The fifth evidence session in the committee's inquiry is to hear evidence from organisations that represent people who work in key public service facilities that have been procured and funded by different methods. I welcome Jon Ford from the British Medical Association, Dave Watson from Unison, and Ken Wimbor from the Educational Institute of Scotland. I will give each of you an opportunity to make a brief opening statement.
I am the head of health policy and economic research at the BMA in London. We are a United Kingdom organisation, by which I justify my presence here.
As colleagues will know, Unison is a long-standing critic of PFI, largely on the grounds of cost and poor value for money. We believe that PFI undermines the public service ethos and team delivery, and that it is inflexible in delivering services. We are equally sceptical about non-profit-distributing models. They are not non-profit and they retain many of the weaknesses of the PFI model.
I thank the committee for inviting the EIS to give evidence. In the late 1990s, it was estimated that between £2 billion and £4 billion was required to bring schools up to an acceptable standard. The subsequent concentration on PFI/PPP projects as "the only show in town" led to the neglect of other procurement options.
A submission from the unions says that PPP/PFI is not good value, and Unison says that the focus should have been on conventional borrowing using the prudential borrowing regime where possible, because that represented better value for money. However, we have heard that the investment required is much greater than could be afforded through conventional borrowing. How do the unions think the problem could be overcome?
As I suggested, there is no way of funding capital infrastructure without cost. If you can afford to pay the unitary charge payments of a PFI scheme, you can afford to pay the prudential borrowing costs through conventional borrowing. As our research has demonstrated, PFI schemes incur billions of pounds of additional costs. The revenue cost of borrowing has to be met, whichever way it is done. Prudential borrowing will work in a way that PFI does not.
That is pretty much the BMA's opinion. The advantages to the Government and the Exchequer of postponing capital investment into an income stream over 30 years or so are obvious because it postpones accountability and so forth, but the sums of money that are involved outweigh the sums that would normally be expected in a conventional up-front approach to capital investment.
I have nothing much to add, except that I concur with my two colleagues' views and with those that the Scottish Trades Union Congress expressed in its written evidence, which I think members have seen.
Dave Watson has answered in part the question that I will pose. We have been taking evidence on a number of different models of funding; for example, the Borders railway is to be funded under non-profit-distributing mechanisms. I would like to hear your views on the use of the NPD model in public sector investment.
To some extent, the NPD model and the Scottish futures trust as it is now envisaged—as opposed to how it was originally envisaged—are little different from the PFI arrangements, because profit will still be taken from income streams. The difference seems to be that there will be less profit at procurement level because the economies of scale mean that it will be possible to drive a harder bargain when borrowing the money. However, I presume that there will be more profit downstream for the contractors, who will obviously take profit from the income streams, as they do under PFI. It seems to us that there is almost just a semantic change from the PFI model, whereas the original Scottish futures trust bond route, which I know is not available for a variety of reasons, seems far more attractive to us and is much more akin to what we would like to be used.
We argue that the NPD model retains the higher borrowing costs of PFI and will still include the extraordinary costs that are attached to risk transfer. We added those up and they total about £3.6 billion in Scotland—the most expensive insurance policy in living history, I should think. Further, the NPD model includes the inflexible contract provisions that are inherent in PFI. Of course, NPD is not non-profit, because the profit is simply taken at contractor level.
We felt that the NPD model and the Scottish futures trust as originally envisaged represented a distinct move away from existing procurement through PFI/PPP. However, recent developments suggest to us that there remains a problem regarding borrowing costs and the continuation of private profit.
We have heard a number of times—particularly from people who, I suppose, benefit from the PFI/PPP system—that that model provides more security for asset management for the future. Can you give us some ideas about how we could achieve that security without the PFI/PPP model?
