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HM Treasury News Release

152/99

20 September 1999

Today I want to outline the Government's approach. Let me say at the outset that partnerships between the public sector and the private sector are a cornerstone of the Government's modernisation programme for Britain. They are central to our drive to modernise our key public services. Such partnerships are here and they are here to stay.

I say that for two principal reasons. Firstly, because they are necessary. PPPs make possible more investment in our key public services after years of systematic under-investment. Over the last Parliament (and over the last cycle) public sector net investment fell by 1 per cent of GDP (and by 2 and a quarter per cent of GDP between 1979 and 1997.) This government believes in our public services. We believe in the values of public services and in the staff who deliver them. We believe too that they can be better than much of the private sector. But we also believe that they have to dramatically improve their productivity, their efficiency and their performance. Indeed this government was elected with a mandate not just to save services like the NHS but to modernise them too.

To do so we have launched the most far-reaching programme of reform our public services have ever seen. And we have matched our commitment to deliver significant improvements by putting our money where our mouths are. Not only record extra cash for hospitals and schools but record levels of investment as well to modernise the fabric of our country. After years in which public sector infrastructure was allowed to deteriorate we are doubling public sector net investment in Britain's infrastructure over the next three years. An extra £12.5 billion of public money going into the fabric of our hospitals, schools, transport and other services to begin the process of modernisation that is so long overdue. Our ambition is to close the all too clear gap that exists between the quality of our public sector buildings and facilities and those of the private sector. We are harnessing private sector capital to help us bridge that gap. But whilst the previous Government sought to use private investment as an alternative to public investment, this Government is using private capital as an addition to public investment.

The principal means of this extra investment has been the Private Finance Initiative. Since the election we have signed £4 billion of PFI deals and we have got PFI working in sectors like health where it has not worked before. 31 major hospital developments worth almost £3 billion are in the pipeline. The biggest new hospital building programme in the history of the NHS. We are now seeing the benefits of private sector investment spread too into other parts of the public services such as schools and colleges. By the end of this year we estimate that private sector investment in PFI projects will account for around 14% of overall public sector investment. By the end of this Parliament we aim to have signed PFI deals worth £12 billion. That of course is on top of the direct up front investment we are making available through Exchequer capital. All of this investment is necessary - and not just because the public has a right to first class services - but because in a fast moving world public services will not be able to keep pace unless they are capable of investing in the modern technologies. New IT systems in particular will help deliver quicker, better and more integrated services.

So PPPS are needed. But I said at the outset that there were two reasons why they are here to stay. Not only are partnerships necessary, they are right.

The changed world in which public services operate demands the marrying of private sector and public sector skills if modernisation is to deliver the responsive convenient quality services people need. Today's public services were designed at a time when needs were more uniform than they are today and users were less vocal. Mass produced services for an era of mass production. Today people rightly expect public services to be tailored to their needs, delivered efficiently and to the highest standards. We pay for insurance over the phone so we expect to be able to do the same with our council tax. We shop at all times of the day and night and we expect the same 24 hour access to our health services. Today's public services have to be shaped around the needs of the people who use them.

Harnessing the commercial consumer orientated management skills of the private sector then will help in the public service modernisation process. But what is more the public sector needs other private sector skills if it is to successfully meet the challenges it faces. It needs commercial expertise to help manage the enormous and complex investment process that is now underway in IT, in transport and in other services across the public sector. By introducing private sector investors who put up their own capital, skills and experience, the public sector gets the benefit of commercial disciplines, innovations and efficiencies. The result is not only better services but better value for money too. Prisons built through PFI that brings savings of 10%. Defence training projects delivering savings of up to 15%. IT in schools delivering savings of up to 30%.

Under PPPs the public sector specifies the outputs required from new investment but the responsibility for and, crucially, the risks associated with delivering those outputs is transferred to the private sector. In PFI projects for example this means the Government no longer needs to build roads as a primary activity - instead we purchase miles of maintained highway. We no longer need to buy computers and software - we can instead purchase managed IT services.

This is a seismic switch in the business of government itself. It recognises that in today's world governments are judged not so much on what they own - or even what they spend - but more on what they do. The yardstick for success in the modern world is whether the services we fund deliver their core purpose. So our focus now, in all that we do, has to be on outcomes not on inputs. The products of our spending, not just the size of our investment or the scale of our ownership.

This new approach represents a decisive break with what has gone before. The dogma of the right - both yesterday and today - insists that the private sector should be the owner and provider of services. The old left insisted that this was all the responsibility of the state. This Government rejects both of these arguments.

In some areas the private sector is best able to provide the services. In others the public sector is in the best position. In the case of the health service for example clinical services are best delivered by public sector staff not least because the NHS is more efficient than the private sector alternative. But in many cases the best way forward is through new partnerships between the public and the private sectors. Where each brings something to the table. Where we combine private sector enterprise experience with public service values. For this Government the key test is what works. We recognise that what the public want is better quality, more responsive services. Their concern - like the Government's - is about outcomes not ownership.

Hence our emphasis on standards. Our drive to improve performance. Our determination to reward success and to root out failure. And, above all else, our ambition to provide the public with services in our country that really are the envy of the world. Our ambition is not to undermine our public services but to modernise them.

