H.M. TREASURY NEWS RELEASE

HM Treasury News Release

124/99

22 July 1999

SHAKE-UP FOR PFI AND GOVERNMENT PROCUREMENT PLANS WILL SAVE UP TO £1 BILLION

The Government is to create a new private sector-led body to help increase and improve investment in the UK's public services from private sources.

Partnerships UK will employ City experts to help the public sector get the best deal from the Private Finance Initiative and other forms of public-private partnerships.

A new Office of Government Commerce is also being set up as part of a shake up in how Whitehall goes about managing its £13 billion a year procurement budget.

The changes, which are expected to produce savings to taxpayers of up to £1 billion over three years, follow recommendations made in two separate but interrelated reports - one from Sir Malcolm Bates, Chairman of Pearl, about improving the Private Finance Initiative and the other from Peter Gershon, Managing Director of Marconi Electronic Systems Ltd, about improving Whitehall procurement processes.

Launching the reforms, Chief Secretary to the Treasury, Alan Milburn, said that Partnerships UK would provide the public sector with the key commercial skills to forge more and better partnerships with the private sector on equal terms.

The Government's reforms to the Private Finance Initiative have already produced £4 billion worth of signed deals in services such as hospitals, schools and transport but Ministers want to push the initiative forward to help deliver the Government's modernisation programme for public services.

Ministers also want to avoid a repeat of some of the problems they have inherited in large PFI computer deals where a lack of expertise in the public sector has led to contracts being signed without a proper assessment of risk.

Partnerships UK will act as a project manager for PFI deals, providing public sector organisations - from Whitehall departments to local education authorities - with expert advisory and implementation skills.

The new organisation follows the recommendations made by Sir Malcolm Bates in his second report on the PFI.

His first report in June 1997 resulted in the creation inside the Treasury of a PFI Taskforce, drawn from the City, to help build up PFI expertise in government. The Taskforce's two year life is now drawing to a close and Sir Malcolm has now recommended that a permanent organisation be formed to replace it.

The ground breaking Partnerships UK will itself be formed as a partnership, with the private sector taking a majority stake in a joint venture with central government and with a Board Chairman drawn from the private sector.

Public sector bodies thinking of entering into PFI deals will be able to use Partnerships UK on a voluntary basis. It will have no monopoly and will seek to win business on the strength of its expertise.

Partnerships UK will not operate as a bank. Instead, as recommended by Sir Malcolm Bates it will be able to provide development funding to get PFI deals off the ground, where existing forms of private finance are not available. In these cases it will, where necessary, provide a range of financial products, tailored to the needs of public sector bodies in the early stages of the procurement process, which enhance, rather than undermine, existing flows of private finance.

Partnerships UK will be one of two new organisations formed as a result of the Bates and Gershon reports.Mr Gershon recommended that a new Office of Government Commerce should also be formed to maximise the Government's buying power.

The public sector is the largest buyer of goods and services in the country but Mr Gershon found that procurement activity was too fragmented with 180 departments and agencies having separate dealings often with the same supplier.

The new Office of Government Commerce will aim to maximise the Government's buying power in the case of routine items while bringing scarce professional expertise to bear on major capital projects. It will deliver over £1 billion of efficiency savings over the next three years while cutting project delays and overruns. It will be overseen by the Chief Secretary to the Treasury.

Speaking today Alan Milburn said:

"Sir Malcolm Bates and Peter Gershon have done an excellent job. We are actioning all of their recommendations.

The changes we are announcing today will mean more value for money in Whitehall and more investment in front line services.

The Government is modernising how we do business to provide a better deal for taxpayers and public service users alike.

Partnerships UK will provide the public sector with the expertise of the private sector. It is the final piece of the jigsaw in the modernisation of PFI that we promised in our manifesto.

We have turned the PFI around. Ending universal testing, providing certainty through new accounting treatment, offering staff a fairer deal and standardising contracts have reformed the PFI. In place of public versus private we now have public and private in partnership.

The challenge now is to use the new PFI to help drive forward the Government's modernisation programme of our public services. We want to expand the PFI especially in sectors where it has not worked before.

Partnerships UK will help deliver that. It will help get more PFI deals done more quickly. And by enlisting private sector skills it will get the public sector better value for money deals. It will have world class project management skills to help deliver world class public services."

Cabinet Office Minister Peter Kilfoyle said:

"I very much welcome Peter Gershon's report and the creation of a stronger centre through the Office of Government Commerce. This new body will enable Government commercial relations to contribute fully to the modernising agenda and to improve service delivery. I am pleased that the transfer of three Cabinet Office agencies to OGC - CCTA, PACE and TBA - will enable them to play a more significant role in Government commerce."

NOTES TO EDITORS

1. Following the announcement of Partnerships UK, a Steering Group will be formed to oversee the development of its business case, to consider governance issues, and to prepare for the raising of private sector capital, which is not expected to take place before March 2000. The Government will appoint financial advisers during this period to advise it on its involvement in Partnerships UK.

The Steering Group will include representatives of a selected group of financial institutions consisting of Abbey National Treasury Services Plc, Barclays Bank, Halifax, Prudential and Royal Bank of Scotland, together with the European Investment Bank. These institutions have not given or been asked to give any commitment to underwrite or provide any part of Partnerships UK's long term capital, and enjoy no special privilege or priority to do so. It is expected that the private sector capital raising will be tendered competitively. The Government will pay the development cost incurred during this period, estimated at £6 million.

During the development period leading to the raising of private sector capital, the Government expects to engage in extensive dialogue with Partnerships UK's intended public sector partners, with potential investors in Partnerships UK and with private sector participants in the PFI in order to ensure that Partnerships UK's final business plan achieves the greatest benefits for all stakeholders in the PFI, from both public and private sectors alike.

A majority interest in Partnerships UK would be held by private sector investors and this would be reflected by a majority on the Board and a private sector Chairman. Although, as a result, Partnerships UK is expected to be classified as a private sector entity for the purposes of the national accounts, its role as a catalyst of public sector investment projects will be central to the terms of reference under which it will operate. The Government will be entitled to appoint a minority of non-executive directors to represent its interests.

Media enquiries, including requests for copies of the Recommendations and Summary of the Second Review of the Private Finance Initiative by Sir Malcolm Bates and the Gershon Report should be addressed to Malcolm Graves on 0171 270 5192. Public Enquiries to 0171 270 4558.

This news release, together with Recommendations and Summary of the Second Review and the Gershon Report are available on the internet at http://www.hm-treasury.gov.uk and at http://www.treasury-projects-taskforce.gov.uk.