We move to agenda item 5 and welcome Andy Kerr, the Minister for Finance and Public Services, to give evidence in our PPP/PFI inquiry. I invite the minister to make a brief opening statement.
I want to explain briefly my role in relation to PPP policy and funding in Scotland. I also want to answer your questions on the issue as best as I can. Sandy Rosie and Andrew Clearie are here to help me with that.
I am sure that members will have questions on a number of the issues that you raised. I will kick off. From the work that the committee has done, it is clear that PFI projects have fairly large overheads for the cost of advisers and for the work that must be done before the finance can be put in place. Does that mean that there is a critical size for PFI projects? If so, will the projects be concentrated heavily in the bigger local authority areas, on big projects and, in the health sector, with big agencies? What are the implications of that for smaller authorities and for people in other parts of Scotland?
As the convener of the Transport and the Environment Committee—you also listened to the evidence, convener—I learned that there are fairly substantial up-front costs for PFI/PPP projects. That is not to say that public procurement does not involve similar up-front costs. That is an important point. With PFI, the cost is borne by both parties, who scrutinise each other's efforts and roles. The more time that is spent on that, the better the delivery of the service through the procurement process. The time that is taken to get a project together and the money for advisers are well spent, because they should mean a better result. The procedure is a negotiated one. I know that the committee has examined that process.
I am interested in what the minister said about the amount of conventional capital spend and the small proportion of capital spend that PPP takes up. From the evidence, it seems to me that most of the savings or claimed savings from PPP projects come from elements such as design, project management, and maintenance and transfer of risk, and not from the provision of the capital per se. The main argument from the Government in relation to the provision of capital was that it is necessary to get it off the balance sheet.
Those are matters for the chancellor. I have not signed up to that fundamental point. I do not see PPP as a route round the public sector borrowing requirement, although it could be argued that PPP provides a bonus for the PSBR. However, in partnership with the public sector, no matter what the relationship, PPP brings experience, discipline and a dynamic new approach to the procurement of public services. That is the view of someone who spent 15 years in the public sector, working on the procurement side and on bidding for tenders. My view is that we benefit from PPP's different approach, which involves rigorous, sound management and the transfer of risk.
It is clear that there is transfer of risk only if a project remains a PFI/PPP one. However, it could be argued that many of the private sector's capabilities, such as its ability to do things better, smarter and more innovatively, could be done by the public sector. Have you seen evidence or do you expect that there will be a transfer of experience and working methods so that, in future, the public sector will be able to do things such as project management as well as the private sector?
I hope that that will be the case. My view has always been that the private sector has much to learn from the public sector about the management, organisation and running of public services. The private sector can also learn about the impact that the public sector makes on our communities because of its service-level standards, training and the terms and conditions under which it employs its work force. During my days in cleansing, our fundamental task was to ensure that the place was clean and tidy, the bins were lifted, the streets were swept and the rubbish and waste were disposed of in an environmentally friendly manner. That was the focus. If we had had to spend our time designing depots, facilities and transfer stations, I would—to be blunt—have regarded that as a diversion from the key task.
On that point, do you think that there should be a central pool of expertise—a public sector consultancy, if you like—that would compete with the very active private sector consultancies, some of which have tremendous experience in a particular field and can apply it to a number of projects? Would such a central unit mean that we would not have to bundle up projects to deal with them? Many of the community projects that have to be attacked cost an awful lot less than £10 million, which is the figure that you quoted.
We are learning all the time. For example, we have Partnerships UK and the Treasury. We could develop a unit within the Scottish Executive that would help us to provide advice on such matters. The health department and the finance department include large sections devoted to the issue. We need to examine how the Executive organises and supports initiatives. I want to draw the lessons that we can learn into the centre to ensure that we are providing good-quality advice.
Will such an approach not cause some tension? For a start, you will be competing directly with the private sector. Are you suggesting that the Executive should provide such a facility, even though it is responsible for approving many of the projects? Does that not smack of central takeover?
I think that it smacks of the opposite. The private sector partner—or special purpose vehicle—involved in a project might have its own set of advisers that will look after its interests. The Executive facility will simply streamline our protection of public sector interests.
You said earlier that you had worked on both sides of procurement in the public sector. Do you see any changes in relation to whole-life cost evaluation, which seems to be the thrust behind the argument for PPP? What is being offered now that was not offered in the past?
I hesitate to give a specific answer to that question; perhaps Sandy Rosie and Andrew Clearie can help me out. I can tell you that, on a superficial level, I see much greater innovation and a more standardised approach to the development of contracts. Perhaps Sandy can say more.
