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HM Treasury News Release

209/99

7 December 1999

SPEECH BY CHIEF SECRETARY TO THE TREASURY,
RT HON ANDREW SMITH MP, TO THE PARTNERSHIPS UK CONFERENCE, 7 DECEMBER 1999

Thank you all for being here and allowing me the opportunity to address this gathering of key public and private sector players in the field of PFI and other public private partnerships. I know many of you here have been waiting for the opportunity to contribute to the consultation process on the setting up of Partnerships UK and there will be ample opportunity to do that later on this morning. I want to start this conference, however, by explaining our approach to public private partnerships. I hope it will put Partnerships UK into context.

Public private partnerships are a cornerstone in building public services for the twenty first century - an approach for equipping the public services to meet the challenges they face for many years to come.

Our partnerships are already a great success story, arousing interest from all over the world. But we now need to maximise their contribution to our modernisation programme. To do so, we need to enlist the best possible skills and expertise so that we deliver value for money and public services fit for the twenty first century.

Drawing the best from public and private sectors

Public sector

In the past, Governments were judged on what they owned and how much they spent rather than the services they delivered. Today, that has changed - for the better I believe. In the modern world 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.

Arguments about whether public ownership is always best or whether privatisation is the only answer are arguments for the history books. Today we see the debate as a mistaken legacy. Because today Labour recognises that the only way we can deliver the modern, high quality public services the public want and increasingly expect is by drawing on the best of both public and private sectors.

To do this, we need to first recognise the fundamental roles of Government. In their fevered pursuit of privatisation, the previous Government never fully recognised or accommodated this.

First and foremost, Government is the collective purchaser of public services, providing democratic accountability for service choices, monitoring and enforcing service standards, and safeguarding public interest issues.
The Government has clear responsibility for these objectives and seeing that they are delivered to the standards required. We believe that public private partnerships must be founded on this principle.

Indeed, public private partnerships enable responsibility for many elements of service delivery to be transferred to the private sector. And at the same time the public sector retains responsibility for:

- deciding on the right level of public services, and the public sector resources which are available to pay for them; and

- setting and monitoring quality and performance standards for delivery of the services and taking action if these standards are not met.

And in the case of state-owned businesses, public private partnerships enable the Government to bring the private sector into the ownership and management of the business while at the same time it remains responsible for safeguarding public interest issues.

Public private partnerships also recognise what the public sector can bring to the table in terms of the skills and dedication of its workforce; its assets and businesses, and its ideas and intellectual property. Our Wider Markets Policy is aimed at making the most of public assets such as scientific research, not just to obtain greater value for the public purse but also for wider economic benefit.

Private sector

But how often do we see this potential wasted? That is where the private sector and public private partnerships can help the public sector to deliver modernised public services.

(i) commercial incentives

First, the private sector provides commercial incentives. Private sector organisations either generate profits or they die (unless of course you are an internet stock!). The realities of the market place exert powerful incentives on private sector management and employees to maximise efficiency and take full advantage of business opportunities.

But these disciplines can never be fully replicated in the public sector, where there are many complex and diffuse policy objectives to consider in addition to the need for delivering value for money, and many more stakeholders to consult.
Public private partnerships enable the Government to harness the disciplines of the private sector, by introducing private sector investors who put their own capital at risk. In this way, public private partnerships are helping to improve value for money, so enabling the Government to provide more public services and to a higher standard.

(ii) a focus on customer requirements

Secondly, the private sector can also encourage the public sector to focus more clearly on the needs of customers. Private sector businesses are more adept at looking for innovative ways of enhancing their services, and adapting to changing requirements and expectations.

(iii) new and innovative approaches

Thirdly, the search for new opportunities to develop profitable business provides the private sector with an incentive to innovate and try out new ideas - this in turn can lead to better value services, delivered more flexibly and to a higher standard.

(iv) business and management expertise

Finally, the private sector brings specialised skills - skills 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; skills to assess the commercial opportunities of potential business venture; skills to focus on delivery to customers; and skills to innovate.

The disciplines, incentives, skills and expertise of the private sector can help release the full potential of the people, knowledge and assets in the public sector, enabling the Government to deliver its objectives better.

Implementing the vision

Our ambition is to deliver public services which will be the envy of the world. This will never happen if we undermine our public services. We believe in our public services and that is exactly why we are modernising them. Modern services which recognise the Government's responsibilities, and which employ the best of both the public and private sectors.

We have already had one step change in the delivery of public service infrastructure since this Government came into power. Over the last two and a half years, we have fundamentally reformed PFI. By prioritising projects, ending universal testing, offering a fairer deal to staff and standardising contracts, we have streamlined PFI and put it on a more sustainable and successful basis.

