Q591 Lord Eatwell: Yes, fine. Go ahead.
Ian Pearson: For instance, the school in my constituency, Summerhill School, was built under a PFI contract that had Ballast as one of the partners. We are all very aware of the problem with Tower Hamlets and the problems that Ballast had that meant it went bust. It is also the case with the hospital in my constituency. Again, there were contractual issues during the building phase and in the operational phase as well, which involved the contractors taking a significantly greater financial hit than they expected at the time of the contract. It is still the case that the school is run under a PFI contract, despite Ballast going bust, and despite the contractual difficulties with the hospital as well. It is still the case that the private sector has paid more for it but it is still being delivered as a PFI project and delivering successful outcomes for hundreds of thousands of people who use the hospital services. I entirely accept that there has got to be some sort of tail risk and that at the end of the day if everything goes completely wrong public services still need to be provided, and it will be the responsibility of government to do that. I suppose the question I want to put back is: how do you deal with that tail risk because in lots and lots of instances you can see and certainly the experience of PFI and PPP projects as they have evolved, although there have been some problems that have been encountered along the way, very few indeed have involved the government or the central or local board having to step in, in the end. I do not think the risk is perhaps as-
Q592 Lord Eatwell: To follow on about this process, how would you go about saying whether PFI had actually contributed to the overall infrastructure as you claim? Obviously there are the physical things you can see around you in your constituency and, indeed, across the country, but the question is: would these have taken place anyway? Is there some way of getting a grip on what the influence has been? I know this is counter-factual because we cannot see it being done, but is there some way that in the Treasury, where you are trying to look at value for money for the public, you try to estimate what the increment has been?
Ian Pearson: I think it is very difficult to do so because you are just dealing with the counter-factual. I think we can point to facts such as 70% of hospital schemes have been delivered by PFI; round about 60% of new schools have been delivered through the PFI group to indicate that in some sectors it has been a highly significant part of the procurement mix, and you have to ask yourself the question: if it had not been that part of the procurement mix and it had all been procured by conventional means, would you have built as many hospitals? As I say, it is 80 out of 117 that have been procured through PFI, and a similar situation with schools. In other sectors, transport for instance, while certainly there are some high-profile PFI projects, a lot of the procurement in the transport sector has been through conventional means. It is very, very difficult to talk about the added benefit and quantify it, because the Government could have made different decisions on capital expenditure. Any reasonable person looking at this would conclude, I think, that we would not have as many new hospitals or schools today if we had not used the PFI route as if everything was done through conventional means.
Q593 Lord Eatwell: Effectively, more money has been brought into infrastructure investment by this mechanism than would otherwise be the case.
Ian Pearson: In effect, more capital expenditure has been taking place as a result of it. I think the figures are something like over 670 projects with a capital value of over £55 billion have been delivered. You have to ask yourselves the question: if the government had had to pay for all of that, would it have done? That is the counter-factual. If it would have done, then I suppose the line of reasoning would say: would it have done so within the same spending envelope as has existed over the last 10 or 12 years; if so, what would not have been delivered, because you would have had to take money from resource and put it into capital.
Q594 Chairman: Why would it not have been? I know this is getting very hypothetical, but why would it not have been delivered if it was not simply an accounting means?
Ian Pearson: Why would it not? Because what you are doing through a PFI contract is enabling a capital asset and service frequently to be procured and to be paid for over a period of time-20, 25 to 30 years; and the ability to smooth the costs of it through the unitary payments that are made, rather than have to account for it all in one go and actually pay for it in all one go is obviously, I think, the reason.
Q595 Chairman: So the fundamental driver is spreading the payments forward.
Ian Pearson: No, I am not saying that is the fundamental driver. I have said earlier, and I stick to it very strongly, that the fundamental driver for this has got to be the fact that it delivers value for money, but the practical politician in me says to you the fact that you can actually deliver more schools and hospitals, and more quickly than you could through conventional means, has been attractive to the Government, and I think Lord Forsyth was suggesting it was attractive to a previous government. It has certainly been attractive to us, and it is important for our citizens as well because we are delivering better services for them more quickly.
Q596 Chairman: If the fundamental driver is value for money, why is there only 10% of expenditure on infrastructure in PFIs and not 20%?
Ian Pearson: I think when it comes to PFI contracts, certain sectors are more amenable to PFI contracts than others. I actually think that the Government could be more ambitious in future when it comes to its capital expenditure and how much of it is allocated to PFI projects and how much of it is allocated to other procurement methods. The starting point has got to be what delivers best value for money.
Q597 Lord Forsyth of Drumlean: I could not resist interjecting. What you are saying is that the attraction of being able to build all these hospitals and schools, which is great and are required obviously, was that you could buy them on tick instead of having to go along and pay cash, you go along to the DFS and buy a three-year arrangement or something of that kind. It is the same thing but all you are doing is you are deferring the payment. You said-
Ian Pearson: No, it is not all we are doing. As I say, the attraction is very much that we can deliver best value for money and deliver the services and modern infrastructure more quickly as well.
