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OGC PUK CONFERENCE

SPEECH BY CHIEF SECRETARY ANDREW SMITH

23 OCTOBER 2001

Introduction

1. Today I want to explain our initiative to invest in Britain’s public services and the role that Public Private Partnerships (PPPs) play.  I want to report on the progress we are making on public investment. And to thank you for the important part that you are playing in delivering the investment that Britain needs.  

Public investment

2. When this Government came to office, Britain’s public services were suffering from years of under-investment and neglect. We took immediate action: in getting the public finances right, but also, within our fiscal rules, moving ahead - massively - to boost the levels of investment in public services.

3. Our first task, of course, was to build a platform of stability and sustainable public finances.  Because we took the tough decisions, today we not only have low inflation, stable growth and low unemployment but sound public finances and the national debt falling towards 30 per cent of GDP.

4. And it is this sustained improvement in our public finances that makes possible the prospect of sustained investment in our public services. 

5. We have increased investment from £23.7 billion in 1996-97 to £27.4bn this year, and due to rise to £41.8 billion in 2003-4.

6. Government-provided investment, that is the investment in infrastructure - excluding private finance - is increasing from £22.2 billion in 1996-97 to £23.1bn this year, and due to rise to £39.0 billion in 2003-4.

7. And if we take these figures net of depreciation, this shows public sector net investment increasing from £6.3 billion last year to £18.7 billion in 2003-4.

8. This is a measure of the accelerated pace of investment, and the significant role of PPPs, additional to public sector finance.

9. So it cannot be said that private finance is being used to replace public sector finance or that the government is opposed to using conventional public investment when it is the right way forwards. 

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Reasons for PPPs

10. Given the importance of public investment, and the progress we are making in increasing public investment, why then do we need PPPs ?

11. As I have said, it is not to replace public investment. In key areas, as we have made clear, we need PPPs and PFI to help us manage that increased investment effectively, and to make the money we invest go further.

12. PPPs can increase the incentives to innovate, to manage risks effectively, and to deliver complex projects on time and to budget. You only have to look at the Jubilee line extension – almost two years late and £1.4 billion over budget – to realise that the public sector cannot always do this on its own.

13. So this is the key. We are boosting the quantity of public sector investment - not, as our predecessors did, substituting private investment for public responsibility, but using the private sector to boost the quality and quantity of that public investment too.

14. Expectations of the public sector have been raised. It is in part the private sector ethos that has raised them. We have to go beyond offering a basic standard and deliver public services around the needs of consumers. To do so we have to harness the motivation of public sector staff and the efficiency of the private sector where appropriate.

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Under investment and problems with past privatisations

15. When this Government took office in May 1997, we inherited public services that had been underfunded and neglected for two decades. We inherited a PFI system which - because of a dogmatic belief in the superiority of the private sector - was manifestly failing to deliver the goods.

16. The PFI approach adopted in the 1980s and early 1990s was as inadequate as the idea of the use of private sector involvement was new. It became clear that many of the advantages private sector provision was expected to have over traditional public sector procurement were not materialising. The Right were blind to the advantages of partnership. They sought only to roll back the boundaries of the state, not to roll forwards its performance. 

17. The problems encountered in the early days are well known:

• In 1981 the Ryrie rules established that private expenditure could not be additional to public expenditure: so for every pound invested by the private sector the amount of state provision was reduced by a pound. The private sector usurped rather than supported the public sector: not a penny of extra funding flowed into our schools, our hospitals, or our transport infrastructure as a consequence.
  
  
• There was a requirement for universal testing of the suitability of PFI for all new capital investment, overstretching resources in both public and private sectors. There was no focus, no prioritisation, no attention was paid to the organisational issues that needed to be resolved if a timely flow of sound projects was to be achieved;
  
  
• Hostility to the public sector prevented the development of the capacity within the civil service to work effectively with the private sector. The public sector was the poor relation and this meant inefficient procurement and extra costs for both sides; and
  
  
• Public sector clients had insufficient commercial knowledge and experience in many instances, even to get advisers and the quality of advice they needed.

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18. We put the public finances in order, and made possible additional investment in our public services.  But to use the money we invested effectively - to deliver on our commitment to modernise our hospitals, schools and transport infrastructure - we had to reform fundamentally the relationship between the public and private sector, and to reform PFI. 

