Examination of Witnesses (Questions 40-59)
MR PETER
GERSHON CBE, MR
PETER RYAN,
AND MR
COLIN BUSBY
WEDNESDAY 12 DECEMBER 2001
40. How much more than 50 per cent? At present
you are at something like 80 per cent; is that right? Somewhere
in here I think I saw a figure of that sort.
(Mr Gershon) I am clear what number we should aim
for.
41. That is not the point. What are you getting?
(Mr Gershon) What is my belief?
42. Yes.
(Mr Gershon) How many would be better than satisfactory?
43. Yes, satisfactory or better by the end of
the contract. How many of the authorities will still think that
these were good value for money contracts when they come to their
final year?
(Mr Gershon) At least the same number who think they
are satisfactory or better today.
44. Really?
(Mr Gershon) Yes.
45. Although it seems to be falling, and yet
you are saying that from now on it is not going to fall any further
at all?
(Mr Gershon) First you asked me a question about what
would happen at the end of the contract, and that was the question
I answered. As I said, I think we are taking a number of measures
that will help clients' capability to manage these contracts and
strengthen the ability to derive value for money from them.
46. I hope you are right. Probably neither of
us will be here in the year when these contracts end.
(Mr Gershon) I sincerely hope that at periodic intervals
the NAO will do similar reviews to this so that we are all able
to monitor what is happening and the effectiveness of the management
actions that are being taken.
47. It will be very interesting to see how this
graph changes over the years, and no doubt the NAO will wish to
reproduce this graph as years go by. Mr Busby, may I ask you a
question? Twenty five of the firms concerned have had deductions
made as a result of failure to fulfil the contract terms totally.<fu2>
Are you not a bit worried about the figure? It seems to be quite
a lot. Presumably if they were, as one hoped they all were, tendering
for the minimum price which would nevertheless give them a reasonable
return on the amount of capital employed and the workforce employed,
and 25 of them have actually not got that price because they have
had deductions made as a result of failing to fulfil the contract,
is that not rather bad news for the contractors?
<fo2> C&AG's Report, para 1.22.
(Mr Busby) It certainly puts pressure
on contractors. If I can use the example of the hospital, the
contractors will get paid for two things in hospitals on the service
side. One is the provision of the service and the other is the
availability of the service. For example, if a ward is taken out
for maintenance the authority involved would be entitled to make
a deduction for that particular non-availability and would in
fact do so. It is that area where I believe the deductions have
been made. I do not think it is a fundamental assessment of the
performance under the contract. It is a process within it that
allows for deductions to happen in those terms.
48. So you are saying that this is not a case
in which they are making less of a profit than they thought they
were going to make?
(Mr Busby) It could easily be that, yes. I would expect
the deduction to reduce their profit undoubtedly.
49. I may want to come back to that later because
it was not quite how I understood it. Mr Gershon, are you aware
of any cases in which deductions could have been made but were
not?
(Mr Gershon) I personally am not aware of any such
cases.
50. Can I ask you now about the timescale for
putting these contracts into place? It seems to me from experience,
particularly in my own constituency, that very often putting a
PFI contract into place takes a hell of a lot longer than going
down a straightforward paid-for-by-the-government-out-of-public-funds
type of contract. Is that correct, in your experience?
(Mr Gershon) Yes, I think that is a fair top level
statement to make.
51. In that case what notice is taken of that
when you are deciding to go one way or the other, because clearly
if we are talking about providing public services, if you can
provide a public service perhaps at a slightly greater price now
or at a slightly lower price in five years' time and add on the
extra time taken to set up the contract, is notice taken of that
in making the decision as to whether you go one way or the other?
(Mr Gershon) Yes, but offsetting those delays is the
better performance that we are seeing of the private sector in
PFI contracts bringing the assets in on or ahead of the schedule
demanded by the contract compared to what we regrettably have
seen too often in the past, that through traditional procurement
the assets come late, sometimes many months, sometimes years and
years later than the original plan. Therefore, although yes, you
may get additional time at the beginning, you have to look at
what happens overall in the life of the project.
