Rt Hon Nick Raynsford Speech Private Finance in Local Government

PRIVATE FINANCE IN LOCAL GOVERNMENT

The text of a speech given to Local Government Private Finance Initiative Policy Forum by the Rt Hon Nick Raynsford MP, Minister of State for Local Government and the Regions, on 28 October 2004

My purpose today is to try and give you a feel for the approach the government has taken, why we regard PFI as an important element in the procurement armoury for local authorities - not the only option by any means, but one important option - and how some of the changes we are introducing are making it easier for local authorities to make an appropriate use of PFI to procure particular services or projects.

Before looking at the future of PFIs, I think it is worth reflecting on where we are now and how we got there. In other words, setting the context for the way forward on PFI and, indeed, for the event today.

When we came into office in May 1997 one of our first priorities was to ensure that the PFI could extend to local government. It had already been tried out elsewhere in the public sector but at that time, local authorities could not use this procurement route.

There were two major obstacles in place. First, there were widespread doubts about whether local government had the legal powers to engage in this type of contract. City institutions were particularly concerned about this, and that they would be bearing the financial risks of the schemes. So their concerns needed addressing urgently.

Second, we knew that the nature of financial support available to local government was not necessarily conducive to PFI. Authorities following the traditional route of borrowing money by doing the construction themselves normally receive government revenues for the grant covering most of the borrowing costs. But an authority following the PFI route would not have been borrowing, so, as things stood in 1997, wouldn't have qualified for grant support. That would have made the PFI route much less attractive. So we introduced the system of grant support specifically for PFI schemes and that's the one, with some modifications, still operating today. That was clearly key to the successful launch of local government PFI, as of course was the legislation which has now been largely forgotten - the Local Government Contracts Act - which came into force in December 1997, and was designed to deal with the legal concerns which I mentioned a moment ago.

That is how local government PFI got off the ground. Today. it has a small but important role in the range of procurement options available to local authorities. The projects best suited to the PFI approach are generally large-scale, complex projects that need to be delivered on time and on budget. That's not to say other projects should not be delivered on time and on budget, of course.

Another factor which can make projects suitable for PFI is where there are likely to be significant ongoing maintenance requirements. That's fairly obvious because of the different type of relationship in which the local authority is not simply procuring a building but procuring a service, and the maintenance of that particular facility over a period of time is one of the most important of their services. But it certainly does not suit all projects, even all large-scale ones, so the golden rule is to make sure you choose PFI for the right reasons, and only where it really delivers value for money.

Indeed, there is an ever-increasing number of procurement options and opportunities open to local authorities. The new regional centres of excellence are helping local authorities on procurement and other issues. They give guidance on assessing the options and make sure local authorities are taking advantage of the best route for the work in hand. Tim Byles, Chief Executive of Norfolk County Council, who has done a lot of work in particular on the construction field in local government, has recently been appointed procurement champion, and he is there to ensure best practice in procurement is shared across the local government family.

For local government the desired result is the one that delivers the best product and largest benefit for the local community it is set up and elected to serve. Not just when the project has been constructed and starts operating, but also during the whole of its potential lifetime - a point I will return to.

Let us look at the kinds of projects that have already been delivered successfully so far through the PFI route. Nearly 150 local authorities have been involved in PFI projects and, in fact, as many as 75 per cent of authorities outside of districts and single-purpose bodies are involved and are gaining experience in PFI projects of one sort or another. Between them, these authorities have over 280 projects endorsed by the Project Review Group to go forward to procurement. That represents a capital value of well over £8.5bn. Around half of these projects are now operational and claiming grant. We are expecting to pay out over £425mn this year in a further grant.

Those are the facts and figures, but what about the actual nature of the projects themselves? About half of local authority PFI has involved building or refurbishing schools, but the variety of projects is as wide as the responsibilities of local government itself. I will just mention a few examples outside of the schools sector, all now operational.

Manchester City Council has used PFI to deliver a major housing scheme, supporting the regeneration of the city centre. The scheme includes a selective demolition programme and the comprehensive refurbishment of the remaining stock. This is having a major impact on the quality of life for future residents.

Leicester City Council has procured a new waste-management service through PFI. This scheme has the twin objectives of reducing the need for landfill and increasing recycling -obviously important environmental objectives.

PFI has been used in an innovative way to fund the provision of fire appliances and equipment for the London Fire and Emergency Planning Authority. Also in the fire and rescue sector, three authorities - Avon, Somerset and Gloucestershire - came together to provide a new training centre which was financed through PFI.

The last example shows how local authorities can work together, across boundaries, to produce better value for money and improved outcomes by undertaking larger and more ambitious projects than they could probably justify on their own. That is a very important pointer in the context of the Gershon agenda, where we're going to be looking for the scope for economies through combining with other authorities.

Another example of this, in the north-east, is Newcastle and north Tyneside working together to deliver a major project on street lighting. The aim is to ensure better and brighter street lighting in the areas of the two authorities, improving road safety, reducing crime and reducing the fear of crime. These are issues we know are particularly important to people.

Down south, Kent County Council has joined up with all the Kent district councils to procure an extra-care housing development. Again the project has resulted in an enhanced level of service for particularly vulnerable people.

As the total number of projects and number of local authorities involved suggest, there is a growing experience of PFI within local authorities. Successful procurement via the PFI route calls for the right mix of external advice and internal skills. The 4ps - co-hosts of today's event - have played a key role in building up the capacity and skills within local government in this area, supported by our Capacity Building Fund.

I would like to acknowledge the work of 4ps in this and also in acting as informal technical advisers in what can quite often be a complex and daunting process for local authorities. It is important that only the right projects go forward via the PFI route and 4ps have played an invaluable role as a 'critical friend' to ensure suitable projects are selected for soundly based reasons.

