Examination of Witnesses (Questions 180-199)
MR PETER
GERSHON CBE, MR
PETER RYAN,
AND MR
COLIN BUSBY
WEDNESDAY 12 DECEMBER 2001
180. I know that but I asked you to give me
an indication of the spread of return or do you have no information
at all?
(Mr Gershon) We do not have that data, as yet.
181. You have begun that review but you have
no information at all having begun the review, is that correct?
(Mr Gershon) I do not expect to have until the external
reviewers are ready to report against their assignment.
182. Have you any idea, a rule of thumb, of
the sort of rate of returns you would expect or have you simply
no idea what the review will generate? You are a man of considerable
business experience, I know that, so what is reasonable, do you
think?
(Mr Gershon) I do not know what the review will highlight.
183. When you get the figures you will have
no idea how to evaluate whether it is fair or not?
(Mr Gershon) I can only tell you from my own experience,
which is largely not to do with PFI, what one might consider to
be acceptable rates of return if you were looking at an investment.
184. Precisely. So what sort of rates would
be reasonable for the private sector?
(Mr Gershon) If you were using the shareholders' own
money as opposed to using debt, if you were using equity to find
an investment, if it was an investment in a piece of capital not
just in a contract, in terms of internal rates of return, post
tax, in real terms, you would normally be looking at something
in the range of somewhere between eight and 15 per cent.
185. So eight to 15 per cent. So Mr Kier is
not doing very well for his shareholders, is he?
(Mr Gershon) No, what Mr Busby talked about—
186. Mr Busby, sorry.
(Mr Gershon)—was a margin which is looking at
a profit to sales ratio, which is not the same as looking at the
return on investment.
187. Fair enough. What is your return on investment
actually, Mr Busby, so we are not talking apples and pears?
(Mr Busby) The targets within PFI, and I think that
is the relevant here, are in line with Peter's estimate.
188. So eight to 15 per cent?
(Mr Busby) Post tax it is maximum 15.
189. I will move on, I do not want to get too
bogged down in this. Can I just ask the NAO something. I do not
want to dwell on this because Jon picked it up, but am I right
to say that this report is not really a test of value for money
and the like but simply, as has been put, a questionnaire and
one of the questions that emerges out of this is when are we going
to have a consistent methodology for measuring value for money
and PFI projects? This almost masquerades, so I was fooled, but
basically it is just asking a lot of people what they think, is
that right?
(Sir John Bourn) It is a report that does what it
says it does. It is a report that looks at the replies to a series
of questions on 121 projects. It shows what the people who were
responsible for the management of those projects believed to be
the case on the level of satisfaction as they saw it. It is not
less and it is not more than that.
190. Obviously there are all sorts of bias in
terms of who responds and all this as to whether they think it
is good or bad, but alongside that, given that PFI is the political
menu of the day, there will be a propensity for people to feel
they should say "this is great, we get a lot of added value".
(Sir John Bourn) I do not think there is any greater
incentive to say that than if they were people responsible for
a traditional procurement, because if that was what they were
working on and if you say because they are working on it and in
a way their careers are going to be judged on it, there will always
be a propensity to say that what you are doing is going well,
whether it is PFI or anything else.
191. Can I ask Mr Gershon, you mentioned you
did not know much about the PRIME project, did you not? I was
surprised by that.
(Mr Gershon) I am aware of the NAO report and what
I know is based on the NAO report.
192. I only mention my surprise because I understand
from the report that half of the total value of penalties paid
for failures of contract, half of £5.6 billion, on page 11,
1.22, was in this PRIME project. I would have thought you would
have found out quite a lot about the failures of that but you
did not, did you?
(Mr Gershon) That was an example of where the contractor
was contracted to do a defined level of service and in the initial
period—I think it was a year—of operation after hand
over he clearly struggled with great difficulty to meet the contractual
levels, fell short and paid a whopping penalty which then acted
as an incentive for him to sort out what he had to do. It had
exactly the desired effect in the eyes of the client.
193. More penalties mean good contract management.
Can I ask you about your wider commercial skills agenda. The situation
is that in the 1980s and 1990s we had the then Government bringing
in skills market testing and a huge exodus of procurement managers
from the Civil Service, a valuable asset, went to the private
sector. Alongside that we have got a situation now where different
people can enter different departments at the same level at widely
different salaries and there are big differentials between departments,
which stand as pillars, and that undermines the opportunity for
you to move procurement managers, contract managers, around the
system between departments. Is that a fair summary?
(Mr Gershon) It is not just looking at procurement
specialists in a narrow sense. It will look at things like project
management, contract management and other key disciplines that
are necessary to ensure the successful management of the whole
life cycle of a project. Yes, part of that is because departments
have to respond to the business needs that they face and the market
conditions at the time. If you have to go and recruit people today
—
194. Are you paying them enough, these people,
to match their private sector counterparts?
(Mr Gershon) I think I have been asked that question
on a previous occasion by this Committee when I was examined on
the management of the procurement of professional services. I
said at the time in a number of key skills areas there were big
pay differentials between what the private sector paid for certain
practitioner skills and what the public sector pays.
195. Are there differentials between departments
as well?
(Mr Gershon) There are also in some areas differentials
between departments.
196. Are there incentive systems?
(Mr Gershon) They have to be careful. In some instances
departments need people at a higher grade than other departments
and that clearly also drives salary.
197. Can I ask you something about figure 8.
It says in figure 8 we have a situation that only 55 per cent
of accounts are open book accounting. We cannot see profit transparency.
Only 49 per cent have benchmarking, so if unit costs go down in
the market place we cannot track down our costs. Only 15 per cent
are arrangements for sharing of refinancing gains. Do you not
think all those are very profound indications of failure to deliver
optimum value for money in PFI contracts across this sample?
(Mr Gershon) I did not catch the question.
198. Yes. All these indications, namely half
the people do not bother with benchmarking so if the unit costs
of what they are providing slips down they do not track that.
Only 15 per cent have arrangements for refinancing. Somebody comes
along and says "This is the cost" and they go off after
they have shown there is no risk, it was all a pretence or misunderstanding.
They refinance and lower costs of capital, make lots of money,
there is no arrangement for refinancing in 85 per cent of cases.
In 45 per cent of cases there is not transparent open book accounting,
as it is called, so both sides know how much money is being made
out of the deal. Do you not think that is a disgraceful situation
in terms of delivering value for money for the public sector?
What is your response to that?
(Mr Gershon) I think I have been asked that question
before.
199. You keep saying that. Can I have an answer,
not the answer "I have been asked that before". What
is the answer?
Chairman: I am afraid in this Committee Permanent
Secretaries get the same question over and over again. You have
to give the same answer.
(Mr Gershon) Right. Well, I will give exactly the
same answer as I gave before...
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