Jesse Norman's campaign for a PFI rebate continues apace

By Jonathan Isaby
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Last December, Jesse Norman - who was elected MP for Hereford and South Herefordshire at the 2010 general election - wrote here on ConHome about his campaign for a voluntary rebate to taxpayers from contractors who benefited from costly Private Finance Initiative deals negotiated by the last Labour Government.

On Thursday afternoon, he took his campaign to the floor of the Commons' Westminster Hall chamber, opening a three-hour backbench debate on the issue - the first time it had been afforded time for such a debate, he claimed.

Norman said that PFI had caused more than £200 billion of public debt, yet had created great private fortunes, and that it was not unrealistic to press for a voluntary rebate to taxpayers of between £500 million and £1 billion.

He put PFI into context by relating the story of his local hospital:

"Starting in 1999, Hereford hospital was one of the earliest PFI projects. It was built and is currently owned and managed under a 30-year contract through a special purpose company, which is three-quarters owned by Semperian, a large PFI firm based in the City of London, and one-quarter owned by the French industrial services giant, Sodexo. Non-clinical services are contracted out to Sodexo, WS Atkins and to others.

"Car parking charges at the hospital have been the source of huge local anger because they penalise patients at a very vulnerable time in their lives. They particularly hit frequent users such as those visiting in-patients and those suffering from cancer. They are socially regressive, falling relatively harder on the poor than on the rich. As I investigated further, I found that that was only the tip of the iceberg. The reason why the charges were so high was down to the PFI itself, because car parking was contracted out not once but twice—first to Sodexo and then to CP Plus, and each had its own mark-up."

"Later PFI contracts have contained financial safeguards for the NHS, including automatic efficiency savings of 3% a year and the right for a hospital to put services out to public tender periodically. However, the Hereford contract contains neither of those safeguards. There are no automatic efficiency savings, and the contract cannot be retendered until 2029. The hospital trust is doing a valiant job, but it has little influence, legal scope or access to underlying costs which might help it to negotiate changes to the contract. Worse still, no mechanism exists by which the hospital can group together with other PFI hospitals to exercise collective influence over the PFI contractors. By contrast, Semperian has 106 PFI contracts. The imbalance in power is obvious, yet the NHS seems to have done nothing to remedy that."

Norman said that an important feature of his rebate campaign was that at least part of any savings would remain with the public service involved, meaning a win for both the taxpayer and local communities. He then explained how seriously it was being taken seriously by all involved:

"What I did not expect was the level of support that I and colleagues have received from key players in the PFI industry itself. They know that something is wrong. They are aware of public concern, and they want to participate in the next generation of economic infrastructure. Having started as a solo mission, the campaign has become a cross-party movement of more than 70 Members of Parliament. We have sat down with many large PFI companies and talked in detail about the scope for savings.

"Parliamentary concern about the costs of the PFI has resulted in an inquiry by the Treasury Committee and, to their huge credit, the Government are taking the idea of a rebate very seriously indeed. Ministers at every level have made clear their desire to see savings. The Cabinet Office has been looking closely at the PFI in its quest for greater efficiency across the public sector; the Ministry of Defence has announced that it is reopening three major contracts as part of its own renegotiation strategy; and the Treasury has opened discussions with the PFI industry about a new code of conduct and it has recently concluded a “deep dive” investigation of the PFI contract at the Queen’s hospital in Romford. That is the first time in 15 years that a Government have taken a forensic look at a specific PFI contract, and it sends out a clear signal of intent to dozens of other PFI projects. So we are making progress. That is the context for this debate—the first Parliamentary debate on the PFI—and I hope that colleagues from all parties will make their support loud and clear for these actions for better public services and real savings for the taxpayer.

He then gave something of a history lesson of the Labour Government's embracing of PFI:

"In 1997, the new Chancellor, the right hon. Member for Kirkcaldy and Cowdenbeath, and his then adviser, the right hon. Member for Morley and Outwood (Ed Balls), were tied down by the promise that Labour had made to stick to Conservative spending plans for two years. They had committed to keep public sector net debt below 40% of GDP, according to their sustainable investment rule, but they were desperate to leave a “legacy” by building a huge amount of public infrastructure. They quickly spotted that PFI projects offered a way out of that quandary, because PFI liabilities could be treated as off-balance sheet and so they would never appear formally within the net debt numbers. Of course, as we now know, they later fudged the sustainable investment rule by redefining the economic cycle and then the rule was blown apart as the financial crisis took hold. 

"After the 1997 election, the new Paymaster General, the hon. Member for Coventry North West (Mr Robinson), summarily fired Alastair Ross Goobey, the chair of the PFI panel and a man with an impeccable record of protecting shareholder value, and ramped up the PFI dramatically. Over time, an unholy alliance developed between the Labour Government and the PFI companies. PFI became the “only game in town”, as more and more projects were pushed in its direction by Government Departments that were desperate for capital spend but prevented by central Government from looking at alternatives.

"That ramp-up was aided by the introduction of PFI credits, which allowed Departments to avoid running local authority PFI spend through their own budgets, thus evading responsibility for them; it was also aided by the use of high official project discount rates, which artificially privileged the PFI over other forms of procurement; and it was also aided by the unwillingness of both the Blair and Brown Governments to permit debate on the issue, conduct any overall analysis of the PFI’s cost-effectiveness or gather the full data on primary and secondary transactions, which would have allowed proper transparency and proper public accountability. Frankly, that was disgraceful behaviour."

Norman concluded by offering the following three recommendations:

"The first is that the Government should take steps to improve their database on PFI deals, and their collection of new data. The quality and quantity of PFI data are surprisingly bad. On primary deals, it is due to inconsistencies in collection, and on secondary market deals it results from a hands-off methodology, which regards trades in PFI debt and equity as purely private transactions, outside the scope of government. All aspects of data collection should be reviewed and improved.

"My second recommendation is that the Government should undertake a major consultation soon on the best means to procure and finance new infrastructure. This country badly needs new infrastructure, at a likely cost of hundreds of billions of pounds over the next few decades, and the private sector has a vital role to play. To finance that development, we need alternatives to the PFI, and several economic models are available. These include regulated asset base models developed from the utilities market, property-based models, strategic infrastructure partnerships and tax increment financing, as well as a reconsideration of conventional procurement methods. I have recently advocated the idea of a national asset trust fund as well, in a publication of my own. The consultation should also focus on how procurement is done. Should different models be used for different sectors? How can public sector institutions be made into better clients?

"Thirdly, and finally, the Government should continue their current drive towards a taxpayer rebate and a new code of conduct on the PFI, if possible with every PFI company involved. Many have already engaged with the Treasury, but some— particularly some large banks, accountancy firms and legal advisers—have yet to do so. I have written to the head of every major PFI firm to put the question directly to them, and I plan to keep the House informed of their participation. The code of conduct would in due course lead to a matrix of all PFI transactions, which would show savings agreed with the private sector to ensure that they were fairly shared. That will require implementation over some months, so that the savings are genuinely realised. The Treasury could also set up a small team to advise individual hospitals and other public services on how to benefit most from the rebate process, with the team’s costs being met out of the savings generated. One thing, however, is vital. Most of any rebate should of course go back to the Treasury, and on to the taxpayer, but a portion should remain with the affected local public service, so that local people can be absolutely certain that their school, or hospital, has benefited."