The flow of deals has risen rapidly as a result. In less than 2 years contracts with a combined value approaching £5 bn have been signed compared with £4 bn over the whole of the previous Parliament. PFI will generate some £11 billion worth of new investment over the period 1999/00 to 2001/02.
The next step is to use the new PFI to drive forward our modernisation programme. This means expanding the PFI and applying it in sectors where it has not been extensively used before and enabling smaller projects to combine so PFI is a more cost-effective option. In order to implement this vision of a greater volume and effectiveness of partnerships, we need to develop further the right skill base in the public sector. We need to be a better, more intelligent, more effective partner, client and procurer of private sector services.

We need to be able to

*specify with more clarity our requirements and ensure they are enshrined in the partnership
*understand better what we can and cannot expect the private sector to deliver and what risks we can expect them to take
*obtain better value, not necessarily with lower returns for the private sector, but with better structured deals
*overall, implement PFI deals more quickly and more effectively
*and critically as PFI is about long term partnerships, to be a better manager of long term contracts with the private sector.

As is commonly acknowledged, there is also something of a gap in the private sector's understanding of the operations, decision making, accountability, and other requirements of the public sector.

Delivering better partnerships will require bridging the gap between the skills base of the public sector and the private sector's understanding of public sector requirements. Partnerships UK is one of the mechanisms with which we expect to do this. It will itself, of course, be a novel public private partnership.


Partnerships UK

Following Malcolm Bates' second review of PFI which reported back in Spring, we announced our intention to set up Partnerships UK to help us in the public sector improve the way we work with the private sector in PFI projects. It will offer to the public sector, the key commercial skills which we need to forge better partnerships with the private sector, on equal terms.

Partnerships UK will fill a unique role - there is nothing to equal it in the private sector - of addressing the weaknesses, particularly in terms of skills and commercial experience within Government. It will be a co-venturer strengthening the public sector client in a transaction.

PUK will help the public sector raise its game in the same way the Treasury Taskforce has done. And together with PUK, the public sector can become a much more effective client, which should mean more opportunities for everyone - more deals, lower costs and greater clarity and speed in PPP deals.

As a part of PUK's business planning process, we have been discussing within Government a range of circumstances in which it might play a role. Let me give you a few examples. In the education sector, Glasgow City Council is seeking to replicate the success if its current PFI scheme for its secondary schools estate; and three English local authorities are considering working together on what are essentially similar schemes in different authorities. The Department of Health is considering an innovative approach to bundle up the development of primary and intermediate care centres.

In addition to its role in PFI which may be more familiar to you, we expect Partnerships UK to also help us implement transactions in our Wider Markets policy to use public sector assets. There are two-three pilot projects that are already being considered for PUK. For example, the Forensic Sciences Service is working with the Treasury Taskforce on a project to realise the commercial potential, especially overseas, of its very advanced crime detection technology. British Waterways is considering a scheme where its canal network, technical capability and local knowledge could provide infrastructure to transfer water from places of surplus to places of shortage.

These are few of the 25 or so projects that have been identified so far in the development of Partnerships UK's business plan. All of them have involve a significant degree of innovation which is an important part of PUK's mandate. It will not only improve deal flow in existing PFI sectors but open up new sectors and develop new models of public private co-operation.

The Treasury has employed Rothschilds and Herbert Smith to advise it on the development of Partnerships UK. A Steering Group - containing representatives from both the public and private sectors - has been overseeing the development of the business case, making sure that PUK will bring benefits for all the stakeholders in PPPs.

I am pleased to announce that yesterday, the second reading of the Government Resources and Accounts Bill in the House of Commons put public accounts on a proper accrual basis and also allowed for the establishment of Partnerships UK.

I am also delighted to be able to announce today the role of Derek Higgs, Chairman of Prudential Portfolio Managers, as Chairman Designate of Partnerships UK. Derek needs no introduction for all of you. We are very pleased indeed to have his support and expertise in guiding us through the next critical phase in the launch of Partnerships UK. He will of course work with Adrian Montague who I am also very pleased to announce has accepted the position of Deputy Chairman designate.

Conclusion

I am confident we have the right team at the helm to drive forward what this Government sees as crucial policy for delivering front line services and the second step change in the flow of PFI deals since we came into Government. We are, as planned, on schedule for Partnership UK's launch in the Spring.

We have been supported and advised in consultations by many representative organisations involved in PFI. The conference today provides you with another opportunity to give us your views on the further work that has been done. We look forward to a continued dialogue with you and to your support in creating a unique body - one which holds out the exciting prospect of real benefit to public and private sectors in helping to create for Britain a world class infrastructure.

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