Examination of Witnesses (Questions 1
- 19)
WEDNESDAY 21 JANUARY 1998
Mr J Mortimer, Treasury Officer of Accounts, further
examined.
Chairman
1. Good afternoon, everybody. This afternoon
we welcome Mr Richard Tilt, the Director General of the Prison
Service, to the Committee to discuss the Comptroller and Auditor
General's Report and the PFI contracts for the Bridgend and Fazakerley
prisons. Welcome again, Mr Tilt. I trust you are at least as well
fed today as you were the last time you were here!
(Mr Tilt) I hope so.
2. Could I ask you to start by introducing
your colleagues to the Committee.
(Mr Tilt) On my left I have Julian
Le Vay who is the Director of Finance at the Prison Service and
on my right is Tim Wilson who is the Head of the Contracts and
Competition group who has responsibility for negotiating these
contracts.
3. Thank you. I will start straight in.
Figure 10 on page 46 is the first thing I am talking to. It shows
in aggregate the two prisons are likely to cost 10 per cent less
under PFI than under the traditional procurement. Could you tell
us how these savings arise?
(Mr Tilt) Well, in embarking on
the bidding process we considered that it was necessary to construct
a public sector comparator and the details of the public sector
comparator are in the report. The contract price for the two places
added together was £513 million. That compares with the price
that is calculated on the public sector comparator of £567
million. That is how the 10 per cent arises.
4. Where were the savings?
(Mr Tilt) Oh, I see. Savings arising
out of different staffing arrangements, savings arising out of
different design arrangements, savings calculated on the basis
of risks connected to the history of these sorts of projects which
led usually to both cost and time overruns. And time overruns,
of course, would cause us considerable problems, apart from the
costs associated with them.
5. I see. Others may want to come back on
that.
(Mr Tilt) Yes.
6. Figure 10 also shows that while you achieved
a £53 million saving at Bridgend compared with traditional
procurement, the corresponding saving for Fazakerley was only
£1 million. Why were you unable to negotiate a better deal
on the Fazakerley contract?
(Mr Tilt) I think the principal
difference is to do with the designs submitted by the two potential
suppliers. The design suggested by Securicor at Bridgend was considerably
more innovative. It led to the possibility of lower staffing costs,
it had a greater reliance on new technology and IT particularly
and it allowed them to put in a lower bid. The construction at
Fazakerley by Group 4 Tarmac is a much more conventional one,
much closer to the designs which were being used in the public
sector, and has some higher staffing costs.
7. Paragraph 2.14 says that you estimated
the extra cost of not awarding both contracts to one bidder was
at least £19 million and there is some suggestion it might
even be more than that. Paragraph 2.15 shows that in fact this
cost might have been higher but you did not ask any bidder to
quantify savings that might have been available if they had been
awarded both contracts. Why did you do that?
(Mr Tilt) We were clear from the
beginning and throughout this process that we would be extraordinarily
nervous about awarding both contracts to one supplier, I think
on two grounds. One, we were worried that one contractor handling
both contracts might increase the risk of delays and we could
not afford delays because of the population pressures that we
were under so we did not want to take any risks with that at all.
In the case of Securicor they had no previous experience of running
a prison and we would have been nervous about allowing them to
take on two contracts with no previous experience. The same did
not apply to Group 4 who had got previous experience. Beyond that
we were also keen, given that we were into a programme of DCMF
prisons (PFI prisons) to ensure that we were beginning to create
a market so that we could subsequently ensure there were enough
people bidding to keep the process competitive. That is proving
to be the case and is confirmed very much by the Private Finance
Panel Report.
8. Remind me, Mr Tilt, what was the timing
of this contract being let?
(Mr Tilt) It was finally signed
at the end of 1995 but the process had been going on from 1994.
9. At a time when the building industry
was suffering a fair amount of competitive pressure.
(Mr Tilt) I cannot comment on that.
10. Again I am quite sure that others will
want to come back on that issue, perhaps in some detail. Paragraph
18 of the Executive Summary, to change the subject briefly, says
that you spent £1.6 million on advisers which was more than
double your initial estimate of £0.6 million. How did you
satisfy yourself that the higher than expected costs of advisers
represented value for money? I would like you particularly to
address the question of why you let the contract to Lazards without
any competition at all?
(Mr Tilt) I think it was extraordinarily
difficult to estimate what the costs were going to be. This was
completely new business for us, as indeed it was for the bidders.
