Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1-19)




  1. Welcome to the Public Accounts Committee. We are considering the Comptroller's Report on Managing Relationships to Secure a Successful Partnership in PFI Projects. We are delighted to welcome back Mr Peter Gershon, who heads up the Office of Government Commerce, and we also welcome Mr Colin Busby who is Chairman of the Major Contractors Group and Chairman and Chief Executive of Kier Group PLC. Perhaps I could start with a question to you, Mr Gershon. Can I refer you please to page 2, paragraph 7, where it says: "In total 81 per cent of authorities said that value for money was currently satisfactory or better". To what do you attribute this positive outcome?

  (Mr Gershon) There are a number of factors, Chairman. There are competent staff applying good practice and guidance. There is management focus on value for money as a priority and the involvement of specialist experts to help get and keep projects on track, in other words what was the Treasury Task Force and has now become Partnerships UK. There is the discipline that PFI gives about the focus on outputs and service levels. I would also add that if you also take into account figure 36 on page 35, which shows some of the underlying trends, there is no room for complacency in that 81 per cent achievement.

  2. Can I question you a bit more about that? Can you tell us a bit more about the way in which you are monitoring the extent to which the expected value for money improvements for PFI contracts are being delivered? Are you monitoring it?
  (Mr Gershon) The overall responsibility for looking at individual projects rests with the individual accounting officers. Within the OGC we are looking at a number of sources of feedback. Firstly, as the Gateway review process cuts in, which I have referred to on a number of occasions when I have appeared at this Committee, the so-called Gate 5 Review is a formal review post the start of operational service to see whether the benefits in the original business case have been confirmed and to confirm what the clients are doing about the ongoing monitoring of value for money. As we get feedback from those reviews that will help inform us. We also get feedback from Partnerships UK, monitor National Audit Office reports and other reports on individual projects, and there is established networking with departmental private finance units which gives us additional feedback.

  3. Are you convinced that your department and, more importantly, other departments, are coping with change as these projects have very long lead times—30 years? Are you convinced that they have got their finger on what is going on?
  (Mr Gershon) First of all, not all of them are 30 years in length. Some of them are of rather shorter duration. Am I convinced? The short answer to that question is no, I am not convinced. Through things like the Gateway process we are helping to sharpen the focus on the whole life aspects of these and other forms of complex projects in public sector procurement. I think this report has acted as a very useful wake-up call about the importance of post-award contract management. Following the discussion and agreement at the last meeting of my Supervisory Board, the OGC has now commenced a programme of work in conjunction with departments looking at what we call the wider commercial skills agenda which explicitly includes a focus on contract management, and in due course that will result in a number of measures to help improve skills and capabilities in this area, for example, the introduction of new training courses and encouraging certain people to see that they can build careers in this sort of practitioner discipline.

  4. Would you like to turn to page 33? I just want to open up a number of areas that my colleagues can explore further. At paragraph 3.39 you will see there that 23 percent of authorities who gave us their current perception of value for money considered that value for money was not as good as at contract letting. I want to pursue this point about value for money being eroded during the life of a PFI contract. Have you got any more comments on that paragraph?
  (Mr Gershon) Of course this can happen in conventional procurement as well. I do not think this is unique to the Private Finance Initiative. I am dealing with one case of conventional procurement at the moment where I am very concerned about the potential deterioration in the value for money in the life of the contract. I use that as an example. What are we doing to improve client capability in this area? First, we have the introduction of the Gateway review process. As I said, there is also a greater focus on trying to get much more professionalism and stronger capability into the practitioners who are involved in disciplines like contract management. We want to build up a contract management network of PFI practitioners as the NAO has suggested in this report. Over time we will see a sharper focus about testing ongoing value for money in contracts. For example, in many long term contracts to do with property and construction, somewhere around the five or the seven year point in the life of a contract, the client has the option to go to the market again to re-run a competition for the provision of soft facilities management services. There are other mechanisms such as benchmarking, but we all have to look at how we can introduce stronger governance mechanisms through looking again at our advice and guidance to help improve clients' capability in this critical area.

