Exchange of correspondence between the Committee and John Kingman

I am writing to confirm the request made by Mr Bacon in his telephone conversation with you last Thursday (19.07.07).

At the Committee's hearing on 20 June, Mr Bacon requested details of the projection for the aggregate future cash outlays expected under PFI contracts up until 2031-32 (Qq 99-122). He also set out his request for a total in question 129:

Q129 Mr Bacon: Is it possible you could first do it up to 2031 as far as it goes and then explain in total how much there is beyond that accounted for by whatever contracts there are that for some reason or other run longer than that?

Mr Kingman: We will certainly do our best. I am not sure there is anything very useful we will be able to say about the period beyond 2031-32.

Mr Bacon: I am looking for a number that probably is in the region of £150 billion to £160 billion, by the sound of it, but I would like a more accurate one and some assessment from you of where you think it might be going after on that, so ifyou add the two together you would get atotal public sector liability.

The supplementary note provided by you on 3 July provides the figures year-by-year up to 2031-32, but does not give a total as requested.

Mr Bacon appreciates that any total would be spread over a 24 year period and would thus not have the same economic value as an identical amount paid today. Nonetheless, he has repeated his original request for such a total: he would be happy for this to be accompanied by a note thoroughly explaining the differences between a total spread out over 24 years and a total in today's money.

26 July 2007

Your clerk's letter of 26 July asked for an aggregation of the future nominal cash outlays expected under Private Finance Initiative (PFI) contracts up until 2031-32.

I should first apologise that, due to a problem in one of the underlying spreadsheets provided to us by Departments, a slightly incorrect version of the annual unitary charge payments table was provided to you in my 3 July letter. A corrected version is attached to this letter. I apologise to the Committee for this error.

You have asked us to provide you with a total of these figures. The total, if one were to add together these future and non-comparable figures without applying any appropriate adjustments, would be £170.8 billion. However, I must emphasise, as I already have to the Committee and to Mr Bacon, that this number has no meaning. To add together a figure in today's money to a figure in the money of 2030, without making any adjustment for the changing value of money over time, produces a nonsensical number. It is rather as if we were adding a figure in £ to one in $, without converting the currencies, and ending up with one that is not denominated in any currency at all. I am obviously uncomfortable providing the Committee with a figure which is meaningless and I would not want the Committee to be in any way misled about this.

A more meaningful exercise would be to take the stream of future payments set out in the table and to aggregate them as a net present value. If one were to do this one would end up with total future payments under the PFI measured in today's money which aggregate to £91 billion. The discounting methodology applies the Green Book rate of 3.5% to account for time preference and a discount of 2.8% to account for inflation. These two elements are compounded to give an overall discount rate of 6.4%. The inflation figure of 2.8% is HM Treasury's projection for RPI inflation consistent with CPI inflation remaining at its 2% target.

I should emphasise, as I explained in my previous letter, that it would not be correct to regard either of these figures as additional to Public Sector Net Debt (PSND).

This is for two reasons. First, many of the liabilities (where the debt portion of the relevant project is on the public sector's balance sheet) are already included within PSND. Second, unitary charges under PFI contracts include an element of payment for use of a school or hospital, but also include payment for the services-cleaning, catering and maintenance-associated with running that asset. These service payments would score as current expenditure in any circumstance. (To add PFI unitary payments together and say this is to be added to PSND would be akin to adding up the electricity, gas, cleaning, and food bills for a family home over the next 30 years and saying that this amount is part of the mortgage debt on the house.)

Table C19

ESTIMATED PAYMENTS UNDER PFI CONTRACTS-MARCH 2007 (SIGNED DEALS)1

1 The figures between 2006-07 and 2017-18 include estimated payments for the LUL PPP PFI contract. These contracts contains periodic reviews every 7.5 years and therefore the service payments are not fixed after 2009-10.

John Kingman
Managing Director
Public Services and Growth
HM Treasury

7 September 2007