House of Commons Treasury Committee Private Finance Initiative Written Evidence Only those submissions written specifically for the Committee and accepted by the Committee as evidence are included. Ordered to be published Tuesday 17 May 2011 List of written evidence 1 North Yorkshire Waste Action Group 3 2 Nick Collard 10 3 British Medical Association 19 4 Colin Raynor 23 5 Martin Blaiklock, Consultant, Infrastructure and energy Project Finance 31 6 Royal Institute of British Architects 38 7 Lisa Smeaton 43 8 John Sullivan 44 9 PricewaterhouseCoopers 45 10 Canmore Partnership Ltd 53 11 NHS Confederation 59 12 John Laing 64 13 Trampower 70 14 CBI 72 15 Hogan Lovells LLP 78 16 Donald Roy 84 17 Skanska 87 18 Greg Dropkin & Sam Semoff 94 19 Balfour Beatty 99 20 Health Care Audit Consultants Ltd 107 21 John Patrick Heawood 114 22 BDO LLP 118 23 Kent Police 124 24 Dr Yseult Marique, Lecturer, University of Essex 129 25 Ron Hodges 137 26 Edward Milner 142 27 UK Contractors Group Ltd 143 28 Andrew Barrie, Vice President Operations & Jon Mitchell, Development Director, KBR International Government & Defence 150 29 Dr Richard Thorne 156 30 Meridiam Infrastructure 157 31 PPP Forum 164 32 Dundas & Wilson C.S. LLP 172 33 Foundation Trust Network 180 34 Mr Geoff Haley, Global Chairman, International Project Finance Association 183 35 Dr Andrew Edkins, Graham Ive & Murray 194 36 CIPFA 200 37 Bill MacKeith, Founding member, Oxon PFI Alert Group (established 1999), 206 Committee member, Oxon Keep Our NHS Public, Assistant secretary, Oxford & District Trades Union Council 38 Frances Kelly 207 39 Dr James Robertson 208 40 Transport for London 211 41 Globalise Resistance 219 42 Barclays Infrastructure Funds Management Ltd 230 43 North Tees and Hartlepool NHS Foundation Trust 239 44 Dr Chris Lonsdale, University of Birmingham 245 45 The Specialist Engineering Constructor’s Group 251 46 Dexter Whitfield 255 47 Equility Capital 264 48 Professor Allyson Pollock, Queen Mary, University of London 269 49 Professor David Heald 272 50 Professor Dieter Helm 281 3 Written evidence submitted by North Yorkshire Waste Action Group EXECUTIVE SUMMARY 1. NYWAG believe PFI is inflexible, expensive and inherently wasteful of public resources. In waste management, it tends to lead to large capital-intensive projects that lock Local Authorities (LAs) into long-term (~25 year) inflexible contracts. This locks out technical developments, discourages greener options and freezes out cheaper solutions such as providing services through a multiplicity of local providers who would create many more jobs. 2. In PFI there is a conflict of interest between the desire to make the best use of the skills and knowledge of the private sector, the inevitable self-interest of firms motivated by profit and the democratic wishes of local communities. Separation of responsibilities between waste management consultants and the eventual contractor could help address this issue. This is especially important where the public sector lacks sufficient experience to act as an informed customer. 3. PFI projects are generally more costly; private debt always costs more than public debt and PFI incurs additional transaction and financing costs. In long PFI contracts managing the quality of service is difficult. 4. The psychological impact from greater transparency and visibility of debt would have reduced the use of PFI. Problems with lack of transparency render bringing PFI debt on to the balance sheet imperative. 5. Under PFI, public bodies are expected to develop interdependent relationships with suppliers that allow risk to be transferred. This often leads to asymmetrical relationships where the private body holds much of the power so risk isn’t transferred. Moreover, risk is often factored into the original cost so facilities cost markedly more than if funded directly. As the public sector wants the project to do the intended job, if the contractor faces real difficulties in meeting the PFI terms then the state is likely to bail them out. This implicit guarantee renders risk transfer to the private sector somewhat illusory 6. Observing the decision-making process locally makes us doubt whether PFI is a suitable vehicle for LAs, particularly for large projects where the LA has little or no experience (e.g. MSW incineration). There are also dangers in many LAs taking similar decisions at about the same time (a classical “bubble” situation). An immediate decision to remove PFI support for incineration projects would reduce this risk and save the taxpayer £billions. Introduction 1. NYWAG believe PFI is inflexible, expensive and wasteful of public resources. In municipal solid waste (MSW) management, it tends to lead to large capital-intensive projects that lock Local Authorities (LAs) into inflexible long-term contracts which lock 4 out technical developments and discourage greener options This is particularly unfortunate as rapid technical progress is being made in MSW management in several competing technologies. This is contrary to the current opportunity to create an environmentally sound strategy for MSW management. This would reduce the amount of waste produced, maximize re-use and recycling and avoid incineration with its inflexibility, high capital costs and financial, environmental and health risks. 