may change your mind, and you should make sure the decision-making processes are better to avoid that rather than say that PFI causes a problem and that others do not.
Q545 Baroness Kingsmill: It has nothing to do with the procurement method.
Mr Coates: It is decision making.
Baroness Kingsmill: thank you.
Q546 Chairman: A variation on that point is that, if there is constraint on public expenditure and if you are stuck with a PFI contract with fixed payments over time, then your ability to react to the constraint is obviously limited to those things that are not PFI.
Mr Coates: My point is that no matter how you fund the borrowing, whether it is done by the Treasury or by a PFI contractor, if you change your mind at some point you have an expensive tail to pay off, the taxpayer has the tail to pay off. These things have always had a price. PFI makes those more pronounced and brings those down to the local level. You could argue that improved local accountability improves local decision making, because they have to live with the decision for the next 30 years.
Q547 Lord Best: We did not hear it like that. The way it was presented to us was that the PFI contractor has you over a barrel. For sure, over 30 years, how we deliver health or education or anything else is bound to change. Unfortunately one is boxed in with a PFI contract and although, yes, it costs money to change your mind later to do something different, if you are in control of that situation because you are not in a 30-year contract it is very different from if someone is going to make you pay a very heavy price for changing your mind later on.
Mr Coates: A PFI contract is a collection of different contracts doing different things. Some are quite short-term contracts, five year contracts for maintenance and five years for cleaning, and longer contracts. If you decide not to use a PFI asset after a number of years, over time those contracts will collapse, the same as it would do in a public hospital, because, for example, most public hospitals outsource their cleaning, portering and domestics, and if you decide to close a hospital down you still have this tail of contracts that you have to pay off. It seems to me that you end up with a sum of money that inevitably is a negotiated sum around how much bank debt is outstanding and any, you might say, tail of profit that a contractor may be entitled to. I do not see that as significantly different from a problem you would have with a public asset.
Q548 Lord Lipsey: There has obviously been a break in the upward curve of public finance because of the credit crunch. When you gaze into your crystal ball, do you think it will go on taking an increasing proportion of public procurement or will it level off or will the credit crunch have some lasting effect?
Mr Houten: We have continued to do PFI deals. There have been 14 done by Partnerships for Schools this financial year. That has been helped through the European Investment Bank broadening the base of lending, and Nationwide have also come into the schools market. They were not previously in. We still have a pretty steady flow of projects. From my perspective PFI will remain an important part of the mix, but we use about £1.3 billion of credits every year. It is a different system for us because it is local authorities who do the procurement. That is against an overall schools capital programme of between £8 billion and £9 billion. It is a proportion, but not the lion's share of what we do.
Ms Mingay: Government-sponsored private finance projects is just one strand of the use of private finance in transport. It is one tool in our kit. If you look at the transport PFI procurement pipeline, I think we currently have 15 projects with a capital value of £3.2 billion which are in procurement, but I also have in procurement a range of deals which are not pure PFI but use their techniques; namely in the rail rolling stock market, which is to the value of a further £11 billion. That is the rolling stock for Thameslink, Intercity Express, and Crossrail. When I look at our procurement pipeline, pure PFI, we have a good mix. Whether it is helicopters or tram extensions or highways maintenance or bridges, there is a good mix and we will use it where we think it is best, and to the extent there will be further investment, we would look to use it. I think we will also look to use it in and around where we can use the techniques, where a classic PFI may not be the right thing but it may be applicable elsewhere. In that context I think it is worth saying that we have spent quite a lot of time in the last few years thinking about pension fund money, wanting to invest in long-term infrastructure and how we can harness that to best effect in transport investment. You will have seen reference to that in the Pre-Budget Report last week, when it was announced that Infrastructure UK was going to be established by the Treasury, and amongst the many things they are going to be doing they are seeking to develop new funding models based on the success of PFI/PP and to unlock new sources of private capital. That is in the context of infrastructure where I think there are very significant ongoing needs and a desire to continue to use it in whatever is the best way.
Q549 Lord Lipsey: Can you give us some idea of the scale on which pension fund money is coming into PFI projects?
Ms Mingay: I do not have that figure exactly to hand, but if you like I can have a note sent.
Q550 Lord Lipsey: It would be interesting. We have had another witness who has been talking quite a bit about that and it would be interesting to know just how that is developing.
Ms Mingay: Thank you.