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29 Jan 2003 : Column 947—continued

Mr. Flight: Not £745 million?

Mr. Bacon: No, the PFI was much closer than that. There was only £100,000 in it.

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I had a pocket calculator with me at the hearing and thought that the sum looked strange. It was almost dodgy: how could it be that close? Having done some calculations, I decided that a bit of jiggery-pokery had been going on. If we reduce the 29.5 per cent. figure, which is quoted as the risk as the percentage of base costs for capital expenditure, by 0.5 of 1 per cent.—from 29.5 to 29 per cent.—instead of the public sector comparator looking £100,000 more expensive, it suddenly looks £1 million cheaper. If instead of going from 29.5 per cent. to 29 per cent. we go down to 25 per cent., it looks £10 million cheaper. If we go down to 20 per cent., it looks £20 million cheaper. The question arises: how was the figure of 29.5 per cent. reached? What is so miraculous about it? What makes it so special? Why is the risk for "legislative change" 4.6 per cent.? Why is it not 3.6 per cent. or 9.6 per cent.?

I share my concerns about the public sector comparator with the hon. Member for Hemsworth (Jon Trickett). He used to be a building contractor. If his clients queried a price, I can only imagine what their reaction would have been had he said, "Don't worry, chum. I've put in this capital expenditure risk factor here of 29.5 per cent. on top of the base costs. Experience shows that this factor varies between 2 and 51 per cent. So if you take the difference between the two, divide it by two and add a little bit for a rainy day—if you really feel like it, divide by two thirds of the square root of the number you first thought of—then the 29.5 per cent. does indeed seem, well, how can I put it, guv, absolutely bang on the nail. You've definitely got the best possible price available." I imagine that had the hon. Gentleman said that, he would have got an answer involving some plain Anglo-Saxon words, possibly mentioning brass knobs.

The plain fact is that the public sector comparator provides enormous scope for manipulation to get the answer one wants by exploiting the inherent uncertainties of any given situation and the complexity of the financial models.

Mr. Jenkins: As someone who has been involved in the public sector, I have made decisions on purchasing and refurbishing contracts. If a contract came that close to the figure, I would have severe doubts about going down the PFI route. The marginal cost of maintaining my staff, expertise and ability to use my staff in future would make me decide firmly in favour of the public procurement route. [Interruption.]

Mr. Bacon: I would be grateful if the hon. Gentleman would rephrase his question succinctly. I did not hear all of it because of undoubtedly incisive and eloquent chuntering on the Front Bench.

Mr. Jenkins: If there was a close decision between PFI and public procurement, as someone who has had experience of such decision making, I can assure the hon. Gentleman that I would go down the public procurement route because it would mean that I could keep my staff, make a contribution to my overheads and be allowed to compare contracts as I would have a control group capable of putting a package together.

Mr. Bacon: I agree that a control group has merits. One does not have to rely on assurances from Ministers

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at the Dispatch Box that all the lessons that could be learned have been learned, and that everything is being done in the best possible way with the possible best motive for the best possible result, as one has something that one can look at. That point was made in a report, not by the National Audit Office, which advises us, but by the Audit Commission. A bit of competition between audit bodies does not seem to do anyone any harm. It may be true that those schools contracts referred to in the Audit Commission report were early phase contracts, but that is no reason why we should not go forward with some new conventional procurements so that we can run different systems side by side.

One worry about the contracts that I mentioned earlier is the fact that they are long term. The contract for the Treasury building, for example, runs for 35 years, as does the contract for West Middlesex university hospital. The contract for Norfolk and Norwich university hospital is for 60 years, with a break at 30 years. A short PFI contract lasts 20 years. The worry is whether it is possible to write a sufficiently flexible contract to allow for huge changes that could occur over such lengthy periods. Meanwhile, of course, annual unitary payments are obligatory. I appreciate the point that the Treasury frequently makes about acknowledging the need to pay whole-life costs, but the rational decision may be to let something decline because the resources are needed for something else. We need to consider whether the PFI allows us sufficient flexibility to do that. Running the two systems side by side would be a great way to check that in real time.

