Examination of Witnesses (Questions 200-219)
MR PETER
GERSHON CBE, MR
PETER RYAN,
AND MR
COLIN BUSBY
WEDNESDAY 12 DECEMBER 2001
200. I am not talking to somebody in the Department
now.
(Mr Gershon) This is not good. 15 per cent showing
in refinance is clearly not acceptable. I have already indicated,
the action we have taken is to move the position that it will
become the norm in PFI contracts that there are explicit refinancing
gains in all contracts for 50:50.
201. Okay. Just very quickly. On figure 8, the
15 per cent refinancing benefit within a year, that will be near
100 per cent?
(Mr Gershon) We cannot retrospectively do that.
202. I know that.
(Mr Gershon) If you took a sample of contracts going
forward, let today, you would expect to see that number become
100 per cent.
203. Open booking accounting, 55 per cent now,
is that going to move to 100 per cent?
(Mr Gershon) There are a range of other techniques
to establish ongoing value for money. I would not necessarily
expect to see open book accounting used in all contracts. I would
expect the percentage to become much higher. I would not necessarily
expect to see all VFM mechanisms used in all contracts.
204. No, but if you have a target. This cloudy
language means people think they do not have to do it. I am talking
about your focus on benchmarking, open book accounting, and you
have already said about sharing of refinancing.
(Mr Gershon) Yes, and the Gateway Reviews explicitly
test how the department is planning in the pre-contract phase
to secure ongoing value for money in the post-contract phase.
205. You would expect benchmarking and open
book accounting in the future, is that true, just so we are clear
where you are going and where you have been?
(Mr Gershon) Yes.
Mr Davies: Thank you.
Chairman: That is a good way to answer on that.
Thank you, Mr Davies. Mr Bacon.
Mr Bacon
206. Mr Gershon, it is a pleasure to see you,
although I feel on this occasion you will be singing to me rather
than the other way round. The question which interests me is this
question about whether the public sector is "managing the
contracts well". You have said a number of times that you
are taking specific steps to improve the ability of the public
sector to manage these processes well. Can you just expand on
the specific steps a little for us?
(Mr Gershon) Yes. Take, firstly, the Gateway Review
process. That is testing various points in the life cycle of the
project, from the very earliest stage. You could relate that to
the earlier comment about women and sex, I am not sure I would
use it, to describe the very earliest stages of conception of
a project through into the operational phase, whether the departments
are taking account of best practice using sound management techniques,
how they are planning to resource the teams and whether they are
resourcing the teams with people of the appropriate skills and
experience. As we get a body of projects that have been through
that process, and given the period of time it takes for projects
to move from conception through to operational service, is going
to take a number of years before we see the full benefit of that
but we will see a growing body of projects that are on much stronger
foundations than a number of public sector projects which have
come in front of this Committee all too often in the past. That
is one of the steps we are taking. We are looking in a number
of areas to provide better advice and guidance, that is both at
what I describe as the operational and business level where the
OGC inherited an enormous volume of advice and guidance from its
antecedent organisations, and we are going through a process of
updating it and making it more coherent. Some of the advice which
came from different origins was inconsistent and in some cases
in conflict with each other. As an example of that, we are planning
that by the end of next March we will have provided revised operational
guidance in the area of contract management because we have looked
at our contract management guidance and it is inconsistent and
it needs updating to take account of helpful reports like this
and other reports which have shown the need for better contract
management advice. We have also identified that there is a need
to provide much more focused advice for accounting officers and
their management boards because in my experience it is very difficult
to expect a very senior busy manager to read a 50 or 100 page
advice document that is designed for middle management and practitioners.
We have produced these fold out two page documents which are trying
to help Accounting Officers focus on critical issues. We have
done three of those, two of which I think are relevant to this
hearing, which are about managing partnering relationships and
why service contracts can go wrong. We have another one on the
stocks, as I alluded to earlier, which is about how value for
money can be assessed and determined, the sorts of factors that
need to be taken into account in identifying value for money.
Whether it is PFI or non-PFI the generic issue is the same.
207. Can I interrupt you because it is all very
interesting and actually you have raised a couple of other questions
but I know I am going to run out of time if I do not interrupt
you. It leads on to a question I was going to ask later about
the position of the OGC in the firmament. One of the things you
said much earlier was if the OGC is consulted by departments they
get a very clear steer. To what extent is your job about getting
the attention of Accounting Officers and to what extent can you
invoke powers to require them to do what you want?
(Mr Gershon) I said that I want to win hearts and
minds because I am great believer that if you have people's hearts
and minds you can achieve far more change than if you instruct
them what to do.
208. I am asking the Lenin question "who
whom". Machiavelli said given the choice between having someone
fear you and having someone love you he would go for fear.