So today we have an impressive range of local government schemes already delivered or in the pipeline. Where do we go from here? The future of PFI will be in the context of different and new forms of public-private partnership.

So PFI will have to face competition from these other options. There's also, of course, the introduction of prudential borrowing from April this year. This gives local authorities the freedom to borrow or lease without government consent, provided they can meet the costs from their own resources. This is all part of the process of widening options, freedoms and flexibilities and enabling local authorities to choose between a wider range of options on grounds of best value and help to establish a genuine level playing field across procurement options.

Despite all these new options we believe that there is still a significant role for PFI. That was demonstrated in the July announcement that the Spending Review had concluded that there should be nearly £7bn worth of additional PFI credits for the financial years 2006/07 and 2007/08. That brings the total value of credits made available since 1997 in the local government sector up to nearly £19bn. Sponsoring departments undertook value-for-money assessments using the new methodology - which you will be hearing more about later - as part of the Spending Review to demonstrate the type of projects and programmes PFI should in principle be suitable for.

Local authorities will be getting the opportunity to access the additional PFI credits shortly. A letter seeking bids for new projects in housing was sent out last month. ODPM, along with the Department of Health and possibly others, will shortly be issuing a joint letter inviting bids, an initiative aimed at making it much easier to submit proposals which take a joined-up approach across different service sectors. This is another important theme for local government at the moment. Not just working within the traditional silos.

Another outcome of the Spending Review was that we agreed to review the way the PFI grant system works. The PFI grant system has been in place for seven years and has worked well but that doesn't mean that it cannot be improved. We finished consulting on our proposals this month and early indications from the responses suggest that they are welcomed overall, although we need to look at a number of issues of detail before we reach final conclusions.

The main element of the reform proposed is that the grant should, in future, be provided at a constant level over the life of the contract, calculated as an annuity. This will be a much better fit for the payment profile of a PFI contract and avoids affordability problems caused by more grant being paid in early years when often not so much finance is needed, and less being paid in later years when often more is needed.

There are also a number of other changes, including measures aimed at increasing certainty to authorities in working up costs during procurement. We all know the importance of getting the costs right at the start, not going through the traditional pattern of perhaps failing to anticipate difficulties and therefore having to make variations in contracts which have been traditionally one of the great bugbears of many contractual arrangements. The introduction of a 'scaling factor' would bring the grant more in line with support for borrowing. That is in line with the objective that the procurement route should be chosen on the basis of value for money, rather than the level of grant support.

Overall the proposals offer a balanced package - some eliminating bias in favour of PFI and some eliminating bias against. Our aim is to have a level playing field of procurement options with the deciding factors being solely value for money and suitability for the project.

Another aspect that has been looked at is the framework for assessing whether PFI really is the best option. Recent work towards improving this assessment includes developing new value-for-money guidance and producing standardised contracts. These are subjects that are going to be covered in some depth later in the day, so I will not pursue them here.

One issue I will discuss a little further, however, is the sustainability of projects. Very often all the emphasis is on signing contracts and ensuring initial delivery. And, indeed, recent research shows that PFI has delivered well on cost and time factors at this stage. But that is not the whole story, and as far as the people in the local community are concerned it may be just the beginning. There needs to be just as much emphasis on getting the right working arrangements in place after construction or initial delivery. This means not only ensuring the project is running properly but also that it is properly monitored and scrutinised on a regular basis.

In fact, the PFI route has enormous potential to deliver a good performance over the whole lifetime of the project. For the local authority and the local community this can mean delivering maximum ongoing benefits for their area. The London Fire and Rescue Service example I mentioned earlier ensures long-term high-quality maintenance of the equipment as part of the contract, something which is obviously highly critical.

I would just like to finish by highlighting a few final points. First, PFI is a very good route for delivering improvements to local communities when it is used for the right sort of project for the right reasons. There are other procurement options and PFI must be properly assessed on its merits for a particular project within this range. But used properly it can represent very good value for money, not just for the initial delivery of a service or construction and maintenance of a building but on lifetime costs over a prolonged period.

Second, contrary to some reports, over the last seven years it has proved itself a successful and robust system for procuring a wide range of different projects and shown that it can be the best way of meeting the community's needs in specific areas. It has delivered on time, on budget and up to expectations. When asked I always give the example of City Hall, which was procured on a PFI-type basis. At a time when there's been huge controversy around the cost over-run and delay of the Scottish Parliament building, I think it is interesting to look at the procurement experience of City Hall, which was procured on a basis very similar to PFI principles, and which was delivered on time and on budget. So every procurement route has to be looked at carefully and PFI is no exception. However, it's record to date is one of success and there is no reason why that should not be maintained.

And third, PFI continues to offer real opportunities for local authorities to work in partnership with the private sector, and with other authorities and agencies. Through PFI, authorities can bring in the right mix of expertise to deliver improvements on a large scale to their area, on a scale that may not be possible if they were acting on their own

At the end of the day local government must deliver services and facilities that meet the rising expectations and growing aspirations of the people we're here to serve. PFI is a tool that, used skilfully, can produce impressive results. It has certainly earned its place in the line-up of procurement options. It will not always be the perfect answer but it should be among the solutions considered. Local government is facing many challenges over the next few years and I am certain that PFI has an immense contribution to make.

The Rt Hon Nick Raynsford was appointed Minister for Local Government on 11 June 2001 and was made a privy councillor in the 2001 New Year's Honours. He is currently responsible for local government, regional government, the fire and rescue service, and civil resilience. Mr Raynsford was Shadow Minister for Housing and Construction from 1994 and Frontbench spokesperson for London from 1993.