I hope that I understand David Davidson's point correctly. The difference in appraisal—Andrew Clearie is better on the technicalities than I am—is the whole-life look that is being taken. That has changed the way in which people address the factors involved in the appraisal of a project. That is completely different from conventional procurement and the guidance that applied to that.
I welcome the minister's statement that PFI/PPP is not the only game in town. That is an important point. The implication of what he highlighted is that the availability of capital from the public purse is not a constraint any more. Is that a fair comment?
I think that what I said was that that is not the primary driver for me with regard to why we use PFI/PPP.
If those two points are valid, I presume that you make the determination on the basis of whether you can deliver the project to specification, on time and within budget. You drew those three characteristics to the committee's attention in relation to the Hairmyres project. All the criteria are currently being met at the £20 million-plus project that is currently under construction at the royal Aberdeen children's hospital. They are all being met through the traditional procurement method, so it can be done in the public sector by the traditional method.
You hit the nail on the head when you said that the Aberdeen hospital project was done through the traditional route. The point about any project that we undertake is that an assessment is made and there is a public sector comparator. Each project is put through the sausage machine. If it comes out on the side of being value for money for the public purse if it is done through the traditional route, that option will be chosen. In other cases, a project goes through the sausage machine and comes out the other end in a different shape, so the PPP route is chosen. The attraction is that it has come out as being better value for money for the public purse. The fact that projects can be done by either route is an important point. The reason why a particular route is chosen is because it provides better value for money.
People's concerns are probably not about what is delivered at the end of the day but about the nature of the sausage machine that makes the assessment. There may not be a detailed understanding of how the assessment is made or, in particular, of how public sector comparators are chosen. People are concerned about the fact that, in many cases, the financial margins are not great—one can almost choose the method of assessment to deliver whatever type of route one wants.
I do not start from the premise that we need to do everything with PPP—I am trying to express the opposite view. I start from the premise of providing value for money for the taxpayer.
Can I be clear about your two messages? Is value for money in the public sector comparator the most appropriate mechanism for talking about the merits or demerits of PFI/PPP, or does service quality become one of the dominant criteria?
There is a balance. For me, value for money includes quality—quality should never be separated out. When I talk about value for money, I include quality aspects in the word "value". Cheapest is not best.
In the evidence that we have heard, costs—particularly the maintenance costs—have been cited as one of the main benefits of PFI/PPP. In circumstances in which we choose to go down the traditional procurement route, what mechanisms are we developing in the public sector to ensure that appropriate maintenance is built into the system? Is resource account budgeting sufficient for that, or should we look to other mechanisms?
I do not think that resource account budgeting is sufficient. Although it delivers in relation to certain aspects of the Executive's work, I am not sure that it can be transferred beyond that in an effective enough way. We are discussing with our colleagues across the public sector—including service providers and service users, as well as the institutions and organisations—our desire to have a body that allows us to exchange best practice in an effective manner. Down south, IDEA—the Improvement and Development Agency—is about improving and developing public services. We are looking at that model. Although we will probably not choose to go down the same route, we want to have a public sector best practice organisation in Scotland. That would enable us to reach the eventual goal in relation to the activities of the public sector and the private sector that Brian Adam mentioned.
Do you believe that you can deliver good practice without the discipline of the market? With a PPP, someone else has control over the maintenance budget. Is good practice possible without that external control?
I have always believed that competition, benchmarking and best value play a key role in the public sector. Even if we manage to develop a model in the public sector that adopts the best practice of the private sector, we still need to test that model. We cannot take money directly out of people's pockets without putting such a model to the test. That is where the key difference lies in the present discussion. Even if we are able to achieve the desired level of best practice in the public sector, we will still have to test our model in the marketplace.
Capital projects have always had an impact on revenue expenditure. Increasingly, people are expressing the concern that, because of the level that PFI payments have reached, there will be an adverse impact on the revenue that is available to different clients. It is estimated that PFI payments will exceed £350 million by 2003-04. Does that represent cause for concern? Is there an appropriate balance between conventional procurement and the use of PFIs, or is that a spurious concept?
The idea of an appropriate balance is not a spurious concept. There must be a levelling in relation to where we can go, so that we do not tip over the relationship that exists between conventional procurement and PFI procurement. Together with Cabinet colleagues, members of the Finance Committee and others, I want to come to some conclusions about the relationship between the percentage of PFI capital spend and the percentage of traditional procurement capital spend. There is a limit on how far the revenue costs, which are less than 2 per cent of the Scottish pot, can go. I fully acknowledge that PFI schemes entrap one's resources over 30 years or an equivalent period.
