Examination of Witnesses (Questions 80-99)
MR PETER
GERSHON CBE, MR
PETER RYAN,
AND MR
COLIN BUSBY
WEDNESDAY 12 DECEMBER 2001
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.
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