House of Commons Treasury Committee Private Finance Initiative Seventeenth Report of Session 2010–12 Volume II Additional written evidence Ordered by the House of Commons to be published 17 May and 18 July 2011 Published August 2011 by authority of the House of Commons London: The Stationery Office Limited The Treasury Committee The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of HM Treasury, HM Revenue and Customs and associated public bodies. Current membership Mr Andrew Tyrie MP (Conservative, Chichester) (Chairman) Tom Blenkinsop MP (Labour, Middlesbrough South and East Cleveland) John Cryer MP (Labour, Leyton and Wanstead) Michael Fallon MP (Conservative, Sevenoaks) Mark Garnier MP (Conservative, Wyre Forest) Stewart Hosie MP (Scottish National Party, Dundee East) Andrea Leadsom MP (Conservative, South Northamptonshire) Mr Andy Love MP (Labour, Edmonton) John Mann MP (Labour, Bassetlaw) Mr George Mudie MP (Labour, Leeds East) Jesse Norman MP (Conservative, Hereford and South Herefordshire) David Ruffley MP, (Conservative, Bury St Edmunds) John Thurso MP (Liberal Democrat, Caithness, Sutherland, and Easter Ross) Mr Chuka Umunna MP (Labour, Streatham) was also a member of the Committee during the inquiry. Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk. Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/treascom. The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in printed volume(s). Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee are Chris Stanton (Clerk), David Slater (Second Clerk), Jay Sheth, Peter Stam and Daniel Fairhead (Committee Specialists), Phil Jones (Senior Committee Assistant), Caroline McElwee (Committee Assistant), Steve Price (Committee Support Assistant) and Nick Davies (Media Officer). Contacts All correspondence should be addressed to the Clerk of the Treasury Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5768; the Committee’s email address is [email protected] List of additional written evidence (published in Volume II on the Committee’s website www.parliament.uk/treascom) 1 North Yorkshire Waste Action Group Ev w1 2 Nick Collard Ev w4 3 British Medical Association Ev w9 4 Colin Raynor Ev w12 5 T Martin Blaiklock, Consultant, Infrastructure & Energy Project Finance Ev w16 6 Royal Institute of British Architects Ev w20 7 Lisa Smeaton Ev w22 8 John Sullivan Ev w23 9 Canmore Partnership Ltd Ev w23 10 KPMG LLP, John Laing Plc and Lloyds Banking Group Plc Ev w27 11 Professor Lewis Lesley, Technical Director, Trampower Ev w30 12 CBI Ev w31 13 Hogan Lovells Ev w35 14 Donald Roy Ev w38 15 Skanska Ev w39 16 Greg Dropkin and Sam Semoff on behalf of Keep Our NHS Public (Merseyside) Ev w43 17 Healthcare Audit Consultants Ltd Ev w47 18 J P Heawood Ev w51 19 BDO LLP Ev w53 20 Kent Police Ev w57 21 Dr Yseult Marique, University of Essex Ev w59 22 Professor Ron Hodges Ev w63 23 Edward Milner Ev w66 24 UK Contractors Group Ev w66 25 Andrew Barrie, Vice President Operations and Jon Mitchell, Development Director, KBR International Government Defence Ev w70 26 Dr Richard Thorne Ev w73 27 Meridiam Infrastructure Ev w73 28 PPP Forum Ev w77 29 Dundas & Wilson CS LLP Ev w81 30 The Foundation Trust Network Ev w86, w134 31 The International Project Finance Association Ev w87 32 Dr Andrew Edkins, Graham Ive and Alex Murray, University of London Ev w93 33 Chartered Institute of Public Finance and Accountancy Ev w97 34 Oxon PFI Alert Group Ev w100 35 Frances Kelly Ev w101 36 Dr James Robertson Ev w101 37 Globalise Resistance Ev w103 38 Barclays Infrastructure Funds Management Ltd Ev w105 39 North Tees and Hartlepool NHS Foundation Trust Ev w112 40 Dr Chris Lonsdale, University of Birmingham Ev w115 41 The Specialist Engineering Contractors’ Group Ev w118 42 Dexter Whitfield, Director, European Services Strategy Unit and Adjunct Associate Professor, Australian Institute for Social Research, University of Adelaide Ev w120 43 Equility Capital Ltd Ev w126 44 Professor Allyson Pollock, Queen Mary, University of London Ev w129 45 Professor David Heald Ev w130 cobber Pack: U PL: CWE1 [SO] Processed: [04-08-2011 07:57] Job: 012808 Unit: PG01 Treasury Committee: Evidence Ev w1 Written evidence 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 (eg 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 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 (eg 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. cobber Pack: U PL: CWE1 [E] Processed: [04-08-2011 07:57] Job: 012808 Unit: PG01 Ev w2 Treasury Committee: Evidence 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.