52. We are looking surely at value for money
in both cases. If you have a straightforward contract and it comes
in late, then presumably you have got something in the contract
that says you get some money back or the price is lower.
(Mr Gershon) I am sorry, that is not always the case.
In traditional procurement methods often the cost of the overrun
fell to the public sector, both the direct cost and the consequential
cost.
53. There is no reason for that, is there, if
you write the contract properly?
(Mr Gershon) But historically most public sector contracting
was not done on a prime contracting basis. It was done using more
traditional procurement methods where the client in effect acted
as his own prime contractor.
54. What you seem to be saying is that if you
go for a traditional procurement method but you introduce into
your contract some sort of penalty clause then that is very often
going to be better value for money than going for a PFI scheme?
(Mr Gershon) No, I am not saying that at all, because
there is a cost to the public sector of the asset coming in late
in terms of delayed services. The point you make about the additional
time is absolutely right. We are in discussion at the moment with
the industry association of which Colin is the Chairman, where
they have drawn to our attention a number of areas where the time
that was being taken is a matter of concern to them and I am in
dialogue with a number of the departments to understand what is
driving these excessive timescales which are giving rise to additional
cost for the private sector and the public sector to see what
we can do to shorten the timescales in PFI contracting. It is
not a given. There is no fundamental law of nature that says it
should take as long as it does for some of these contracts to
get awarded.
55. But it has done up to now.
(Mr Gershon) It has done up to now and it is a matter
that I am paying attention to.
Jon Trickett
56. I do not feel comfortable with this report
in some ways. Its methodology is really an opinion survey of a
number of people chosen we do not know quite how. I am not sure
that measuring perceptions tells us very much, especially when
you are asking people, "Are you in favour of motherhood or
apple pie?" Underlining some of my questions will be that
general theme, that we have here an opinion survey rather than
any objective study of value for money or anything else, although
there is some interesting information coming out of it. Sir John,
are you in favour of motherhood and apple pie? It seems to me
that the culture of this place now is that PFI is the latest flavour
of the month. Personally I am not particularly in favour of it
but I guess if you asked the majority of civil servants, "Are
you in favour of PFI and do you get value for money?", it
is a bit like saying, "Are you in favour of motherhood and
apple pie?"
(Sir John Bourn) Yes, but that of course was not what
the survey was about. The survey was about the experience that
people had of working the PFI contracts and the experience showed
that there was a degree of satisfaction. The experience also showed
that satisfaction was declining. The experience also showed that
on both sides people had ideas on how to make things better. It
was—and I do not claim for it any more than it was—a
survey of those people who were responsible for this work and
a survey of what their experience was. As Mr Gershon has said,
this is the first time that an attempt has been made to provide
information on this area at all and that does not mean to say
that we will not do further work which examines this from other
bases.
57. I have no doubt that there is useful information
in here but you really are asking people about perceptions: "Do
you perceive that you have had value for money?", and then
we have made a table which members have made much of about whether
the people who are managing accounts perceive that they have achieved
value for money. I guess most people are going to say yes, and
in a way it is a self-fulfilling approach. That is my view and
I just want to say that some of the people of whom we have asked
questions are clearly not equipped to give answers. I will demonstrate
that in the questions which I am going to address to yourself
and others. First of all can I ask on what basis you selected
the projects? There were 400 projects altogether. You chose 121
of them. Actually you did not even manage to get some of them
to reply, did you?
(Mr Finlay) The sample that we chose was virtually
all of central government PFI contracts.
58. Every one of them?
(Mr Finlay) At the end of 2000 which had been in force
for over a year. That was the basis of the sample.
59. Not everybody replied though, did they?
(Mr Finlay) Not everyone replied but we did get a
high proportion who replied. What I would also say is that although
you have mentioned that we asked perceptions about value for money,
which is absolutely true, we also asked a series of much more
detailed questions to build up a very close understanding of the
mechanics of what was going on.
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