Examination of Witnesses (Questions 40
- 59)
WEDNESDAY 21 JANUARY 1998
Mr J Mortimer, Treasury Officer of Accounts, further
examined.
40. It was an omission that that was not
in the tendering document.
(Mr Tilt) It was.
41. It is interesting to me that you put
it in that way. I wonder whether or not you decided, and kept
to that decision from 1994, that this strategic decision, that
was decided at a very early stage, there was no way all the way
through that was the intention and it never changed?
(Mr Tilt) In terms of discussions
that I and the Prisons board were involved in I would accept from
the spring of 1995 actually.
42. Spring 1995?
(Mr Tilt) Yes.
43. A letter had been sent out in 1994 saying
that the contracts would be awarded to separate bidders?
(Mr Tilt) Yes, indeed.
44. Had that been under review or discussion
in the interim?
(Mr Tilt) Obviously before you sign
the final contract and before you award the contracts, you want
to look at all the facts around at the time and you might have
concluded differently but the discussions that we had throughout
this process, certainly that I was aware of, were very much around
the risk of allowing one contractor to have both contracts. That
did not change throughout the discussions but it is not impossible
that it could have changed. The balance of the argument might
have swung; it did not.
45. I wonder if you seriously considered
perhaps awarding the contracts for both prisons to one bidder
or whether or not you ruled it out from an early stage and did
not seriously consider it? What would be your view about that?
(Mr Tilt) My view is that it was
considered that there was an overwhelming view against it, that
the risks were very high indeed for the reasons I have given,
both risks of not delivering on time and thus running us into
police cell occupation and police cell costs and the risks, particularly
related to Securicor, of possible disorder of trying to get two
quite large prisons off the ground at the same time.
46. Do you think there would have been any
more risk letting two than letting one?
(Mr Tilt) Yes.
47. Why?
(Mr Tilt) In terms of control and
disorder?
48. In terms of either delivering on time.
It seems to me that the reasoning you have come up with, apart
from this policy matter of deciding you want to develop a market
in custodial services is just as good at making clear that you
would not award to Costain at all. If you are going to award them
one, why not award them two?
(Mr Tilt) There are two points there,
one is what were our worries about. One of the worries related
to delivering the construction of the two places on time if the
company was trying to build two at the same time. In both cases
they were using new construction methods, quite innovatory, particularly,
so I think, at Parc and we were concerned about having to use
those in two different locations. Indeed the advice that we received
was that the sorts of discounts that were being offered would
only be achieved if the single contractor, that is to say Costain,
phased and used some of the equipment from Bridgend at Fazakerley.
Now that would have delayed the delivery of the places so that
was one concern. The other one on getting two new prisons off
the ground when you have no experience is quite simply that the
contractors, the approach they take, particularly as they come
into the market for running prisons, is to take on board expertise
at management level so that they can manage these. The speed at
which they take that on determines how fast you can run, how many
prisons you can run. Our experience has been that these places
are difficult to open and it is much better, much safer, to have
the company concentrating on getting one going than trying to
spread its effort across two places.
49. I wonder if you can tell me whether
this strategic decision to use public money and forego possible
savings in order to develop a market in custodial services was
one made by the Department or one made you? Is it a policy decision
or an operational decision?
(Mr Tilt) It was a decision made
by me.
50. It was made by the Prison Service not
by Ministers?
(Mr Tilt) No, that is correct.
Maria Eagle: I think that is all
I have.
Mr Leslie
51. I am not a lawyer, Mr Tilt, but reading
through some of this report I think it might be often profitable
if I was. Drawing your attention to figure 11 on page 55 of the
report, whilst I realise you have admitted that in terms the contract
for financial advisers was not open to competition and that was
wrong, I am interested in this 217 per cent rate of inflation,
the increase which occurred in the cost of your legal advisers,
Freshfields. They gave you an estimate of £200,000, it went
up to £634,000. Can you comment on that?
(Mr Tilt) Yes. I think that is not
quite a correct reading. It is not a 217 per cent increase in
inflation, the £200,000 was the estimate that we set, that
is what we thought we would need to spend. The fact that the actual
cost was £600,000 arose out of us having to do very much
more work than we had originally anticipated. As I said earlier,
it was new ground for us, we were not sure what it would cost.
We needed to put in some estimates for budget purposes but it
was very difficult to estimate what they would be. The whole process
went on much longer than we expected because we had to re-tender.