  5. Can I ask you about one contract for the sake of example? I am told that in the Department of Work and Pensions there is a property deal called Prime. If we look at the management team in the department, nobody involved in the management team was involved in the original deal and nobody in the private sector side was involved in the original deal. This is rather worrying. Do you know about this particular contract?

  6. I am aware of that situation. We have seen some of the consequences of that. Certainly in the advice that we are giving to departments we are strongly encouraging them that there is a level of continuity between those people involved up to the point of contract award and those who are involved post-contract award. I do think that is important to help the partnering relationship get off to a good start, particularly in the early years of the contract, because if there is complete loss of memory on both sides about what led to particular agreements around the contract at negotiations, then it must increase the risk that the partnering relationship does not get off to a good start.

  7. And you knew about this particular situation with Prime, did you?
  (Mr Gershon) No, I did not. It did not go through the Gateway Review process. It was too far down the track to go through it. If it had done that issue would have been picked up because we explicitly test in these reviews for what the client and the supplier's contract management plans are in terms of resourcing.

  8. Will you now go back to page 17, and if we look at paragraph 2.8 you will see there that it says: "There were, however, many authorities which had provided little or no training in contract management skills either before staff took on contract management duties or in the form of follow-up training." Are you not worried that this is putting the public sector at risk on these important long term contracts?
  (Mr Gershon) I am concerned, but if you asked me the same question about non-PFI complex or novel projects I would give you exactly the same answer, Chairman. The key is about the actions that we are taking, some of which I have referred to already, which will lead to improved client capability to commission and manage projects which is in the area of advice and guidance, the use of the Gateway review process and the actions that will flow from a stronger focus on wider commercial skills.

  9. Can I ask a question now of Mr Busby? Can you please turn to page 20? If you look at paragraph 2.17 you will see that many contractors highlight the need for authorities to understand the operations of commercial organisations. That is a fairly obvious statement. It is a bit of a naive question but in what ways would such an understanding lead to improvements in the delivery of successful PFI contracts? It is a very easy question to let you have your say about the public sector.
  (Mr Busby) It does not sound very easy. It is in the area of risk allocation that most of the detailed debate happens in the early days of the contract negotiation side. A greater understanding in that particular area would be helpful. That is what I interpret as the commercial aspect. The particular point that concerns my organisation is one of time. Frequently during the leading up to and award of contracts, the time pressures are allowed to slip and it is an area that the private sector feels as though it struggles with. One gets the impression that a lot of the public sector organisations do not understand the importance of time to the private sector. Time is money in that area and the request that we would have would be to try and get a greater conforming to the timetable as laid down. It is in that type of area where most of these issues affect my particular members.

  10. If you go back to page 8 and look at paragraph 1.11, you will see that 79 per cent of authorities thought the risk allocation was totally satisfactory but only 53 per cent of contractors had this view. Do you want to tell me why you think that contractors and authorities had differing views on how risk transfer is worked out?
  (Mr Busby) There always will be a difference. I would suggest that the public sector would be worried if 100 per cent of contractors thought the risk allocation was ideal. The fact that there is debate in this area I would consider fundamentally healthy. I think it comes down to detail. There is the Gateway process that I know Peter's office has issued various announcements on. The fundamental criteria there as I understand it is that risks should be allocated to the party that is best able to manage them. That is a principle that we agree with. The debate that happens is on which party is best able to manage each individual risk. I feel as though it is a learning process. We are talking here of PFI. It is a process that has been around for a relatively short time. There are very steep learning curves in this process and one assumes that as PFI continues the detail of risk allocation will become a procedural rather than a discussion point.

  11. Mr Gershon, if you look at page 14, paragraph 1.38, you will see that 55 per cent of these authorities have already used the change procedures to update their contracts. How are you going to encourage authorities to achieve successful outcomes to any new service requirements?

