Examination of Witnesses (Questions 60
- 79)
WEDNESDAY 21 JANUARY 1998
Mr J Mortimer, Treasury Officer of Accounts, further
examined.
Mr Love
60. Can I go back to your stated reason
for not wishing to give both contracts to the same person as being
the wish to create a market for future contracts. Can you give
us some idea of what you estimate to be the number of prisons
that will be put out to PFI in the future? What is your programme?
(Mr Tilt) That requires a complicated
answer. The last Government's policy was one that all new prisons
should be procured through the Private Finance Initiative and
the then Home Secretary made an announcement in 1993 that we would
procure six prisons in that way. We are continuing to complete
that programme of six DCMFs and the current round of Agecroft,
Pucklechurch and the ones that are currently out for the tender
brings us to that number of six. The new Government on coming
into office announced that it had some concern about the use and
position of the private sector in providing prison places and
whilst agreeing to continue with that programme of six DCMF prisons
asked us to undertake work to see whether a different version
of PFI could be used which would be designing, constructing and
financing the building but then managing it publicly. That work
is going on and is due to report in the context of the comprehensive
spending review in a few months' time. It is a little difficult
to say what the programme will be, if indeed there will be a programme,
beyond the existing six that are already in the pipeline.
61. Can I ask you, and this follows on,
it is stated in the report that four new prisons that were built
in the traditional methods have been contracted out.
(Mr Tilt) Yes.
62. Presumably there are no other prisons
which have been built by traditional methods but have any other
prisons been contracted out since that time?
(Mr Tilt) No, there are four plus
the six in this programme. Lowdham Grange sits separately actually
and would make that up to seven.
63. Can I go on. When you were asked a question
about the estimate that you had made that there would be ten per
cent savings under the PFI from the traditional comparator using
the private sector, you stated it was staffing, design, risk connected
to overrun?
(Mr Tilt) Yes.
64. Could that have been achieved by splitting
effectively the contract into two, into design and build, and
then contracting out to the private sector? Here I am stepping
back from the obvious priority that it be funded from the private
sector to see if we are getting value for money.
(Mr Tilt) Yes, it is very difficult
to answer that question. I do not think I can answer the question.
I understand precisely the point you are on. If we had had conventional
capital available to us, what would have been the outcome if we
had built it and then contracted out the management?
65. I ask that in the context of the question
the Chairman asked earlier on which was about the state of the
construction industry at that time. It was, to say the least,
extremely competitive. Some of the design and other risks that
you have associated with the additional savings I am sure, at
least it would be my view, would have been available at that time.
(Mr Tilt) The difficulty for us,
of course, is that to do it in that way would not have been a
DCMF, it would not have qualified because we would have been separating
off the service delivery, if you like, from the construction and
we would have ended up really in effect with a lease arrangement
for the construction if we were not careful. We did not approach
it in that way. We have always approached this as a PFI with the
need to have a service delivery contract over a fairly long period,
25 years. I was going to answer the point about the building industry
and whether it was particularly slack at that time. The analysis
that we made of cost and time overruns was based on the earlier
Audit Office report, 1994, in relation to a very large prison
building programme over I think about 15 years with 21 prisons
built where there had almost always been cost and time overruns.
Now there would have been times during that programme when the
building industry had similar sorts of slack. I think the difficulty
was the Property Services Agency had never been able to deliver
that absolutely spot on, at the time that we needed it and we
were well aware of the risks in all that.
66. I understand that. I have lost the thread
of the question I was going to go on to ask you. Can I move on
and I will come back to that in a second. You mentioned in relation
to the £19 million or other savings that you would have got
from giving both contracts to the same contractor that you were
extraordinarily nervous for two reasons. One of those was delays,
and I think you have touched upon that already, but part of the
whole contracting business is to write in or to transfer risk
so that the risk from delays is transferred to the PFI contractor.
(Mr Tilt) Yes.
67. Yet you have indicated that although
you had done some of that because of the pressures of prison numbers
there were still significant risks with yourself?
(Mr Tilt) Yes, you are quite right.
We did transfer some of the risk. Certainly we transferred risks
relating to cost overruns and there were provisions for time overruns
but they would not have covered the kind of numbers of prisoners
that we would have had to put into police cells if there had been
significant delay on either or both of these sites. There was
a very real risk for us. The other part of it, as I said earlier,
was also a worry about one operator, particularly one without
any experience of running a prison, trying to open up two at exactly
the same time.
68. The other reason you gave was about
being nervous about giving both contracts to someone who did not
have any previous experience. Yet that was exactly the contractor
that came up with the innovative solution. Can I ask you why having
come up with something which the Prison Service, over a very long
period of time had not been able to develop, and we heard your
colleague talking about fewer buildings, simpler structures, tighter
ground limits, all of which were developed by this so-called inexperienced
contractor, why could that very innovative solution not give you
some advantage that they could have carried through?
(Mr Tilt) You could turn that round
and say that the reason they came up with that was because they
had not got experience of running a prison. The first offer that
they put into us we modified, we asked them to modify because
we thought the first one was even more risky and the contract
price increased slightly as a result of us working on it and saying:
"We think there are certain requirements you must put into
this". I come back to a judgment that was made which was
that our experience with opening both public and private sector
new prisons is that it is a very difficult period actually. The
first 12 to 18 months is not easy. Routines are not in place,
prisoners will test those routines out right from the beginning
and everywhere we have seen opening new prisons is a difficult
business. If you have one company with no experience of it at
all trying to do that in two large new prisons you are stretching
their resources quite considerably. Now of course they would no
doubt have put more resources in if they had got two contracts
but there is a limit to the risk that we thought we were prepared
to take with them.
69. Does that not take me back to my original
point about splitting the contract in two? Does that not make
an additional argument for that?
(Mr Tilt) Yes.
70. I am really thinking of splitting it
in terms of the Fazakerley contract because it states quite clearly
in the report that Fazakerley, when you made a comparison with
the public sector, came out pretty well even.
(Mr Tilt) Yes.
71. Yet you have already indicated there
may well have been possibilities to make further savings in the
building contract.
(Mr Tilt) Yes.
72. Does that not throw into some relief
whether we actually achieved value for money from the Fazakerley
contract?
(Mr Tilt) Yes.
73. Especially in the light of both Bridgend
and subsequently the new contract as well.
(Mr Tilt) Yes, I think that is a
fair point and certainly as I was hinting earlier on from our
point of view, a straight build and then a management only contract
is an easier concept and one that we have already made to work
well with good cost savings. Of course what we have got out of
this that we have not had before is some transfer of risk. We
have transferred the cost and risk of maintenance to the contractor
so there are no costs to us in terms of maintaining it and we
get the building back at the end of the 25 year period in a suitable
condition having been maintained so that is an advantage to us.
Mr Campbell
74. Can I take you back to figure 11 just
to clear one or two points on what you said to Mr Leslie. If you
could explain a couple of things for me. I hear what you say about
the estimates that you built into your budget initially but the
actual cost for your advisers, according to this, is £1.55
million.
(Mr Tilt) Yes.
75. Which is described by some as twice
as high as you had estimated but is actually nearly three times
as much. Does that include VAT?
(Mr Tilt) No.
76. What would the effect of including VAT
be?
(Mr Tilt) Note one says that it
excludes VAT.
77. What would the effect of including VAT
be?
(Mr Tilt) I do not know.
78. Would you put VAT on all these services
that you sought from advisers?
(Mr Wilson) Yes.
79. So the figure is an eighth higher, is
that right? No, sorry.
(Mr Tilt) 17.5 per cent.
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