Examination of Witnesses (Questions 60-79)|
GERSHON CBE, MR
WEDNESDAY 12 DECEMBER 2001
60. We are politicians and we try to understand
opinion polls and that is what this really is. We also know that
opinion polls depend on accurate sampling. When you get a rogue
poll it is because the sample of population that was asked was
not truly random. We have only got a limited number of responses.
Ninety per cent of the authorities but only about three-quarters
of the contractors bothered to respond. If you look at the detail
of the report many of them did not fill all the questions in,
did they? They did not answer all the questions.
(Mr Finlay) Certainly in the answers on value for
money we got a high proportion of responses there.
61. What steps did you take to find out whether
the people who did not respond were not skewed in some way? How
do you know that the people who did not respond were the ones
who were most disgruntled, unhappy or confused?
(Mr Finlay) We certainly took steps to get as high
a response rate as possible.
62. Yes, but I did not ask you that question,
did I? How do you know that the ones who did not respond were
not the examples of worst practice?
(Mr Finlay) Clearly if we have not got the response
from an authority or a contractor then we do not know exactly
what their view of the contract is. What I would say is that having
devised the survey by reference to, as I say, virtually all central
government PFI contracts which had been in force for over a year
at the end of 2000, it was a virtually comprehensive sample that
we started from and the list of projects at the back does show
a very wide ranging list.<fu3>
<fo3> C&AG's Report, Appendix 2.
63. It does. I have made the point, which you
have not responded to but it is on the record because I have made
it, that even the ones who responded did not reply to every question.
In some cases your analysis was only based on 72 responses, in
table 12, for example. If we turn to the outcomes of this opinion
poll, I am surprised that anybody says we have not achieved value
for money because presumably they are required by their contracts
of employment to produce value for money. In a way it is back
to this motherhood and apple pie thing. When we looked at the
skill levels of the staff who were managing the contract I thought
that that was useful information. I think it is very valuable
to us. I will just turn to Mr Gershon. Are you happy with the
information which was revealed, for example, in table 12, admittedly
on a relatively small sample, which indicates that significant
numbers of the staff were not appropriately skilled or experienced
in managing contracts, does it not?
(Mr Gershon) The contract management team should have
had experience in the appropriate skills. I am happy with that
but there is some cause for concern with these figures. In any
team you would expect to see a blend of experience and appropriate
skills. Otherwise how will young people ever become the experienced
people of the future? Where you see the percentages below 50 per
cent, that would be cause for concern.
64. Seventeen out of 72 were precisely less
than 50 per cent.
(Mr Gershon) Yes.
65. So in 17 out of 72 cases, according to your
answer just now, and this is design and build, you are unhappy
with the blend of skills there.
(Mr Gershon) Yes, I am.
66. Then we note elsewhere that the number of
staff who were then transferred from having designed the contract,
prepared it and presumably let the contract to managing the contract,
it is fascinating that significant proportions of contracts were
managed by yet another group of staff who had not been involved
in the preparation of the contract. Are you content with that?
(Mr Gershon) No, I am not. It is because of that that
we recognised that that was a problem some time ago, which is
why in the Gateway review one of the things that is explicitly
tested is things like the skills and capabilities of the team
at the design and build stage and that the skills and capabilities
of the team at the procurement stage, and we also look at what
are the plans for contract management and test what plans the
department has for an acceptable level of continuity.
67. Two-thirds of the contracts were managed
by staff who had no or little involvement in the procurement of
(Mr Gershon) Incidentally, we may not like these results
but it does illustrate that people who answered the survey were
68. I am going to come back to the C&AG
in a moment because this question reveals two things: firstly,
contract preparation and contract management are conceptually
separate from a civil servant's point of view which I would have
thought you would be unhappy with; secondly, the people who are
preparing contracts are not all equipped to prepare those contracts
in many cases. The question then is, if that is the case, were
these the same people who replied to the questionnaire because
we are compounding the problem of levels of competence if we are
then asking these less than competent people to respond to say
whether they felt that the contract was well managed? I think
it rather proves the reverse of what you were saying, does it
not? Let us just stick to the question which is about levels of
competence in terms of contract management and contract preparation.
Are you happy with the information that has come out?
(Mr Gershon) I have just said that I was not. Ideally
I should like to have seen no entries in the 0-25 per cent and
the 26-50 per cent ranges. Mr Williams always thinks we are a
bit slow but in this area with the Gateway review process, from
when we first launched it last February, we have been helping
the department take a whole life approach to these forms of complex
projects, not just PFI contracts but other complex projects as
well, where we test explicitly for the skills in the public sector
team in the procurement phase and the plans for the skills in
the public and private sector teams in the design and build stage
and the service provision stage. We highlight to the Accounting
Officer where those reviews identify the sorts of weaknesses that
this report is also highlighting.
69. Let me go on to table 8. I may not have
time to get back to the C&AG. These are supposedly the ways
in which VFM was guaranteed objectively according to the perceptions
of the people responding to the opinion poll. It is interesting
to see that large numbers of contracts do not seem to have had
VFM exercises done on them, objective tests. If you take bench
marking, for example, which I am not totally convinced is an accurate
way of securing value for money, how convinced are you that the
staff who were doing the bench marking were competent?
(Mr Gershon) Bench marking as far as I am aware not
only involves the authority's own staff. They may well bring in
third parties who have specialist market knowledge to assist in
the bench marking exercise.