The assessment that was made did not take account of all the difficulties
that we encountered, indeed as the report makes clear we had to
re- tender because the first exercise had to be aborted because
we could not persuade the potential bidders that they should accept
some of the risks that we were suggesting. We ended up with a
very much longer process than we had expected. It is not surprising
that the fees were therefore higher. I should say, we have learned
I think from the experience in that. In the competition for Lowdham
Grange, which has been completed now, we stayed within our budget
which was set at a very much lower level than the figure here.
That is because by then we were beginning to understand precisely
all the ramifications of the contract process. In terms of not
having a competition for Lazards, I entirely accept that in retrospect
that was wrong, we should have done that. Since then we have always
had competitions for advisers and will continue to do so. We did
embark, of course, on the contract with Lazards on the basis of
the fee rates that arose from an earlier competitive contract
but nonetheless I accept that we are open to criticism.
11. Again others may want to pursue that.
I will come to my last question before I open the questioning
up to the Committee. You mentioned the Lowdham Grange contract,
paragraph 3.11 says that the Prison Service subsequently let a
third PFI contract which was 21 per cent less than Bridgend and
36 per cent less than Fazakerley. What lessons did you learn from
the Bridgend and Fazakerley projects that will inform future PFI
contracts to achieve these savings in future?
(Mr Tilt) Part of the saving comes
from the fact that Lowdham Grange is in our terms a simpler contract,
a simpler business. It is a single function establishment, Category
B training prison. The other two, Altcourse and Park, were both
multi-functional local prisons taking in both young offenders
and potentially women as well as Category A prisoners. So there
would inevitably be a price reduction. It is a much simpler affair.
Some of the buildings that we required at Parc and Altcourse are
not required at Lowdham Grange but there is no doubt that as one
gets experience of the process then we get better at negotiating
good contracts. The market is competitive and we have taken some
benefit, I think, out of the establishment of the market that
came from this first competition.
12. Have you done a value engineering analysis
for that reason for the 36 per cent difference?
(Mr Wilson) We have an understanding
in terms of the different construction of the prison. Fazakerley
is much closer to the kind of prison that the Prison Service itself
would have been building: a large number of separate buildings
with considerable additional construction risks and within a much
larger area. Now from Bridgend through to Lowdham Grange we have
gone for fewer buildings, simpler structures, smaller, tighter
perimeters. The first competition gave us a template. Indeed,
when briefing contractors at the conclusion of that competition
we made it very clear that we were looking for further pressures
through competition to reduce the unit costs of the prisons that
we were procuring later but maintaining the same level of service.
Chairman: I recommend you do look
at a value engineering analysis. Let us open the questioning up.
Miss Maria Eagle.
Maria Eagle
13. Mr Tilt, nice to see you again, although
I still cannot quite see you properly. I wonder if you accept
my interpretation of the report in respect of Fazakerley Prison
in particular that you appear to have accepted a loss to the public
purse of up to £65 million-there is a question about how
much but up to £65 million-on the basis that you wish to
rig up a market in prison construction that did not previously
exist. Do you think that is a fair interpretation?
(Mr Tilt) No, I do not. I do not
wish to rig up any market. I did wish to construct a competitive
market.
14. Construct a competitive market.
(Mr Tilt) But on the figures that
you suggest, I do not recognise those figures at all.
15. Mr Tilt, do you think it is your job,
as an accounting officer of an agency, to pay for constructing
a competitive market?
(Mr Tilt) No. I think at the time
in the context of a policy of delivering new prison places through
the PFI it was important to us that we had a good market, that
we had a number of people who were prepared to engage in the bidding
process.
16. You were prepared to expend public money.
(Mr Tilt) Can we come back to the
question of the money. I do not recognise your figures.
17. They are in the National Audit Office
report.
(Mr Tilt) I do not think they are,
I do not see the figure £65 million in the report anywhere.
What the report suggests is that if you take the £19 million,
which is the difference that we acknowledge exists between the
contract prices, if you add to that the five per cent discount
that Securicor afterwards, post hoc, said that they might have
been prepared to offer, you get to a figure of £44 million.
So that is the maximum figure that I am aware of or that I am
aware of anywhere in the report.
18. You accept it could be up to £44
million?
(Mr Tilt) I accept it could be up
to £44 million but on the five per cent discount, it is perhaps
worth noting that did not appear in the competition.
19. You did not ask them?
(Mr Tilt) In the subsequent competition
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