(Mr Gershon) My minister is the Chief Secretary of
the Treasury responsible for public expenditure and above him
sometimes sits Gordon Brown, the Chancellor, and it is known within
departments that if I feel they are doing something which is fundamentally
not conducive to value for money that I have escalation routes
to draw the matter to their attention. I would hope to win that
argument on a face to face basis with the departments but if I
cannot I have resort to that weapon.
209. You keep a little button under your desk.
(Mr Gershon) And I hope I never have to use it because
I would regard it as the nuclear option.
210. The Gateway Review process, as it is now
set up, is it something through which every project now goes as
a matter of course?
(Mr Gershon) Yes.
211. It is not an option for departments, they
have to go through it?
(Mr Gershon) In central civil government.
212. That brings me to paragraph 2.9. Presumably
you are referring to health authorities or local government that
do not necessarily go through that Gateway process, is that right?
(Mr Gershon) At the moment that is the case, yes.
213. Is that likely to change?
(Mr Gershon) I do not know. For example, the Byatt
review on local government procurement recommended the adoption
of a Gateway-like process for big capital projects in local authorities
and ministers are considering that recommendation. We are in discussion
at the moment with the NHS about how the Gateway process could
be used on some of their projects.
214. Considering the Sunday Times ten
days ago reported that between 16 and 20 per cent of all the health
service budget is wasted through fraud or inefficiency, I hope
you are right and something happens. In paragraph 2.9 it talks
about contract management manuals and how useful they can be but
"only a minority of authorities had produced such manuals"
whereas in actual fact where they were produced people were very
likely to regard their relationship as very good. It is basically
saying that if people have a very clear idea what they are supposed
to do because there is a contract manual then it is much more
likely that things will go very well. Plainly that being the case,
manuals being a very good idea, yet only a minority of authorities
having contract manuals, can you say when it is going to change
so that it is utterly standard to have a contract manual?
(Mr Gershon) What I can tell you is that in the revised
guidance that I referred to earlier about contract management,
this will feature in that as part of the updated advice and guidance.
I would certainly expect in Gateway Reviews that the review team
would be testing what methods were in place to facilitate the
ongoing management of the contract. Part of the evidence they
would be seeking would be a plan to produce a contract manual
of the type described here.
215. When do you think you will promulgate your
updated advice and guidance?
(Mr Gershon) On contract management we are targeting
to get that out by the end of next March.
216. So how long after that would you expect
local authorities and health authorities to have taken it up and
done something about it?
(Mr Gershon) As I have just said, my remit does not
extend either to local government or to the NHS at the moment.
217. Nonetheless, this is advice that you are
issuing which will be taken up throughout the public sector, will
it not, in some form or another?
(Mr Gershon) Yes. What I have said is we would then
see to what extent some of that we could then embody in terms
of advice that we do provide to the wider public sector through
PFI and encourage that to flow out across the wider public sector.
218. All I am saying is that I would find it
disappointing if we were reading a report like this in a year's
time where contract manuals were only issued in a minority of
cases even though plainly they have a good effect.
(Mr Gershon) I would agree. The experience to date
is where we have produced updated advice and guidance there is
an encouraging level of appetite in the wider public sector to
take our revised advice and guidance, even though there is no
mandate for people to do that, to take advantage of it. I think
it is encouraging that Sir Ian Byatt thought the Gateway Review
process had sufficient value to recommend it in his own review.
219. Can I ask you a specific question about
the transfer of risk. In paragraph 1.13 it talks about authorities
being tempted to transfer inappropriate risk. Mr Busby earlier
said the issue of risk is one where it ought to lie with whoever
is the most appropriate holder of that risk. What is the mindset
of the negotiator going into a negotiation? Is it, and one might
expect it to be, intuitively one would think it would be, "let
us offload as many risks as we can" and the commercial provider
trying to commercially accept as few risks as possible, or is
it in the minds of authorities, do you think, in negotiating consciously
to think about keeping risks themselves rather than transferring
them because of the consequence down the road?
(Mr Gershon) In the light of the experience that has
been gained, and as risk management processes become more mature
within departments, there is a greater awareness about what risks
are sensible to transfer, or to seek to transfer, to the private
sector and which ones need to be retained and plans put in place
as to how those risks should be managed. Catastrophic type risks,
like where you still have to provide a public service or the supplier
goes bankrupt, have to be thought about. Having said that, however,
the public sector will always be trying to extend the envelope
of risk that the private sector will take, what may be the optimal
allocation today may not be the optimal allocation tomorrow. As
the private sector gets a better understanding of the market they
may be willing to take more risks. So you would expect the negotiators
to be trying to push out the envelope, but to try to do that within
a framework that they are not trying to transfer risk which can
never be transferred wholly to the private sector.
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