1. This note is our submission in response to the call for evidence on PFI dated 15th July 2009. We are independent researchers in the field of the economy and public finances, and we make this submission as individuals. Before we give our answers on the specific questions posed by the Committee, this brief section on context:
(a) gives short biographical details; and
(b) sets out the history of our research on PFI, outlining the main data sources we have examined, and the key aspects covered in our research.
2. Biographical Details
Jim Cuthbert is a statistician, who has worked in academia, the civil service and consultancy. As a civil servant, he worked in the Scottish Office and the Treasury, and was latterly Scottish Office Chief Statistician.
Margaret Cuthbert is an economist who has spent her career working in industry, academia and consultancy. Her main research interests are in public finance and in enterprise.
We have published extensively, particularly in the areas of public finances and the Scottish economy. Copies of the papers we have published since 1997 can be found on our website at www.cuthbert1.pwp.blueyonder.co.uk
3. Outline of Our Research Interest in PFI
Our research interest in PFI started in 1999, but our research was limited initially by the lack of information in the public domain. The situation changed radically from 2005, however, with the advent of the Freedom of Information Acts, (FoI). Because of FoI, we have been able to assemble what is probably a unique archive on the operation of PFI, including the detailed financial projections for eight PFI schemes; the full contracts for a number of PFI schemes, (including around 10,000 pages of documentation on the new Royal Infirmary of Edinburgh); and detailed information on the indexation arrangements for around 35 PFI schemes.
We have carried out extensive research on this material looking in particular at:
- The cost to the public sector of the provision of the capital element of PFI projects, and the projected levels of profitability of PFI schemes for the private sector funders. This research involved developing new analytical techniques to supplement the commonly used, but unsatisfactory, measures of net present value and internal rate of return. The research revealed clear evidence of high costs to the public sector, and very high projected profits, in several of the PFI schemes examined.
- Procedures for ensuring value for money and affordability of PFI schemes: we have identified failures in these procedures in several of the schemes we have examined.
- The effect of the Treasury's specified discount rate: prior to 2003, this had the effect of wrongly burdening the public sector comparator in the value for money comparison with an additional cost equivalent to the government's capital charge.
- The indexation arrangements for adjusting the unitary charge in the light of inflation: we have identified flaws in these arrangements in a number of schemes.
- The way in which the Office for National Statistics adjusts the National Accounts in relation to "on-book" schemes, and the way in which ONS has operated the risk based test to determine whether schemes should be on or off the books. We have identified flaws in both of these areas.
Much, but not all, of our research in PFI is in the public domain, particularly in the form of a number of papers submitted to the Finance Committee of the Scottish Parliament, and in the form of a debate conducted with ONS on the on/off treatment of PFI schemes, conducted in the context of the Scottish Economic Statistics Consultants' Group. References to relevant papers, copies of which are on our website, are given at the end of this note.