Frankly, good asset management has little to do with who provides the cheque. At the end of the day, good asset management has been a developing learning experience over probably 100 years or more, and practices develop and improve. There is nothing inherent in PFI that could not be developed in the standard model; in fact, there is nothing in it that is not being used in the standard model. The asset management policies of most public authorities and of the Scottish Government have been refined over the years to improve the way in which conventional finance is delivered. The important point is that there is nothing magical about getting money from a bank at great expense that means that assets are managed any better.
There is a presumption that the private sector manages assets better than the public sector, but I do not know whether that is borne out by evidence. It seems to be an article of faith, rather than something that can be argued based on evidence. I agree with Mr Watson on that score.
I stay in Lanarkshire. My mother died in Hairmyres hospital, which was an appalling place—there were holes in the walls that had been there for years. That did not really suggest to me that the asset was being well managed, and many of the people who passed through it did not think it was well managed. In the light of that, how can Dave Watson support his last statement?
Nobody is against having new buildings. Part of the problem with the argument about PFI over the years is that it has been presented as, "Either you have a new hospital and build it our way or you don't get a new hospital at all." The finance of capital infrastructure has been weighted and biased in favour of one scheme—it has been the only game in town because it is the only scheme for which Governments have given money.
In the 1970s, a raft of schools were constructed that were, in design terms, a disaster, cost a fortune to maintain and were often poorly maintained, which resulted in children learning in environments that were below the standard that we consider acceptable. With the introduction of PFI, those buildings were replaced at a rate that was previously inconceivable. If PFI produces "nothing magical", why are the new buildings being maintained far better than buildings were under conventional public sector procurement?
As a former EIS representative, I call Mr Wimbor.
I am representing our members accurately. In 2004, we conducted a survey with the Royal Incorporation of Architects in Scotland. Although a number of teachers expressed some pleasure at the new schools that had been built, a significant number of problems were identified, particularly in relation to facilities management, basic maintenance and basic janitation. For example, 30 per cent of our members did not believe that the refurbishment or new school that was delivered represented value for money. I have already made that point, which is provided for in the survey that we conducted in 2004.
I have known headteachers who retired in frustration at their inability to get a school maintained; for example, to have a piece of broken glass repaired or a leaking roof properly fixed. Did you ask the people who had experienced the previous system how it compared with the system at the moment?
I am not for a minute denying that the schools that were built in the 1960s and 1970s now have significant problems or that there are significant problems with maintenance. I am saying that the new schools that have been developed are showing the same problems at a much earlier stage.
To answer the question about ageing infrastructure, Tom McCabe is quite right, of course, that most hospitals that have been replaced by PFI models were woefully undermanaged, but that is because of lack of finance, not because of the method of procurement. When we did qualitative research among some of our members on the state of hospitals post PFI, many said that one reason why they were so happy with what they had got was that they had been waiting 20 years or more for the replacement. We cannot blame that on the procurement method—it was because of the unavailability of funds and the Government's attitude to investing in public infrastructure. Regardless of the method of procurement, that money was never going to come forward.
If I take out a mortgage for my house, am I deliberately postponing expenditure or am I facing up to the fact that I do not have £250,000 there and then?
Yes—that is entirely what you are doing. However, if you were spending countless millions more than you would on a conventional mortgage, which is what happens with PFI, that would be a very different question. If you spend hundreds of millions of pounds on something for which the up-front investment would have been only £20 million or so, the order of magnitude is very different from that of a conventional mortgage, which might cost twice the price of the house.
The mortgage analogy is not accurate. It is much more appropriate to conventional finance—it is essentially what conventional finance is. I accept the fact that there has been bad design in conventionally financed buildings; however, there has been bad design in PFI buildings, too. The reality of the funding issue is that the maintenance costs are built into the price of a PFI building. What is needed are new, modern asset-management approaches to conventional finance that build the same maintenance cycle into the funding of conventionally financed buildings. It does not matter where the money comes from: the only differences between PFI buildings and conventionally financed buildings are that PFI buildings cost a lot more and there is a lot less flexibility because the partners are tied into 30-year contracts.