Q598 Lord Forsyth of Drumlean: Yes, but you said it was 65 billion which the Government would not otherwise have been able to pay. The Government will have to pay; it is just being deferred over a longer period, and during that longer period subsequent governments will find it more difficult to find the money to do the programmes that they would like to do as a result.
Ian Pearson: It is always the case that the government is going to want to make decisions as to how it uses its capital resources and its revenue budget as well. I think what is important, as I tried to indicate earlier, is to get the right sort of mix. For instance, when I was a Minister in Northern Ireland, I agreed a long-term infrastructure strategy that looked at how projects can be funded, and vigorously looked at which were best to be funded through PFI or conventional procurement methods. Getting the right balance between procurement methods is right if you are going to deliver best value for money. I think you have to take into account affordability in terms of the unitary charge because even if it is best to do something through a PFI route, if, as a result, you are going to have a unitary charge, that meant you would have a significant proportion of your ongoing revenue budget gobbled up and not being able to be used for other sources, you would not want to do it even if it was the most cost-effective route. There are always other considerations that need to come into play on this. Having a sensible level of unitary charge is part of a department's, a local authority's or health trust's budget. It seems to me to be a realistic thing to do, just as I certainly have a certain level of debt that I carry, as many people do and as well as many businesses do, and we might want to talk more about that.
Q599 Lord Tugendhat: Chairman, I would like to ask one more supplementary before coming to the next question. An area where PFI has been particularly substantial is the NHS. Obviously we have got many new hospitals and the proportion of old ones has dropped, but do you feel that the nature of PFI in the NHS has actually saddled these hospitals with debts that has made it difficult for them then to pursue the objective which the Government has set, which is to move towards foundation trust status?
Ian Pearson: No, I do not. Let me tell you why. I think that pretty much in every circumstance that you have had PFI deals what we tried to do is ensure that the deal again requires a unitary payment that is affordable, given all the other responsibilities that an NHS trust would have to meet. I am not saying that there might not have been cases where people got their sums wrong. Certainly there have been in the past some experiences of NHS PFI projects that have got into difficulty. I do not believe that we are saddling NHS trusts with a millstone by making them pay an ongoing yearly fee for the capital asset that is being maintained for them that they operate. Again, I think that is a sensible thing to do. I have not said this, so just let me put it on record: there has always been a danger in government, central or local, that when times get hard the first thing that gets cut is the maintenance budget. That does not or should not happen under PFI because it is built into the contract in the first instance. If you get PFI contracts properly structured so they deliver best value for money, that maintenance is required to be done anyway and would have to be accounted for as part of the ongoing budget of an NHS trust. Of course, there is the additional capital repayment in effect for that part of the PFI transaction, but if you structure it in a way that it is affordable within NHS budgets, then it strikes me as if that is the best way in which you can deliver a project that again delivers value for money.
Q600 Lord Tugendhat: Thank you. I will move on to the next question which is to ask you whether you could comment on the relative merits of using ring-fenced special purpose vehicles as opposed to a more equity-financed model. Obviously, what lies behind that is that SPVs can walk away in a way that the substantive organisations might not be able to, and in particular of course we have had the example of London Underground.
Ian Pearson: Yes. I did not bite on Lord Eatwell's mention of the London Underground in the first instance. Let me just say some points about the broader situation. Typically a PFI project would have 10 to 15% of equity and 85 to 90% of debt within it. Over the last two years perhaps there have been some experiences in the marketplace that might need some readjustment about what an appropriate equity portion is and what an appropriate debt portion is because there are different views on leverage. A key feature of PFI projects has always been that because there is a level of debt built into the project that there is a strong incentive for the lenders of that debt to do their due diligence and make sure that the projects are well specified and likely to run in a way that they can over the long term get the returns that they expect from them. Within the framework of the contract, the system of incentives there will ensure that that diligence is done. It is also the case that the debt providers, typically the banks and the insurance companies that are involved in this marketplace, will want to police the providers as part of this. There is an inherent inbuilt incentive system within the PFI model to ensure that these projects are properly specified and delivered. As we have already said, that is not to say that they do not always go exactly to plan and there have not been some problems. In some cases there clearly have been problems. Specifically on what you are saying, I suppose what you mean is that there should be far more equity into projects. I do not think the typical constructor or maybe even service operator could fund these projects entirely from their own balance sheet. It would be a fairly strange thing for them to do. I do not think they would want to do it. Most of them will have some sort of gearing within their organisations and so saying that it should all be equity financed I do not think is realistic. I am not sure it would produce any better benefits in terms of the way the project is structured and delivered anyway. Having a mixture of debt and equity-we could always argue at the margins as to what the percentages should be-does strike me as the best way you are going to deliver a project, and, as I say, you do incentivise the lenders to make sure that they have a really clear view of the project, understand it well and are convinced in their own minds that it is going to deliver; because otherwise they are not going to want to lend to it.