19. In May 1997, straight after taking office, we ended universal testing, which had been a recipe for frustration and delay, and worked against proper prioritisation of projects. 

20. We needed an external perspective so we commissioned Sir Malcolm Bates to review PFI.  He reported in June 1997, recommending:

• The creation of a task force within the Treasury: the first appointment to the Taskforce was made in September of that year.  Members were recruited from the private sector with the project management and financial skills to help make PFI work.  The Taskforce did sterling work - supporting departments in delivering top quality transactions;
  
  
• The standardisation of the contract conditions for PFI projects. He recognised, as we recognise, that standardisation of tender documents would sharply reduce legal fees and other costs, and the time required for negotiation with bidders and financiers; and
  
  
• He proposed that effort in the Treasury and elsewhere in the public sector should be focused on establishing model transactions, forming the basis for other deals.

21. These fundamental reforms we made to PFI, the increasing enthusiasm of private sector staff and the willingness of public sector workers to build capacity, work flexibly and innovate, meant the flow of PFI deals increased from around 40 deals in 1997-98 to over 100 in 1998-99.

22. Where in the period before 1997 PFIs attracted only £3.5bn of private sector investment, the period after 1997 saw that figure leap to £16.5bn. And there are another 300 PPP projects of different types in various stages of procurement, worth up to £16 billion, which will take us to a total of over £30 billion.

23. This is a key contribution to investment in public services and the regeneration of our country, thanks in no small part to the work you have done:

• In health 35 major PPP hospital projects are underway – the largest hospital building programme in the history of the NHS;
  
  
• In education, over 520 PPP schools projects are being carried forward in England and Wales; and
  
  
• Across the public sector – in transport, the judicial system, the prison service and defence – through successful projects the private sector is committing enormous sums of capital to the long term modernisation of our infrastructure.

24. £30 billion is a lot of money. But we see the involvement of private finance in these big projects as important not because the private sector can raise capital, but because we have to get the best out of both the public and the private sectors in the investment of capital. Utilising private sector skills, private sector innovations and private sector efficiencies, while capturing public sector motivation, releasing public sector capacity and dependent public sector trust. 

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25. PPPs will help us ensure that:

• Complex and expensive projects are managed efficiently - delivering on time and on budget;
  
  
• Risk is managed effectively - so the consumer can benefit from enhanced services without the taxpayer having to shoulder the burden of failures or fluctuations in demand;
  
  
• We exploit to the full the reservoir of potential in public sector ideas, assets, and brands;
  
  
• Public sector workers are not restricted by outmoded structures or restricted working practices.

Getting the best out of the public sector

• It is not remotely the case - and we have to make that clear - that everything in our public services is in some sense weak or substandard. The best of our schools, hospitals and universities are a match for any in the world. 
  
  
• Our teachers, nurses and doctors, our armed services, the managers, the people I see in the audience today, are highly motivated, highly trained, and ready to embrace change and modernisation. Conventional public sector procurement therefore remains the dominant method of delivering public sector investment. 

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Managing complex projects

28. The public sector can deliver on traditional commitments, and it has the skills that can be released into wider markets, making more effective use of public resources. 

29. However, the public sector has also historically demonstrated difficulty in managing the delivery of certain facilities and services. In particular there have often been weaknesses in the delivery of complex investment projects.  

30. These are difficulties that follow from a lack of expertise and a lack of commercial incentives. These are the failings that led to the completion of Guy’s Hospital 3 years late and £124m over budget; or the Trident submarine berth in Scotland two and a half years late and £214m over budget; or the Jubilee line extension almost two years late and £1.4bn over budget. 

31. That is why we need to enlist the efficiency and management skills of the private sector. We have big plans for our schools, our hospitals and our transport infrastructure. It is to realize those ambitions that we recognize the contribution that the powerful discipline of the markets can make to the service of the public sector.

32. Where private sector management and employees can promote efficiency and better working practices, where they can develop imaginative approaches to delivering public services and managing state-owned assets, they add value to our public investment.

33. Businesses need, of course, to generate a return so they are forced to innovate and look for ways to enhance the service offered to customers.  By forging partnerships between the private sector and the state, we can turn this innovation towards the improvement of our public services. 

34. We also value the role of private partnership and investment in the quality of assets and the reduction of long-term maintenance costs. Partnering the private sector, not just in the building of facilities but also in their maintenance, creates the right incentives for producing high quality, well designed public buildings - improving the whole life cost effectiveness of projects. 