Mr. Frank Field (Birkenhead): As I was late arriving for the debate, I may not be successful in catching your eye, Mr. Deputy Speaker. However, as the hon. Gentleman is talking about the Ministry of Defence contract, it is invaluable to have the NAO evaluation, which compares the PFI with a more traditional redevelopment route. Basic questions need to be asked. If we assume that the MOD has more than 700 rooms, the redevelopment contract comes out at more than £1 million a room. Is any redevelopment costing that much sensible, given that the total cost of the contract is three times that for the new parliamentary building?

Mr. Bacon: I have a lot of sympathy with the right hon. Gentleman's point. Asking simple, fundamental questions is an important part of what our Committee does and I am staggered by the extent to which they are often not asked in Whitehall. When I asked the finance director of the NHS how much taxpayers' cash he expected to pay out, making allowances for inflation, during the lifetime of the contract for West Middlesex hospital, he did not know. He did not know the answer to that basic question. He did not know how much money he was spending, even though he had come to our Committee to talk about precisely that.

One of the Treasury's own advisers described the public sector comparator as "cretinous". The NAO is usually a paragon of understatement. As a member of the PAC, I have learned to savour its understatements like a fine burgundy. One of my favourite reports was entitled "Inappropriate adjustments to NHS waiting lists"—it was about managers fiddling the figures. Yet

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even the NAO was moved to describe the public sector comparator as "pseudo-scientific mumbo jumbo" which leads to "spurious precision" and

By its elegant and reserved standards, that is little short of apoplectic. Will the Financial Secretary assure us that the public sector comparator will be put out of its misery as a principal tool for decision making on PFI projects? At least, if it is not, I should be grateful for an explanation of how much longer we will have to flog this dead equine, which I am willing to do if required.

Will the Minister acknowledge that, for schemes of the same type, such as school schemes, it makes sense to run some PFI schemes alongside conventional procurements? That would help to measure outputs properly over the long term, and to maintain competitive pressure.

Will the Financial Secretary explain why the professional fees for the Treasury building were so high? How much more is there still to pay? How much cash is the taxpayer going to have to part with in total over the life of the project, including the eastern part of the building? Should I double my figure of £838 million? Why is the financial model for Exchequer Partnership (No. 2) not available for inspection at lawyers' offices and at the FSA? How does that square with the aim of becoming more open, transparent and accountable, which has been central to my remarks?

Finally, it is a huge pleasure to be on the Committee. I should like to thank Sir John Bourn and his staff, particularly the assistant auditors general, especially Jeremy Colman and Caroline Mawhood, with whom I have had close dealings. I also want to thank the NAO press office staff who do a tremendous job in promoting the work of the office and the Committee. Finally, I want to thank the people in the Clerks Office—Nick Wright, Richard Poureshagh and Ronnie Jefferson—who also do a tremendous job. They are very long suffering and hard working.

I look forward to the Committee's work in the year ahead.

5.1 pm

Jon Trickett (Hemsworth): It is a pleasure to follow the hon. Member for South Norfolk (Mr. Bacon), whose speech was typically robust and well researched. When he mentioned my contribution, I feared that I would be branded as a left-wing state socialist, rather than as a building contractor. I am not sure whether I would not be proud to be branded as such.

I, too, should like to thank the officers working for the Committee and the NAO. The Committee involves an enormous amount of paperwork. I occasionally misplace documents, and the staff have always been polite and efficient in providing replacements. I usually then find the original documents, and end up with two sets. That is wasteful, but I am grateful for the help that I receive.

It is a privilege to be on the Committee. We meet some of the finest minds in the public sector when we encounter the permanent secretaries and accounting officers who work for the various agencies and Departments. I have learned something about the organisational culture of the civil service. As has been said, things are done in the civil service that would not be done in the private sector.