52. It is still a rather regrettable hike
in the price on your original estimate, is it not?
(Mr Tilt) Yes, it is a hike in the
spend rather than the price, if I can put it that way. Of course
it is regrettable but it is entirely understandable. I am not,
in retrospect, surprised about that. What I would say is, as I
said earlier, on the next competition with Lowdham we set our
budget at the beginning and we came in within that budget. I think
that demonstrates that we are learning lessons from all this and
we can control the fees.
53. I think a lot of people when we go out
and buy houses or whatever like to make sure that the legal advice
we get we can pin down and make sure that when we ask for certain
things we know we are not going to be given extra advice we do
not particularly want. I am keen to find out how you ensured that
in this contract with Freshfields you actually pinpointed and
got a definition of the type of costs you might be expected to
incur and whether any of those costs would lead to a price variation
of the sort that happens? In other words, should you not have
made sure that they detailed in advance aspects of their work
which could have been pinned down in this way and fixed costs
attached to variable costs?
(Mr Tilt) I think the problem is
the amount of work we asked rather than the price costing of particular
pieces of work, we simply asked for more and more work. I will
ask Mr Wilson to comment.
(Mr Wilson) The contract was let
in competition with a clear understanding of the fee rates. It
was subject to caps which were reviewed throughout. We endeavoured
also to keep our legal costs under control by only giving to Freshfields,
the work for which they were brought in because of their commercial
experience in the project finance and structural issues of the
contract. We gave other work relating to land to Government Property
Lawyers and statutory administrative matters to the Treasury Solicitors`
Department. We were seeking to use Freshfields where their specialist
expertise was particularly important but we could not control
the amount of hours required because of the complexity of what
was the first PFI contract for this kind of undertaking.
54. What you are saying is that there was
not significant overblown inflation, as it were, in the actual
costs that you were charged but you were under control the whole
time but asking for more work to be done.
(Mr Tilt) Absolutely.
55. That seems to conflict a little bit
with the National Audit Office, with what they say in the report.
Paragraph 4.14 " it is important that Departments should
not under estimate the likely complexity of the work involved
and hence establish an accurate budget for these costs even where
they may not be able to draw on experience of directly comparable
projects. They should also ensure that there are suitable arrangements
to monitor and cap such expenditure". In terms of the monitoring
of the expenditure in future, what lessons have you learnt and
what steps will you be making sure that you put in place?
(Mr Wilson) First of all we are
working from an existing contractual template. That limits quite
substantially the amount of work that has to be done, subject
to where we are seeking to change those terms where we are opening
issues such as risk transfer, and we have a much clearer idea
of the amount of time likely to be required for a process of this
kind. Also we have been able to improve the management of the
procurement process to reduce the number of meetings that are
required to resolve issues.
(Mr Tilt) On the Lowdham Grange
contract the budget for advisers' cost is £616,000 as against
the £1.5 million and we have come in half a per cent below
that.
56. I found this in many Private Finance
Initiatives before when you look at a whole range of advisers'
costs but particularly legal fees. It does seem to the casual
observer coming from the outside they are often plucking figures
out of the air. I often wonder whether it is more of an art than
a science?
(Mr Tilt) I think as we have exposed
certainly we under-estimated the scale and volume of the work
that was going to be required.
57. Mr Wilson, I think you talked about
you did put in place some form of cap initially?
(Mr Wilson) Yes.
58. Why in paragraph 4.14 does it urge you
to look at more suitable arrangements to cap expenditure in future?
Are the National Audit Office not implicitly criticising the strength
of the cap placed on that particular example?
(Mr Wilson) I think that I have
read that in terms of the cap it should be more realistically
based on the likely level of expenditure rather than the forecast
expenditure at the beginning which was far too optimistic because
we had no experience of this kind of work before. Now we have
had experience, as the Director General has said, we have been
able to run our professional fees within budget for the Lowdham
Grange contract.
59. I hope maybe in future you might be
able to get some public sector comparator also for your likely
legal fees to be coming in the future so that you can have a more
precise estimate of what you might expect to incur. Would you
think that would be a reasonable thing to look at?
(Mr Wilson) At the moment, within
Government, no part of the Legal Service is able to provide the
legal support on project finance that we need but we do seek to
use Government lawyers whenever possible. I think the day will
come when Government lawyers are available and we will be able
to move away from commercial firms.
(Mr Tilt) And construct a comparator.
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