I wonder whether you have contradicted something that you said earlier, when you spoke about putting public sector procurement and private sector procurement to the test and adopting whichever method comes out as best value for money. It could be that you decide to do everything publicly or to do everything privately, if that is the way that the tests turn out. Surely you cannot then impose a percentage test and stipulate an ideal balance, whereby X per cent is public and Y per cent is private.
In terms of a prudential scheme for these projects, a ceiling can be considered and it may be moveable through time and with experience. As we move down the route, for instance, of removing section 94 controls on local authority capital spend, local authorities will be expected to take decisions based on the prudential framework and to determine the balance of capital and revenue at a local level. The Scottish Executive can do that as well.
But the implication is that at some stage, although your tests show that one scheme would be better value for money, the prudential nature of the decision will make you go in the other direction.
The ceilings that would be set would not, I hope, lead to that scenario in the short term. As we learn from and progress our relationship with PPP, we will take clearer decisions about that relationship. Someone with responsibility for the Scottish block could take the considered opinion that we could not tie up X per cent of our resources over 30 years because it would not leave flexibility to deal with other matters. We may get to that point, but that is postulating far into the future. Initiatives are being developed and different models are coming to the fore and being examined by us. We live in interesting times. We have to put the question, "Is it acceptable to exaggerate wildly that 50 per cent of our Scottish block will be tied up for 30 years in revenue costs for PPP projects?"
If you were asked to take a stab at where the ceiling might be, where would you put it?
I will give the usual response—as you would expect, Brian—that I am considering those matters and that I will have to discuss them with Cabinet colleagues and others who have a direct interest in health, education and so on.
In that case, when are you likely to come to a conclusion and to share it with us?
I hope that it will be fairly shortly, but those decisions should not be taken lightly—they are taken for a reason. I do not want to postulate too wildly at this time.
That issue is of interest.
I wish to shift the questioning slightly. In fairness, the discussion that we have had has been of tremendous interest to us all and to the chattering classes, but to people out there, there is a bill that they have to pay—known as charges—which is outwith the block. Could you outline the Executive's philosophy on those charges? Have you set notional limits? To what extent do you take into account the charges that may arise from a given project in determining whether it is a good project or a bad one?
Which projects do you mean?
For example, take a water and sewerage project. There will be a charge, which the public has to pay and which is outwith the Scottish block—it is a separate revenue stream. The charge may go to councils and it may not be part of your financial considerations, but it has a direct impact on people out there. I am anxious to know the Executive's thinking. Do you have informal guidelines at your own hand? To what extent do you take possible charges and increases in them into consideration when you say yea or nay to a given proposal?
Within parameters, we devolve powers and the taking of decisions to relevant authorities. For example, we talked about local government and the prudential framework. In relation to the water industry, the water industry commissioner can determine ceilings on the industry's charging and borrowing regime. A degree of responsibility is devolved. I refer to my previous point about what we consider to be the appropriate level.
I will comment on some other local authority areas of control. For example, we know that councils look at their so-called affordability gap in a number of different ways, but they use money from the sources that you might expect them to use. Some authorities look to transfer what would otherwise have been their capital provision, if they no longer require it because of shifting across to a PPP scheme. That releases capital provision that they can use. Authorities may also have disposal receipts that they can use. In addition, they have conventional sources of income such as council tax.
I hope that you can reassure me that, were a lunatic authority to choose a scheme with charges that were much too high, the minister and the civil service would be able to advise that authority strongly that the charging regime concerned would not work.
Because we are part-funding many schemes, we are concerned to assure ourselves that authorities have a plan for meeting their part of the bargain, however they do that. That is a direct financial interest, rather than the sort of regulatory interest that the member is suggesting. Authorities also have to satisfy others involved in the process, including private funders. For a number of reasons, not least their own prudential management, authorities must satisfy themselves of the soundness of what are long-term commitments.
Are you arguing that, if a scheme were not viable, the private sector would indicate that it could not work, and that that would serve as a regulatory system?
Any business plan would have to be presented to the markets, which would have to be satisfied that the authority with which they were dealing was capable of making repayments.
Authorities would also have to satisfy the regulatory bodies that exist in Scotland, such as the Accounts Commission for Scotland, which oversees what local authorities are up to. There is also the prudential scheme that is proposed in the white paper.
