Q581 Chairman: Welcome to the Economic Affairs Committee. This is the 10th and last public hearing of our inquiry into private finance projects and off-balance sheet debt. Copies of Members' entries in the Register of Interests and interests declared as relevant to this inquiry are available to the public and witnesses. Minister, welcome, and thank you for making the time to come along this afternoon. I am sure I do not have to ask you to speak loudly and clearly for the benefit of the shorthand writer. Would you like to say any words, as it were, by way of an open statement or would do you want to move straight into questions?
Ian Pearson: Thank you for the opportunity to talk to you today. I will be very interested to hear your conclusions when you finalise your report, but I am happy to go straight into questions.
Q582 Chairman: Let me start with a scene-setter, if you like. Perhaps you could outline what you see as the primary achievements of PFIs, the Private Finance Programme, and what problems you think remain to be solved?
Ian Pearson: Yes, let me do that. I do think that public/private partnerships PFI has helped to transform the way in which the Government delivers services to our citizens, by promoting innovation, ensuring that the whole life costs of initiatives are minimised, and ensuring that risk is properly allocated and allocated to those, public or private, who can bear it best. I think that has been a strong theme for what we have tried to achieve through PFI over the last twelve or more years. Particularly PFI has a track record of delivering on time and on budget, and I think there is some evidence that suggests it has helped to promote a learning culture that has benefited conventional government procurement as well. If I was just to take the example of my own constituency, which I do not think is untypical, but in terms of the benefits, we have seen investment in what is in effect a new hospital at Russells Hall that offers state-of-the-art medical facilities to a population of more than 300,000 people. We have seen another satellite hospital, the Corbett Hospital, built brand new, offering services. I have got a PFI school in my constituency and the local authority is currently bidding for the Building Schools for the Future Programme funding as well, which would involve private finance as well. At the primary care level as well we will see the completion next year of a major new health centre right in the heart of my constituency in Brierley Hill. I do not think my own experience is atypical of other Members of Parliament. We have seen significant capital investment in 21st century infrastructure over the period that I have been a Member of Parliament that PFI has helped to finance. You asked also about the problems that still need to be solved with PFI. I do believe that there has been a learning experience over the whole period of the PFI programme, as has been quite well documented. I think there has always been an issue about procurement times. Procurement times for PFI projects can be lengthy. There can be some significant bidding costs at the front end as well, so for bidders that are not successful that can be a disadvantage. I do think that with best practice, however, procurement times can be shortened. When I was a Minister in Northern Ireland, we managed to run a major procurement exercise from start to finish for procuring a major new building within 12 months; and that shows what can be done with PFI. The final area where I think there is still work to be done will be on the client side, client-side skills. I do think it is the case that we have not always been as good and intelligent a purchaser as we should have been, and as good and effective managers as we should have been. I think whether it is a central government-run PFI scheme or a local authority one or a health service one, ensuring that you have got the right commercial skills to manage the client side of the contract remains an issue. Again, there have been significant improvements over the last 10, twelve or more years.
Q583 Chairman: How do you set about getting those skills?
Ian Pearson: There is a lot of work that has been done through the Office of Government Commerce in terms of procurement capability and reviews looking at skills more broadly across the Civil Service, whether it is skills in terms of conventional procurement or procurement of PFI/PPP projects. That, I think, has been beneficial. There has been lots of work as well to make sure that we are not reinventing the wheel every time in terms of standard of contracts, as I think you are very familiar with; but ensuring that we have got the right calibre of people, that they are properly supported and there is the right level of advice available is crucial. We have recently had initiatives like the Major Projects Review Group. We have got the OGC Gateway programmes that are looking at oversight to ensure proper planning of procurement processes. All those are helpful initiatives in procurement more generally. I think it is one of these areas where there is always more that can be done. Again, I would like to think that there is clear evidence there that we have got better in managing the client side, although we should never be satisfied and should always want to strive to do even better in future.
Q584 Chairman: Do you think that requires recruiting people with those skills from the private sector, in other words turning poachers into gamekeepers, or do you think you have got already?
Ian Pearson: Yes, it does involve that. I think one of the things that has been very successful has been the way in which we have done just that through what used to be the Treasury PFI Unit, which then became Partnerships UK, and more recently with the Treasury Industry Finance Unit as well. Through both PUK and TIFU we have brought in significant commercial skills from the private sector to work on projects and to bolster our teams that are working on the client side within government; and I believe that has produced some really significant benefits.
Q585 Baroness Kingsmill: Some of the witnesses who have appeared before us have demonstrated a certain cynicism about the reasons for PFI and why that method was chosen. Basically, we have been told that it was designed to get round Treasury spending rules. I wondered if you would like to comment on that and whether or not you think that continues to be the case. Supplementary to that-a third, which I am sure you will hold along with the others-do you think the situation will continue, that this will continue to be a means of getting round Treasury spending rules?
Ian Pearson: I do not accept the premise in the first instance. I know that there is a perception amongst some people that this is the case and that the Government has been doing this to get round the rules. However, what I want to say is that the Treasury has always been very clear in its guidance that this is about effective risk transfer; it is about looking at best value for money. It is not about the accounting treatment. If you look at the figures in terms of PFI deals, although the overall number is very high, PFI/PPP deals only account for round about 10% of total procurement; so it is not a route that the Government has been wanting to go down if it wanted to get everything off balance sheet, as some people have alleged. There have obviously been recent changes to accounting treatments that you might want to discuss in more detail, and I gather other people have talked to you about this. Certainly the introduction of new international financial reporting standards will bring nearly all off-balance sheet PFI obligations on to the balance sheets of departmental resource accounts, and the debt implied will be visible in the departments' annual accounts as well.