2. Our evidence derives largely from the perspective of MSW management following the Landfill Directive. While PFI may impact differently in other areas, some of the factors concerned are common. Strengths and weaknesses of public procurement methods 3. We cannot review all methods of public procurement. Instead we examine some of the tensions involved in using PFI: a. There is a conflict of interest between the desire to make the best use of the skills and knowledge of the private sector, the inevitable self-interest of firms motivated by profit and the democratic wishes of local communities. Moving towards a “zero waste” economy requires public acceptance, making it crucial that LAs use waste management consultants guided by strong “green” central government policies to derive their waste strategies. Only after doing this with full public consultation should waste management firms be brought in. Separation of responsibility between those who design the strategy and those who implement it is essential. PFI doesn’t provide this safeguard. b. In MSW management, some LAs have insufficient knowledge to design a viable, cost-effective strategy that meets local needs. When moving away from a landfill- based strategy, this makes them over-reliant on private sector advice but without the experience to act effectively as informed customers. Reliance on their PFI partner during public consultation risks a “sham” consultation with commercial interests playing too strong a role. c. There is a democratic deficit. Small local (e.g. parish) councils can object strongly to major developments in their area but have no effective say in whether they go ahead. They (and local people) should be given a much stronger say. 4. PFI projects cost more than direct-funded ones due to financing costs which a public sector alternative would not incur; Pollock et al (BMJ, 342: 1205–209, 2002) found that on average financing costs for NHS PFI schemes in three areas added 39% to total capital costs. More generally: a. Private debt always costs more than public debt. Even before the credit crunch, private finance interest rates were 2.5%-4% above public borrowing rates (Audit Scotland, 2002: 58, Pollock and Price, BMJ, 341:7175, 2010). The PAC’s 2010 report on financing PFI projects found PFI has become less affordable following the credit crunch; banks lending to PFI projects have increased their interest rates by 20- 30% since the financial crisis. This means higher annual repayments; the PAC (op 5 cit) said increased bank charges “added £1 billion to the contract price, payable over 30 years, for the 35 projects financed in 2009.” b. The amount of capital raised under PFI is inflated by financing charges such as professional fees and the “rolled-up interest” due during the construction period when the PFI consortium is not yet receiving any payments. Additionally, there are fees for preparing the PFI bid and contract negotiations (not always identified in advance). c. PFIs/PPPs suffer from increased transaction costs arising from the complexity and long duration of the relations between the diverse actors. This may be exacerbated by culture gaps between the two sectors. 5. When LAs use PFI, central government gives them PFI "credits" to meet the capital element of funding (with which LAs pay the private sector). The LA selects a private company and transfers detailed control of the project, and in theory the risk, to them. This can mean both the taxpayer and council taxpayer unwittingly accepting financial risks: a. Some LAs lack the experience to carry out proper sensitivity analysis and risk assessment and do not carry out a proper discounted cash flow analysis. Instead, they use a very limited range of assumptions, some of which are implausible (e.g. landfill tax will rise in real terms every year in perpetuity; waste quantities will increase despite national trends to the contrary) to make a case for their “preferred” (PFI) solution. The latter can be selected at a very early stage and the financial implications of newer competing technologies and greater waste reduction, reuse and recycling is never taken into account. b. PFI typically involves large contracts. In MSW management, this means a preference for expensive technologies like incineration. Cheaper options through variety of smaller, local providers are not considered because they don’t fit well with the PFI model as a multiplicity of smaller contracts (often using a range of different technologies) would be involved. This adds unnecessarily to costs. The table compares North Yorkshire’s preferred PFI option at Allerton Park (featuring a large incinerator) with alternative independently costed options (others exist, also without incineration).