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Managing risk

35. There are some who claim that private sector involvement is bound to be at the expense of front line staff and service delivery.  Let us be clear.  We cannot allow this to be the case. Genuine Public-Private Partnership is not built on the principle of a two-tier workforce, but on the commitment, ideas, energy and skills of the workers involved.

36. Private sector profits must flow from an ability to innovate, to consider the whole life costs of projects, and to manage risk effectively. It is where the private sector is better at managing risk - because they have to be in order to make a profit - that we can redistribute the risks associated with delivering large and complex procurement projects. 

37. Where the average overspend on London underground schemes was 22%, the taxpayer had to carry the extra burden.  Where schools and hospitals were completed out of date and over budget, it was the citizen who suffered and the taxpayer who picked up the bill. But where the private sector has capital at stake there is the incentive to deliver on time and to budget. 

38. Transferring risks to the private sector frees the taxpayer from unnecessary burden, creates a greater incentive for the private sector to deliver to budget and on time, and when they do, benefits the citizen - the consumer of public services. To give a few examples:

• Carlisle hospital opening several months early; Dartford and Gravesham ready in 44 months - well ahead of what the public sector could have achieved alone;
  
  
• Altcourse Prison built in just 3 years - half the time taken before the PFI - one described by HM Inspectors as ‘by some way the best local prison we have inspected’; and
  
  
• The Barnhill Community high school opening a year after the contract was signed, providing state of the art facilities to educate 1450 children.

39. PPPs are the means by which the Government is seeking to bring together the best of both sectors - aiming to deliver a higher quality of public service than is possible through the public sector alone.

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PUK and OGC

40. To enable the public sector to act as an effective partner, to work with the private sector and tap new sources of investment, we have established two new organisations: Partnerships UK (PUK) and the Office for Government Commerce (OGC).

41. PUK, as I am sure you all know, was established in June 2000 to help increase and improve investment in UK public services from private sources.  Its objective is to help us deliver PPPs that are developed quickly and efficiently; built on strong, stable relations with the private sector; with savings in development costs on both sides.

42. Of course, getting the structure right is no good if you do not have staff with the expertise and enthusiasm to see the projects through. The commitment of staff at all levels is essential to the success of the process: PUK has the experienced and expert staff to act as a resource for the whole of Government. 

43. But it is crucial to the success of PFI projects that individual Government departments also attract and retain staff who are able to manage PFI projects effectively. So we are also focussing on getting the right staff, with the right skills onto our most important projects, and encouraging enthusiasm and commitment at all levels of Government.

44. We also need to make sure we get the basics right.  That is why we set up the OGC 18 months ago as a central procurement organisation. It works with Departments and acts as a catalyst for improvements across the full range of central Government’s commercial activities. It is already beginning to add real value.  The Gateway process in particular is helping us to improve our procurement strategies, especially on large scale infrastructure and complex IT projects. 

45. But we also recognise that the one size fits all approach adopted in the past is not suited to the complexities of the modern world.  We know that solving today’s problems means producing individual tailored solutions. The decision as to whether some form of PPP is appropriate has to be made on a case-by-case basis, subject to the overriding tests of quality of delivery and value for money.

46. Where appropriate, the aim is to harness the innovation and disciplines of the private sector by introducing private sector investors who put their own capital at risk. The benefits of putting private sector capital at risk are all around us, in the hospitals and schools opening on time and on budget.

47. Taken together, the arrangements for PPP and the expertise of staff at PUK and OGC will enable us to get the best out of the public sector; exploit the wasted potential of public sector assets; manage risk more effectively; and deliver complex projects on time and on budget. This can only mean value for money for the taxpayer and enhanced services for the consumer. 

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Conclusion

48. I have said that we are making a sustained investment in our public services, but using the private sector to boost the quality of that investment too.

49. I know that in the areas I have discussed neither the public sector alone nor the private sector alone can deliver the services we all expect and demand. It is only through a partnership between the best of both, and with the support of workers at all levels, that we can deliver on our commitment to build a strong society and a dynamic economy.

50. Thank you for all that you are contributing. PUK and the OGC are doing a first rate job. Together with our public and private sector partners, you are making an invaluable contribution to Britain’s need for investment.

I thank you and wish a successful conference.

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