70. But it may well involving bringing in some
(Mr Gershon) There are examples that I am aware of
where I know that that has been done.
71. What guidance are you giving to the authorities
and the departments as to these types of methodologies for securing
VFM? Are you happy with these statistics?
(Mr Gershon) No, I cannot say I am happy because to
say 15 per cent shared in refinancing benefits is cause for concern.
I have indicated already through the revised advice and guidance
we are giving departments that we have to take a much stronger
position in the sharing of those sorts of benefits. The direct
answer to your question is no, I am not happy with those percentages
and we are doing something about it.
72. Okay. If I can just come back to the C&AG
because I have been given my short term warning that time is running
out. Mr Gershon is not too happy with the level of competence
that has been revealed in terms of contract management and the
procuring of contracts, the skill of those people. How happy are
you about the level of competence of the staff who fill in your
questionnaire? What steps did you take to ensure that these people
were competent? I would guess that if it landed on my desk and
I was the chief officer in the department I would pass it down
to the person who was doing the contract to fill it in and probably
make sure the boxes were filled in before it came back to yourself.
Is that apple pie and motherhood and things really? What is this
measuring, this document, in a way?
(Mr Finlay) In terms of the people who filled out
our questionnaires, they were sent to the people currently in
charge of the projects, whether that is on the authority side
or the contractor side. Certainly from a lot of the feedback that
we got, because we were regularly in touch with the people who
were completing these questionnaires, they were giving it a lot
of consideration and the people at the top of the teams, even
if they delegated part of the exercise to people beneath, the
people at the top of the team were taking responsibility for sending
it back to advisers.
73. Many of the people who were managing the
contracts had not actually prepared the contracts in the first
place. Let me just say thisI have to finishyou were
asking them had their perception of the value for money changed
and yet many of the people were either not qualified to manage
the contract and/or had not even prepared the contracts in the
(Sir John Bourn) If they had not prepared the contract
in the first place they were not parti pris to it and were
not under any obligation of previous activity to say what they
did not think. It was an opportunity for them to say what they
Jon Trickett: In trying to demonstrate the dynamics
of perception as they change over the lifetime of a contract,
we now know from this report actually that the staff were changing.
You were asking the staff at the time at which the survey went
out rather than the time it was submitted. I have now received
my final warning.
Chairman: You can still get an answer.
Jon Trickett: No, I would like to get the last
74. Page 10, paragraph 1.18, there is no need
for me to quote the paragraph but if you read the paragraph it
is very interesting, is it not, because really this does sum up
the whole of the PFI, does it not? In fact it is the whole basis
of the PFI, is it not? If the private sector do not get a big
enough rate of return they are hardly likely to be interested
in the project to begin with. They are only in it for the rate
of return, are they not? There are no altruistic reasons why they
are in it.
(Mr Gershon) The assumption is they are not charitable
organisations and they are there to make a reasonable rate of
return, as this report identifies.
(Mr Gershon) On the other hand, they are in the business,
not just in terms of what they do for the public sector but with
other customers as well, of providing high quality products, goods
and services because if they do not do that they will not make
reasonable rates of return and they will not prosper as private
sector organisations. The rate of return is a consequence of taking
business decisions and good management action.
76. For example, the hospital in Durham has
just been completed under PFI, my understanding is the contract
was based on the fact that there will be returns for shareholders
of something like 20 per cent. If you are building into a contract
that the shareholders are going to get 20 per cent dividends,
somebody has to be paying more money than the project is worth
in the first place, if we were in the public sector.
(Mr Gershon) I do not want to get into the deep water
we did at the GOGGS hearing about the complexities of some financing
issues, about what is the make up of a return and wherever a return
is necessarily commensurate with a dividend.
77. Presumably if a contractor is building into
a contract the fact that he must get 20 per cent return for his
shareholders, it must make the contract more expensive than it
would have been if it was built in the public sector. You do not
need 20 per cent.
(Mr Gershon) Mr Steinberg, let me try to explain this
issue about the cost of finance. I still remember the debate we
had here a couple of weeks ago. It is absolutely true that money
costs the public sector less than it costs the private sector.
(Mr Gershon) Typically, if you are a sort of credit
worthy private sector organisation, it costs about two and a half,
three, four percentage points more than it costs the public sector.
You are having to fund the construction cost of a project which
is, over the life time, typically around 20 to 25 per cent total
project costs. That is making overall about a one per cent difference.
If you take that extra to three to four per cent of 20 to 25 per
cent it is less than one per cent difference. If that was the
only thing then why would you do it but the whole point about
having the private sector focussing on not only construction responsibility
but having to take whole life responsibility is it should be able
to find efficiencies that far outweigh that additional cost of
79. At the end of the paragraph it says: "The
Office of Government Commerce is reviewing value for money and
levels of return the private sector gets on its investments...".
Why would it be doing that if it did not think the actual rate
of return was too high in the first place?
(Mr Gershon) Because as the market matures and the
risks become better understood by the private sector and the market
develops, you would expect to see that the rates of return are
diminishing over time more towards the sorts of averages the private
sector would earn in other market sectors. That is the piece of
work that I commissioned, to see whether that is happening in
practice. That is what the theory says should happen and I am
interested to assess whether it is happening in practice. You
would expect on the early contracts that the return the private
sector would make, provided the project was successful, would
be higher than they would be making in a mature market. We should
also bear in mind that some private sector organisations have
lost an arm and a leg on PFI contracts. They have not all gone
swimmingly well for the private sector.