One of the most controversial aspects of PFI is the impact that it has on staff. Minister, recently you have spoken about staffing issues, particularly the issue of the two-tier work force. Would you like to say something about that?
The commitment has been made, and tomorrow we meet representatives of the Scottish Trades Union Congress to discuss developing our approach. The two-tier work force is much talked about, but we need clear evidence of its existence. The committee has sought some clear examples of that.
I would like to go back a couple of steps. One of the problems with the conventional procurement system and PFI seems to have been that PFI automatically works out to be more expensive. The difference appears to relate to maintenance and keeping building works as efficient and modern as possible, which has apparently not been done in the past. That seems to be have been missed out of the argument.
As I said in one of our other discussions, the public sector aspires to that level and may want to carry out such work. The public sector is good at delivering services on the ground. Do we want to refocus and re-engineer public services and focus on asset building and maintenance? That is not my decision to make—we devolve such decision making to a local level.
Does that mean that your current preference is that the design and build stage is up for grabs between the two systems, but that the operate stage should be retained in the public sector?
It is down to local partners to determine their local arrangements and what they consider to be best value for money. I would not want to be prescriptive. It would be unhealthy if I started to impact on local decision making in that manner from Victoria Quay in Edinburgh.
Some weeks ago, members of the Northern Ireland Assembly appeared before the committee. Their PPP commitment is not as great as is ours on this side of the water, but they were enthusiastic. To what extent do you compare notes with other devolved Administrations and other states, such as Eire and other European countries, to test what you are doing and to find out whether you could do better? I know that you are busy, but is there a communication channel?
I read with interest what Mr Molloy said when he gave evidence to the committee. Sandy Rosie works as an officer in an integrated network and advice comes back to me. Perhaps he can say how that network works and how it impacts on my decision-making processes.
As members probably know, there are strong links internationally and throughout the UK in respect of how PFI and PPP have developed. There is still much commonality in respect of reliance on guidance and the fact that Partnerships UK operates throughout. There is a lot of dialogue at official level on what people are doing and on what interesting things they are trying in pilots and different projects. In carrying out their review, the people from the Northern Ireland Assembly have spoken to us and were interested in what we have done in Scotland. I think that they are due to come back to see us again before too long.
A lot of the debate around PPP and PFI has centred on the transfer of risk. In the early stages, it was felt that the maximum transfer of risk to the private sector was in the interests of the public. What guidance are you currently giving on the quantification and allocation of risk and the management of risk between contractors and operators on one hand and the public sector purchaser on the other?
My view is that risk is best dealt with by the most appropriate organisation in the partnership. The public sector takes a risk when it projects its estate requirements and estimates its school rolls over the next 25 or 30 years. It is legitimate for the public sector to take that risk. There are volume risks associated with assets such as hospitals and schools. However, in relation to a project such as a waste water treatment plant, the risk should be much further away and should be in the hands of the special purpose vehicle, as that would not involve a people-based risk but would be more to do with the treatment of the waste water. Various models apply: the risk associated with a road is different from the risk associated with a hospital. Legislative risk has to be assessed as well. For example, what risk is there that the raising of European standards will impact on the ability to sustain emission levels?
Are you saying that you are not developing a central set of guidance to indicate that in certain specific circumstances the risk should lie with the public sector and that in other specific circumstances the risk should lie with the private sector?
I think that I have addressed that point. Perhaps Andrew Clearie can be more specific.
There exists technical guidance on the assessment of risk. The Treasury task force technical note 5 sets out the assessment of risk in relation to the construction of the public sector comparator, for example.
So the situation is changing. Is it changing according to the market or Government direction?
Generally, within sectors there is an acceptance of where risk should lie. For example, in the time in which we have done eight deals on schools, there has been evolution in relation to the apportionment of risk. It is now clearly accepted that certain risks lie with certain partners in the contractual relationship.
The evidence that we have taken indicates that transfer of risk is expensive. There is an argument for trying to identify where each risk best lies and what the cost of transfer is in order to ensure that the best value for money is attained. I am not sure that that necessarily applied at the earlier stages of PFI. We might be learning lessons in that area.
All those questions are linked. We are learning and therefore the questions about risk, refinancing and how we carry out the projects are a moveable feast, as I said at the beginning. We must ensure that we are learning from the best, which is why we want to set up a centre of excellence in Scotland.