  (Mr Gershon) If behind that quote was that this level of change is contributing to lack of success rather than success . . . I am not worried about this level of change because one of the things that the NAO have given us in general terms about the nature of these changes is that in the main they do not reflect very substantive changes to the contract post-award. A lot of them are of a fairly minor nature. The sort of example you might expect, I know from one or two contracts, is where the contract was placed on the basis that the supplier would do a set of testing and then the customer would do a set of testing. But in the period between contract award and the asset becoming ready for service and being introduced into service, the client and the supplier agreed to a joint testing approach. That would have to be reflected in a change to the contract. That is a highly beneficial change and reflects in some sense that the partnership is working well. On the other hand you could see a scope change post-contract award because of the needs for example of the prison service, if the role of a prison is changed to include provision for under-18 prisoners who require special additional facilities to ensure their protection. That would then lead to some change to the contract which was accommodated by the contractor. The percentage seems high but the nature of change does not lead me to believe that this is worrying. It might be helpful for Colin to say on a traditional procurement contract which his company has been involved in, the sort of level of changes they would see between contract award and the handover of the asset in a conventionally procured built contract.

  (Mr Busby) I think this whole area of change is a plus side for PFI. The example that Peter is asking me to relate to you was for a hospital procurement under the traditional form. My company has been involved in many of those and it is not unusual for such a traditional contract to have, say, 15,000 change orders during the construction phase of such a contract. I am sure there are plenty of examples where 15,000 is significantly under what has actually occurred. We have just finished a major general hospital in Scotland under PFI and the change orders through that process number less than 50. I am convinced that it is the PFI process that has caused that change to occur.

Mr Williams

  12. Mr Gershon, you have described this report as a useful wake-up call. As far as I understand it we are 400 contracts and £100 billion down the road. What happened to your alarm clock?
  (Mr Gershon) I described it as a wake-up call in terms of helping to focus attention on the importance of contract management, not in the sense that it is not happening today. It is, but it is a very powerful reminder that we need to continue to maintain and strengthen the focus on this area. That is entirely consistent with the remit of the OGC which was created in April 2000 to look at procurement in a whole life sense from cradle to grave, whereas historically procurement much more closely followed what happened pre-award. The Gateway process is a demonstrable example of how we have introduced a technique to support that whole life approach. I use this term in the sense that anything of this nature which helps draw to the attention of top management across the Civil Service to the importance of these disciplines I regard as being entirely helpful to my cause.

  13. You do? Do you not regret that they were not there before?
  (Mr Gershon) Of course I do.

  14. Are you not alarmed? For example, if I look at page 11, in banner headlines in the last column it says "Value for money mechanisms are needed". How is it that they are still needed at this stage? You yourself said that you are not actually monitoring; you are getting some information, but there seems to be no scientific assessment of value for money. Indeed, in the NAO report it is impressionistic whether it is good value for money or not. There is no empirical evidence here that it is good value for money. It is just the contractor saying it is good value for money and the people who enter into the contract say it is good value for money, but neither of them are going to throw up their hands up and say, "We got it wrong", are they?
  (Mr Gershon) What this report is looking at is what has happened over time between contract as contracts move into their implementation and operational service phase.

  15. No, no. The question is value for money. All we have here is impressionistic analysis of the views of the authorities and of the contractors on whether it was good value for money or not. You agreed this report.
  (Mr Gershon) Yes.

  16. If it does say value for money mechanisms are needed you must agree with me and with the report and with your department that indeed they are needed. Why are they so slow in coming?
  (Mr Gershon) As standardisation and advice and guidance affects more and more of the contracts they will include mechanisms for determining the ongoing value for money during the life of the contract. I referred to one example and, if you recollect, I was last in this room with Sir Andrew Turnbull when we looked at GOGGS. That has in it, for example, the provision at various points in the contract to re-complete the soft FM aspects of the contract which provides a real test as to whether that aspect of the contract is continuing to provide value for money.

  17. You quoted one example out of a hundred. You have agreed that there is a need, a gap, for mechanisms. Either you agree there is a gap or you do not. If you do not agree why did you sign up to the report?
  (Mr Gershon) If you look at the text that underpins this it highlights what authorities are already doing.

  18. Yes. That is what they are already doing but it says more are needed.
  (Mr Gershon) Yes.

  19. But it is 400 contracts. You quote one example.
  (Mr Gershon) You are assuming that in 400 contracts there are no value for money mechanisms in place. That is not the case. In a number of instances mechanisms such as the re-competing of the soft FM contracts may not yet have been triggered because insufficient time has passed in the life of the contract because typically that will happen at the five or seven year point.

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