We have developed new levers to bring about these reforms. League tables. Inspections. Targets. Sanctions. Rewards. Partnerships between the public sector and the private sector are a further lever for change. They are part and parcel of our new modernisation approach. And to ensure that PPPs such as the PFI are capable of playing a key role in the modernisation process we have instituted a radical reform programme. We have done so too in part to address some of the failings we inherited in the PFI. There have been over 250 successful PFI deals. But of course a few have run into difficulty. No one should underestimate the complexity of the investment programme we are taking forward in our public services. Often there are individual projects running into hundreds of millions if not billions of pounds. Those who think that partnership is easy have got it wrong. It isn't - but the prize on offer is enormous providing the private sector and the public sector can develop a shared understanding to overcome what can be very different cultures and ways of operating. That process has not been helped by the previous government's hostility to the public sector nor by its failure to properly structure some PFI deals.

We have had to sort out these problems. To do so we have fundamentally reformed the PFI so that it is now better able to contribute to the Government's objectives.

First, we took the tough decision to prioritise which schemes should get the go ahead. Now in the NHS for example the building of new hospitals is determined according to health need and not the whim of the market.

… Second, we ended the previous Government's insistence on universal testing. We now only use PFI where it is the right thing to do and only where it demonstrates better value for money than using Exchequer capital. Some critics say this cannot be. But under PFI we not only get a new asset we get it fully serviced for the lifetime of the contract. Unlike under conventional procurement, cost and time overruns - if they occur - are met by the private sector not the taxpayer. And if we are in any doubt about value for money under PFI we simply do not sign the contract and instead use Exchequer capital just as we have done with four new NHS hospitals.

… Third, we have ensured openness by publishing information about PFI deals so that local communities know what is being planned for their public services and so that staff and other interested bodies are properly consulted.

… Fourth, we have given a fairer deal on pensions for staff transferring between the public and private sectors as part of a PFI deal.

… Fifth, we have ended the requirement for staff providing services such as portering, cleaning and catering in hospitals to have to transfer automatically to the private sector.

… Sixth, we have reformed the accounting treatment of PFI deals to provide a platform of certainty for PFI in the future.

… Seventh, we have introduced standardised contracts into PFI deals, preventing the public sector from having to re-invent the wheel at considerable expense every time a hospital or a college entered into a PFI arrangement saving both time and money.

. Eighth, we have ensured that ownership of assets built through the Private Finance Initiative will revert to the public sector at the end of the PFI contract, where it is in the public sector's interest to do so and where there is no alternative use for the asset. This will guarantee that the taxpayer inherits top quality fully maintained schools and hospitals capable of serving local communities for many years to come. It will give the public a lasting stake in the services they fund through the PFI. This final reform ends once and for all the argument that PFI is about mortgaging the future. It isn't. It's about investing in the future.

. These reforms we have made to the PFI have put it on a stable and modern footing. The challenge now is to use the new PFI to drive forward the Government's modernisation programme for our public services. We want to expand the PFI especially in sectors where it has not worked before. To help achieve this we are setting up Partnerships UK which 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.

. Partnerships UK will provide the public sector with the expertise of the private sector. It will help get more PFI deals done better and 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. It is the final piece of the jigsaw in the modernisation of PFI that we promised in our manifesto at the last general election. In place of the previous Government's use of PFI as a battering ram for the privatisation of public services the changes we have made allow us now to use it to drive forward their modernisation

. But there is one other way in which our approach is radically different from that of the previous Government. Unlike them, we do not apply a one size fits all solution to bring about change in the public sector. Privatisation was their solution. Modernisation is ours. PPPs are central to that modernisation process but if they are to work effectively they need to be tailor made to the particular needs of each industry or service.

. Partnerships are different from privatisation. Privatisation created listed private companies that, while they brought benefits, all too often had insufficient safeguards for consumers, employees and the wider community. PPPs ensure the key objective - the delivery of high quality public services - through means that are appropriate to the circumstances - contractual agreements, regulation, government shareholdings and so on.

. Our approach to PPPs involves examining the needs of the customer, the competition in the sector and the levels of investment and management skills required to bring about change. The starting point is to define the specific outputs the Government is seeking to deliver and to determine whether and in what ways the private sector can make a contribution. The PPP is then designed to fit.

. Differences in structure reflect different objectives and different circumstances. We are using PPPs, where it is appropriate to do so, to ensure that public services are freed from the straight jacket of monopoly control whether by the private sector or the public sector. That means tailoring solutions to solve specific problems. I can tell you today that later this year I will be publishing a prospectus setting out the range of partnerships that the Government is seeking to develop with the private sector. Already we have put in place a range of partnership structures. Commercial freedoms for state owned enterprises, joint ventures, the sweating of public assets, leasing, strategic equity partnerships, minority share sales, concession arrangements, as well, of course as the PFI itself. So while we are committed to making the PFI work even better not all of our eggs will be in the PFI basket. Again for us what counts is what works. In the future we will be looking to develop new innovative forms of partnership too.
. There is huge international interest in the UK's approach to developing partnerships between the public and the private sectors. It is an area of public policy where the UK leads the world. Over 50 countries have consulted the Treasury about the PFI. Some, like Italy, Holland, Ireland and Japan, are following us in the way we organise within government to deliver partnerships. Some are legislating to enable PFI to happen.

. Partnerships are a huge UK success story. We are blazing a trail that others will undoubtedly follow. Governments throughout the world are seeking new solutions to keep pace with change in a modern, globalised, rapidly changing world where the public, rightly, expect their governments to deliver excellence for the many and not just the few. In the UK in place of public versus private we now have public and private working in partnership. The result will be better services for the public and a better deal for the taxpayer. I look forward to the new IPPR Commission helping the Government take forward that approach.

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