Q586 Baroness Kingsmill: So what might have been can be no longer!
Ian Pearson: I do not think it ever has been the intention of Government that PFI deals should be anything other than transparent. You cannot build a big hospital in my constituency and be anything other than transparent, quite frankly. There are people who want to allege that this is some sleight of hand in terms of accounting. I do not really believe that is the case. There is a lot of information out there at the moment. Some of it has now been reported on different bases; but just as we are used to different definitions of inflation, as we have seen in published figures today, I think people can readily understand different ways in which accounting treatment leads to different figures being presented. As long as the information is there and out there, I think that is the important thing.
Q587 Baroness Kingsmill: Do you think the process gained more flexibility in procurement?
Ian Pearson: I certainly believe that PFI has been a revolution in the way in which governments procure services. Looking back on it, it must have always seemed strange that government just procured everything through a mechanism that involved paying up-front in some cases for an asset that has a very long, useful life. Most people, when they are considering purchasing a house, do not buy it outright; they will purchase it over a period of time. The ability of government to make unitary payments over the expected useful life of an asset or a service I think is an innovative initiative for government. I am proud of the fact that we in the UK have actually pioneered this. As you know, many of the countries have copied us since, and I believe that it is a legitimate, cost-effective procurement mechanism, but it is not the panacea for everything. I just wanted to make the broader point as well that when we came to power in 1997, we inherited-without wanting to get too political-an infrastructure in this country that in many respects was dilapidated. As part of a programme of increased capital investment, PFI has allowed us to bring forward investment and to build in particular new schools and hospitals earlier than we would otherwise have been able to do. I think that has been a significant benefit. For those that say, "Well, yes, you have got to pay for it later", yes, we are continuing to pay for it, but in the same way that people will pay mortgages as I have indicated. I do not think that is an unreasonable thing to do. The question is to make sure you have got the balance right between what you procure by conventional means and what you procure through PFI means, and take into account the affordability of that unitary payment as part of your departmental accounts if you are government, or as part of your budgeting processes if you are a local authority health trust or local education authority.
Q588 Lord Forsyth of Drumlean: I wonder if you can help me, without being political. When I was a minister and we had a PFI we saw it as an absolute godsend because we saw it as a way round the very rigid controls on capital expenditure which were imposed by the Treasury. In your opening remarks you explained how you had been able to get these extra hospitals and schools. The reason you were able to do that of course was because the Treasury were not controlling that expenditure. I understand your point about being able to have it on tick, like a mortgage over a period of time; but the mortgage analogy, if I may say so, does not seem to me to be a very good one. It is like buying your house on a credit card as opposed to a mortgage because the Treasury can borrow long-term money much more cheaply than is being charged with PFI. Can you help me with the inconsistency with what you have said at the beginning, which is that PFI allowed all these capital projects to go ahead, and the answer that you have just given to Baroness Kingsmill that it was not a way of getting round the Treasury's strict spending rules? Ian Pearson: It certainly is not a way of getting round the Treasury's spending rules. I do not believe there is an inconsistency. I do agree with you when you say that the mortgage analogy is not a perfect one, because when you have a mortgage on your house, the person you have a mortgage with is not responsible for maintaining that house; you are. There are some significant differences between the mortgage analogy. You are right, of course, to point out the fact that the Government, through its Works Loan Board, can borrow at a cheaper rate than the capital markets and any consortium that is going to the capital markets to borrow. But, as you know very well, there is significant evidence out there that the benefits overall of PFI projects and the transfer of risks that takes place as part of the PFI process lead to a better outcome overall, with regard to the whole life costs of the project. The fact that we have been able to make improvements to the infrastructure of school buildings, hospitals and primary care in particular at a pace that we would not have been able to achieve through normal, conventional means I think is a very beneficial thing to do. But it has not been done at the expense of a rigorous analysis of making sure that we deliver best value for money. That is what we try to focus on as part of it.
Q589 Lord Eatwell: Could I follow up on that because we have a group of questions all about this additional thing. The key issue, it seems to me, in your reply to Baroness Kingsmill and Lord Forsyth concerns the transfer of risk. I have been very puzzled about this business of transfer of risk. Let us take the hospital in your constituency. The hospital has been built by a private contractor, whoever it is, and they are running it, but they may sell it on to somebody else to run; you are never quite sure who will run it. If whoever is going to run it goes belly-up, the risk goes immediately back to the state, to the public sector, so the public sector is never free of risk because it may actually have the entire risk transferred back to it. You are not going to close a hospital because some private company fails. The transfer of risk, it seems to me, is entirely conditional, and it is conditional on the characteristics of the company. Those characteristics seem tome to be something over which the public has very little control. I suppose you can do due diligence, but you can never be quite sure how a public company is going to perform over such a long period of time as these projects are involved. It seems to me that the state is always carrying a very considerable risk, as it has done with the Tube.
Ian Pearson: First, could I say, Lord Eatwell, on the issue of risk I agree entirely with your comments and your letter to the Financial Times today upon risk and credit default swaps.
Q590 Lord Eatwell: Thank you very much.
Ian Pearson: Specifically on risk in this context.