I suppose that, in the context of refinancing and recontracting, we can anticipate that the construction arm of a consortium that has been set up to proceed with particular PFIs may want to realise its equity and move on to reinvest its resources in new construction projects. That might create a set of service providers that concentrate on that aspect of projects. How might that industry take shape? What role might the Executive or some of the commissioning organisations in local government or health have to play in regulating and controlling such a process?
Sandy Rosie has advised me that, at the PUK level, discussions are continuing on that subject but, to be blunt, I do not have the details.
This morning you have talked about local decision making and local views. That takes us on to the Scottish Executive's role and the potential for rationing. This year, Aberdeenshire Council announced that the Scottish Executive had given it an opportunity to bid for PPPs for primary and other schools. There was the distinct impression locally that the Executive had given the council a time-limited window of opportunity—that was how it was put in the council's press release. Could you explain the role of the minister and the Executive?
We have bidding rounds. There were previous bidding rounds and bidding rounds will take place again. For example, another round will take place in September. The window to which you referred might simply be the current window, and another window will come along soon. It is not the end of the world if projects do not—
That is fine, minister. Let me move on to the windows of opportunity. What role does the Executive play in deciding that there will be an opportunity? What limits, such as the obvious limits in the previous round, does the Executive put on opportunities?
We make decisions based on the spending review processes whereby we allocate resources to a particular task. As members know, that spending review process is under way. We allocate according to our views on particular projects. Those windows of opportunity are open and the projects can come through them.
So you are returning to a form of challenge bidding for pockets of PFI opportunity.
One could interpret the situation that way. We also set high benchmarks and targets before people can get access to the funds. Therefore, if the project is determined not to be viable or deliverable, if it is not thought through, if the partners are not in place, or if the project is over-ambitious, under-ambitious or does not address the policies that the Executive is encouraging local authorities to pursue, it will not get money. Funding is not dependent solely on the amount of resource available.
I am encouraged that the minister takes an active role in managing the quality of the roll-out of such schemes. That has added to the evidence.
I assume that the Executive has a role in that context because the Executive funds the revenue consequences of any PFI/PPP bid. That seems to run counter to the assertion that the minister made that the Executive is trying to ensure that decisions are made at a local level and that it does not want to interfere. How will the balance be struck? In relation to the smaller projects that local authorities are trying to bundle, the Executive makes the decisions about which ones go ahead, because it is providing the revenue funding.
We have always done that 100 per cent. We are saying that we are getting local buy-in by the level playing field support that we provide. It is disingenuous to say that the Executive has such control. I have said umpteen times that how such things are developed and managed at local level is critical. The schools will not be ours—the funding must be built into the local arrangement. We do not have the heavy influence that Brian Adam suggests. We have set our benchmarks, we have told the authorities that want to bid what the parameters are and what they must do to be successful and we make a judgment on that.
Your role is no different to what it was in relation to section 94 consents.
It is better. Education authorities have to tell us what they have done in their communities to convince the communities that such projects are a good way forward for the schools estate, or whatever the project happens to be. It involves all those other things about partnership and the way forward—how it fits into other policies such as those relating to special education needs, access issues and deliverability issues in relation to denominational schools. It is about all that good stuff. It is not just about bricks and mortar—this represents policy being delivered effectively.
I want to clarify a point on the education rounds. Am I correct in thinking that the forthcoming projects have to be PPP or PFI projects to benefit from level playing field funding?
Yes. They are bidding into that process outwith the usual capital funding work that we do with local authorities.
If a local authority wants to benefit from the assistance that the Executive is offering, in this case, PPP is the only game in town—otherwise the authority cannot bid for the extra assistance.
The usual capital budget, which has increased by 25 per cent over four years, still exists. Authorities are bidding into a restricted fund for PPP projects. However, the world goes on in relation to delivery using normal capital routes.
One of the things that came across in the context of the Glasgow schools—I suspect that this will apply to the Edinburgh schools, too—is that instead of the bids being made for closed-contract packages, as they would have been previously in the public sector, the procurement mechanism allowed the bidders to tender variant bids that were based on output specification. In Glasgow, that meant that we had 11 new secondary schools instead of one new secondary school, because the system was more cost effective, which has been seen positively in Glasgow.
That philosophy should pervade all that we do in the public sector. It is a key requirement of the spending review that we focus on what is delivered, rather than on inputs. I recall the old days of compulsory competitive tendering, when it was about how many workers would be provided to sweep the streets and how many vehicles or brushes there would be. At the end of the day, nothing was said about whether the place would be cleaner or better managed.
Thank you.
I look forward to the committee's report.
We will try to produce it as soon as possible.
Meeting continued in private until 12:34.
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