Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 80-99)



  80. That is probably an argument they should not have been built in the private sector in the first place. They should have been built in the public sector.
  (Mr Gershon) No, no, no.

  81. I have no great sympathy for that argument.
  (Mr Gershon) The private sector have also lost money on conventional procurement as well.

  82. I want to come back to that later on, to what happens when that does go wrong. Let me just continue down this track just a little bit more. The PFI and public sector development, I understand over a 60 year period would probably cost about the same but over a 30 year period the PFI is much more expensive than a public sector project, is that right?
  (Mr Gershon) Are you making that statement about the particular hospital project in your constituency?

  83. No, generally.
  (Mr Gershon) No, that is not true. That is not true as a generalisation.

  84. It is not true?
  (Mr Gershon) No.

  85. Is it true about the hospital in Durham, just as a matter of interest? You brought that up, I did not.
  (Mr Gershon) I would very much doubt it. I do not know the detail of the public sector comparator but I would doubt it.

  86. What happens if you find there is an excessive rate of return, what would you do?
  (Mr Gershon) As a result of the study?

  87. Yes?
  (Mr Gershon) We would need to look at what steps we would need to take to introduce more competition into the market place or what other factors might be driving it. It might be that there are some particular risks we are seeking to transfer which the private sector is putting a very, very high premium on which is not justified and it might be better to advise the public sector client to bring that risk back into the public sector. There could be a variety of reasons. I cannot be specific about it. I just illustrate two of the possibilities that might be taken if the scenario that you have outlined comes to pass.

  88. In your review will you be trying to discover if the project is making higher dividends than you thought in the first place and those dividends are cutting services, will you find that out in your survey?
  (Mr Gershon) No, no. This is looking at rates of return, it is not an attempt to correlate that with the quality of the service that is being delivered.

  89. Do you not think you should? My point is if high levels of rates of returns are being produced then they have to be paid for somehow. The only way I can see them being paid for is a cut in the service.
  (Mr Gershon) Let me try to explain. When you bid a fixed price for a contract, irrespective of whether it is PFI, any sort of asset based contract where you have to bid in some way a fixed price, firstly you have to estimate what your costs are then you have to look at the risks you are taking and price those risks. You have to set aside contingency money against those risks occurring.

  90. Yes.
  (Mr Gershon) Firstly you have to win the contract, you have to put a price on the table, you now win the contract. If you manage those risks very well you do not use all your contingencies which will lead you to a higher than anticipated rate of return. If you have got your estimating wrong, that may erode your contingency, it may consume all your contingency, in which case you are now into a position known as loss.

  91. Then you have to pay for that loss. How will you pay for that loss?
  (Mr Gershon) You have only got a fixed income coming in.

  92. Exactly.
  (Mr Gershon) Yes.

  93. That is what I am saying.
  (Mr Gershon) But the client has remedies against the contractor for failure to deliver the contracted level of service because you get deductions under the contract for poor performance.

  94. What you are saying is regardless of the performance of the contractor and regardless of the dividends that are made, this should not affect the service?
  (Mr Gershon) The client has the lever to enforce the contractor to perform and deliver the contracted level of service. If he does not his losses just get worse.

  95. Perhaps we are not going down the same track here. Let us just take the hospital as an example. If that hospital has to pay the contractor a certain amount of money per year, let us say £12 million a year, whatever it maybe.
  (Mr Gershon) For a contracted level of service?

  96. Right. That is for the building.
  (Mr Gershon) No.

  97. Not for the service?
  (Mr Gershon) No, no.

  98. They do not provide services?
  (Mr Gershon) They will provide hard facilities management.

  99. Yes, they will provide, perhaps, the car parking and the portering.
  (Mr Gershon) No.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 11 July 2002