I disagree with the idea that PFI has been the only show in town—it has not. It has been part of a mix. We have heard that around 85 per cent of public investment is made by traditional methods, through the Public Works Loan Board, prudential borrowing or the sale of assets. PFI has not been the only show in town. In my constituency, five new schools are going to be built by PFI but three are going to be built by conventional methods. It is not the case that the Government has refused to fund in any way other than PFI.
It is right that the PFI model appears to deliver on time and to budget, which is a major plus. Why is the public sector so bad at project management that it does not deliver on time and goes over budget? The same companies are building and designing the structures as under PFI. What is it about public sector procurement that lets building companies and contractors get out of control when they are not allowed to get out of control under the PFI model? It is all about project management.
The figure that Elaine Murray cites was highly disputed. It was produced by a firm of consultants that had—to say the least—a strong bias in favour of PFI.
All the new builds and school refurbishments that were covered by our 2004 survey were PPP/PFI projects. The question is about the standard and quality of project management. It is not inherent in the procurement method, whether that is PPP/PFI or more traditional methods.
The evidence that we have received so far suggests that a range of options is available, of which PPP/PFI is one. It has been suggested that some methods of funding are more appropriate for some types of projects than for others. Why do you want to take out one model? I am not trying to argue that PPP/PFI is superior for all projects because clearly it is not. Some projects are far better funded by more traditional routes of public procurement. Why should PPP/PFI be removed from the public sector?
Our plan does not say that PPP/PFI should be removed; rather, it says that a level playing field should be created. We have been there—we have done the design and we have been part of the evaluation. If there was a level playing field, most projects would not touch PFI with a barge pole. There would be no subsidy, a proper value-for-money assessment would be done and the project would end up being done using conventional finance.
I go along with that. When we compare the traditional procurement route and the PFI route, the costs in the public procurement route are heavily influenced by the factor that is attached for cost and time overruns. Obviously, historical precedent is brought to bear on that rather than what might happen in the future. If we were to improve project management, that would not happen. We could take that out of the equation and create a level playing field.
We are not persuaded that the transfer of risk compensated for the additional costs that have been associated with PPP/PFI projects. To add to the Metronet example, there is an example closer to home. The buyout of the West Lothian College PPP cost the taxpayer in the region of £27.7 million. That is an example of the problems that can occur.
It is reasonable to assume that most of the panel would support projects being funded by conventional funding whenever possible, and would welcome the announcement about the new hospital in Glasgow, which will be funded that way. However, it is clear from the evidence that we have gathered so far that that will not be possible every time, and that other methods need to be considered. One of the methods that the Government is inclining towards is the non-profit distributing organisation model. Will the panel comment on the fact that the NPDO model appears to reduce the overwhelming equity profits that we see in the PPP model? In using PPP for a hospital you get, in effect, one hospital for the price of two. Maybe it is not the ideal, and you would prefer the conventional route, but is the NPD model much better than the traditional PPP/PFI model?
Equity finance is one of the advantages of the NPD model. However, there are other costs. The committee has heard evidence from other colleagues who are concerned that although you may save a bit on the NPD model, there are costs in other areas. The question you really need to ask is this: why bother? Why create what is essentially PFI lite, with all the inflexibilities and costs of NPD models, when you have another route called prudential borrowing? That route provides the flexibility without the additional costs. Everyone tries to solve the previous problem with finance: the Conservative Government introduces a model, then Labour plugs some of the gaps and now it seems that the new Scottish Government is trying to find another gap to plug. Forget it. Start from scratch and use prudential borrowing. That is our advice.
Would prudential borrowing address the problem, given its size?
