Finance: In the public interest

A Labour government would set clear new priorities for calling on private finance. Andrew Smith outlines his plans for PFI to Paul Gosling

The private finance initiative will be retained if Labour wins the next election, but will be made publicly accountable and more effective, says Andrew Smith, the shadow chief secretary to the Treasury. He stresses that the PFI should be led by the public's demand for improved services and infrastructure, rather than by the private sector's ability to make a profit.

"The Government has not been clear about its strategic priorities," says Mr Smith. "The East Coast Main Line railway has had equivalent priority to a hospital car park in Eastbourne. It is better in the public interest and for private sector partners if government takes a clearer view of what things it believes a priority." This would assist contractors to avoid the heavy cost of pricing tenders for projects that will not be implemented, Mr Smith argues.

A Labour government would also improve training of public managers involved in PFI negotiation to raise skill levels, and introduce a task force to increase the number of schemes implemented. But Labour would end the current rule that all capital projects need to be considered under the PFI.

"We need to encourage public/private partnerships where efficiency gains are thereby realised," Mr Smith says. "That is not necessarily the case in all PFI agreements, and this is one of the problems with the Government's blanket requirement that all capital projects be submitted through the PFI procedure. A number are not suitable for PFI, and there have been delays and abortive costs in that blanket approach. The PFI will not be appropriate in all cases."

Mr Smith believes that the PFI rules need to be more flexible. "The public sector might indicate an equity stake which it is prepared to take in a project, and could then use the private sector and the capital markets for what they are good at, which is to price up the cost of the remaining capital necessary against the prospects of the future revenue stream, and thereby enable some projects to succeed which otherwise would not."

To assist private sector involvement, public bodies might accept an element of the risk, underwritten by insurance. But the public sector should not read this as allowing it to spend more. "There is no question of not having capital controls on local government. We are going to operate within strict rules on fiscal prudence and we do have to show where we save before we spend, and get the best possible value for money out of public expenditure that is undertaken," Mr Smith explains.

The PFI would be driven by bringing private sector expertise into the government's priorities. David Blunkett's initiative to group schools to achieve economies of scale to attract private finance was an example of how public need might be addressed.

"There is a very important difference in the ideology of the Conservatives and Labour on this issue," says Mr Smith. "For the Conservatives, the PFI has been driven by the privatisation agenda, and Kenneth Clarke referred to it as the privatisation of the capital decision-taking process - an abdication of the Government's responsibility to set public sector priorities. For us it is not a question of being led by the dogma of privatisation, but of combining the best that the public sector does together with the best the private sector can offer."

But all spending decisions must be properly costed, and Mr Smith argues that some existing PFI agreements may generate future contingent liabilities that are not accounted for. "It is very important for the future of the public finances and for the delivery of public services that we know what the future revenue liabilities amount to, and that they are good value for money, so that there is no question of current commitments crowding out the future in an unacceptable way," he says.

"The introduction of resource accounting alongside cash accounting does make it possible to have a better appreciation for the sake of public expenditure planning of the assets and liabilities that the Government is building up on behalf of people. The Government has extended that to a departmental level, but Labour would want to go further and put the national accounts on a balance-sheet basis so we could see total liabilities and total assets."

If a 'balance sheet for Britain' had been in place in the past, argues Mr Smith, there would have been greater public awareness and debate on the run-down of national assets, and of the move away from public borrowing for investment to borrowing for consumption.

"No one would expect a shareholder to make a long-term decision about a company without a balance sheet, and I don't see why taxpayers - or stakeholders - in the British economy should expect anything less," Mr Smith suggests.