No form of financing can do that. Scotland's ageing infrastructure requires more money than we will be able to provide at any one time. Even if we could provide the money required, it would probably be outwith the capacity of the Scottish construction industry to meet those demands. The industry's capacity is estimated to be about £1 billion a year, almost half of which is taken up by Scottish Water alone, before we mention schools or other projects. The reality is that we do not have the money or capacity to sort out all the problems associated with our ageing infrastructure as quickly as we would like. However, we can decide how to finance what we can do, given the capacity that is available to us. All the evidence demonstrates that conventional finance, using prudential borrowing, is less expensive than the unitary charge and revenue costs of PFI schemes. If we use prudential borrowing for projects, we will know that we can afford them and that it will be within the capacity of the economy to cope with them.
We are all wrestling with the issue of how we can format an objective comparison of different financing and procurement methods. Whatever the criticisms that can be made of PPP—we have heard many in the course of the inquiry—it highlights explicitly the total cost of a project. I know that questions have been asked about how transparently that figure is arrived at, but it is accepted that PPP highlights the total cost. Is not part of the problem with conventional public sector financing that the life-cycle costs of a piece of infrastructure and the services that it provides are not transparent or readily available, which makes it difficult to compare financing methods objectively?
You have raised the issue of life-cycle costs. The further down the road we go, the less what we expected to find corresponds to reality. In the public sector, especially the health service, things change rapidly, as we found to our cost when using private finance. Many costs do not emerge until you are too far down the road to do anything about them. For example, the presumption that hospital throughput would be at 85 per cent, or thereabouts, of capacity was stretched almost immediately during the first phase of projects by the national health service plan, and the emphasis on waiting lists meant that the service had to crank through many more operations. At that stage, people did not realise that, under the private finance option, higher throughputs lead to financial penalties, not to mention the higher costs that are associated with doing more operations in infrastructure that is not designed for it because there are not enough beds and so on.
You are being heckled by a mobile phone. I ask the person to whom it belongs to turn it off.
It is off.
We have found the culprit. I am sorry for interrupting you.
The transparency of the entire cost cycle cannot be apparent from the outset. The evidence from our members on the ground seems to be that the public procurement route is more flexible, given the changes to which I have referred, than an arrangement that locks us in for 30-odd years.
The one thing that PFI is not is transparent. For a long time, my staff have been trying under the freedom of information regime to get contracts out of the previous and the current Scottish Government. Every method possible has been used to try to prevent us from getting the documentation—in some cases, the last-ditch defence was that the Government did not have it. The total cost of PFI projects is not transparent. During a 30-year contract, a lot of variation orders can be placed by contractors. That is linked to the issue of life-cycle costs. I accept that a figure for life-cycle maintenance costs is provided at the beginning of PFI schemes, but we must recognise that few public buildings will look the same or be subject to the same demands in 30 years' time, let alone 60 years' time, which is the length of some schemes.
Commercial confidentiality is often given as a reason for not providing information about projects. That results in a lack of transparency about existing PPP schemes that has become evident to us.
The health service provides a good example—we all accept that priorities change and that clinical advances affect services. I am sure that that applies to other parts of the public sector, too. However, some such changes would happen anyway and, under conventional public financing, the cost of changing to prioritise waiting lists rather than another aspect, for example, is not as explicit. Is not one issue that no one can say what the cost to the health service of doing X is, whether under private or public finance?
The task is difficult, because we do not have a crystal ball to show what the changes in 10 to 15 years' time will be. The difference between conventional procurement and PFI is that, under PFI, we are stuck with the contract. The client has signed up to a deal for 30 years or more and the contractor always gets his or her money under such a deal—it is ring fenced under Treasury rules. The reality is that the client does not have flexibility. Under a conventional build, people sit down to work out the design changes and approach the health board or local authority to say, "Look—things have changed. We need to do this. You make the changes." That does not involve a commitment to the other 15 years or however long a private contract is. Under PFI, we negotiate with someone who has got us over a barrel, because he or she has that contract in their pocket.
You raise an important point. If, because of falling school numbers or a different view on health services that should be provided centrally, services were reconfigured, which led to reduced demand for buildings or staff, are you seriously suggesting that the members whom your organisations represent would not be at least as strongly capable of influencing the Government of the day as would be contracts that were signed with PFI providers?
I am not sure what point you make.
You represent an organisation that has been incredibly successful at negotiating for its members.
Thank you.
I do not think that that is particularly controversial—you deserve credit for that. If proposals could undermine the interests of members of the BMA or other trade unions, a significant amount of political influence could be exercised—we have evidence that it has been exercised in the past few years—to apply pressure outwith the contractual sphere. Even without PPP/PFI, would not significant inhibitors on service change exist?
The intention of the first phase of PFI and some of the subsequent contracts was to reduce dependence on the hospital sector and increase dependence on primary care. However, the reduction in dependence on the hospital sector did not occur. The number of beds in the first phase of PFI hospitals was too low for the throughput, but that was not to do with the actions of our members; it was more because the Government had different priorities and wanted faster throughput to bring down waiting times.
I suggest you look at a PFI contract, or even a final business case. The appendices at the back of those that have been disclosed show how such contracts are costed out over the 30, 40 or however many years for which they last. The problem with PFI is that the unitary charge is costed on the basis of the initial assumptions.
But if the same situation arose with a conventionally procured resource and the authority told the union that it needed only 250 workers, for example, and that a certain number of job losses were necessary, surely you would resist that.
We cope with service change all the time. You have been a council leader; you have sat round the table—
Would you resist it?
We would and we would not—it is not true that we resist every service change. There are many examples of the service change that has taken place in Lanarkshire over a long period of time. We do not resist all service change. We certainly want service change to be managed and planned in such a way that our members are not made redundant, which involves retraining people and moving them to new places. That happens with all local authorities and health boards, and in Government. All that we are saying is that under a PFI scheme, you are stuck.
The more closely we examine such problems, the greater the complexity that we find. We are talking about a moving target. Issues of timing are involved, and there are changes in tasks and societal needs as regards education, health and so forth. The unknowns result in problems with the methods of finance. If we have not got it right, who has got it right and why?
A number of models are available. It is possible to pick out bits of different international models for the financing of schemes. Our view is that the starting point is good asset management. An organisation should work out its capital infrastructure plan and what it can afford—in other words, it should consider the revenue consequences of any project. Once sound asset management has been put in place, it is necessary to find the cheapest way of financing the project, which is, essentially, through conventional finance.
Those who get it right are probably those who integrate their services most fully. Those who get the flexibility built in are those who have the most integrated systems. We do not yet have an integrated system. We have not integrated primary care and secondary care to the extent that I and our members would like us to have done. I would not hold up the US as a classic example of how to run a health care system, but some bits of its system are integrated. For example, the Kaiser Permanente model seems to work better than others.
I have an example of where flexibility is important. The previous Administration, like the current Administration, was committed to reductions in class sizes, which have consequences for both teacher numbers and accommodation. Our members' perception is that PPP projects have not delivered the required flexibility in accommodation.
It strikes me that the matter is about medium to long-term planning, but, unfortunately, competence and foresight can be scarce commodities.
As I said at the outset, the experience of those of our members whom we consulted about PFI projects has been positive in some respects. They got the new hospitals that they wanted. They have the shiny new facilities and the capital investment that they wanted for 20-odd years. However, as the projects have unfolded, the criticisms have become manifold.
The arguments against private financing have been well rehearsed. The committee has heard all of them during its evidence-taking sessions.
The existing PPP scheme is a flawed model. We believe that it is important to have a level playing field. Our members reported to us four major areas of concern about the schemes that they have experienced: consultation levels; health and safety when a school is not closed during refurbishment; facilities management; and future flexibility, particularly in relation to reductions in class sizes.
Thank you for your important evidence, which is appreciated by the committee. If you wish to raise any further points, do not hesitate to put them to the committee in writing.
Meeting continued in private until 15:50.
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