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The British seem to prefer the dilettante culture. A person who is a good teacher will not necessarily be a good head teacher, nor a good athlete a good sports administrator. A good policy theorist should not necessarily become head of the NHS, but promotion in the civil service tends to go to the policy boffins rather than the managers. The British seem to make less of management as a skill than we should.

Secondly, a curious convention in the civil service is that current accounting officers take responsibility for the mistakes or successes of their predecessors. No doubt that tradition is honourable, but does it not militate against good management? In any other organisation, a person making a colossal blunder or a great success would receive the credit. The PAC often interviews people who are not responsible for the decisions or management functions being investigated. The innovation alluded to earlier by the hon. Member for Gainsborough (Mr. Leigh), the Committee Chairman, is very welcome. It will mean that the person responsible for a decision will appear before the Committee, rather than the current accounting manager.

My third point about the civil service's organisational culture is a curious one. We often discover that apparently criminal acts have been perpetrated—not by civil servants, but by those for whom services are provided. Yet there is a marked reluctance across the whole civil service, in almost every Department, to prosecute. Perhaps the British habit of tolerance is a good one, but to tolerate some of the criminal activities that appear to have taken place is taking tolerance a little too far. The Committee would like to see Government agencies taking a more robust attitude towards such matters than they have done, at least for as long as I have been on the Committee.

Moving away from organisational culture, I want to reflect on partisanship within the Committee. It is fascinating to see how the Committee, although it deals with the most tendentious political and other problems that our country faces, avoids the crime—if crime it be—of partisanship. We seem to be able to approach issues in a non-partisan way. I do not mean that I personally, or any other members of the Committee, have abandoned our politics, or the philosophical and moral underpinnings that brought us to a particular partisan position. I am usually guided in my questioning by a particular philosophical, political or moral perspective, but it is a good and worthwhile tradition that we avoid the crime of partisanship, which would diminish the Committee's work.

I intend to speak principally about the private finance initiative, and I shall illustrate the point that I have just made with reference to the PFI. It seems to me that it would be possible to approach it from an ideological point of view—to say that, for ideological reasons, the idea of a public service being provided either on or off the balance sheet of the public sector is either a bad thing or a good thing. However, we have not taken that line, and the Chair of the Committee regularly reminds us that we ought not to be asking such political and policy questions. When we address PFI matters, the civil servants frequently, almost habitually, say that this is not a question of something being on or off the balance

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sheet, but a pragmatic judgment that has to be made when particular functions, or a particular construction contract, is being taken out to PFI.

The normal argument in support of the PFI is that the Government are simply not very good at handling large-scale capital projects, which is why they are increasingly adopting the PFI. While I have been on the Committee public expenditure has increased substantially, and so has the extent to which the Government have used PFI as a means, or methodology, of achieving their objectives.

Whether or not the Government have not customarily handled capital contracts and building contractors very well, the Government, the Treasury or whoever else makes the decisions has now taken a further step, in saying that not only should building contracts and capital projects be handled externally through private contracts but that the financing of the contracts itself should be undertaken by the private sector.

When we interviewed Sir Andrew Turnbull, he said that the point of privatising—if I may use that word—the financing functions, which are conceptually separate from the building functions, was to use the expertise of private financiers to drive the building contractors hard, and that the leverage that the banks and other funding institutions would exercise over the builders and other main contractors would somehow enhance the private builders' capacity to deliver projects on time.

That is a persuasive argument, but when everything is taken into account I am not entirely convinced by it. Let me examine the way in which the PFI has operated in the schemes that we have considered during the year. We have been talking particularly about the Royal Armouries—in which I declare a marginal interest, because I was the leader of Leeds city council when the project was brought to Leeds—and the Treasury building. We also discussed a more general report called "Managing the Relationship to Secure a Successful Partnership in PFI Projects".

Taking those three papers together, I think there is an overwhelming case for saying that the PFI is not working to the advantage of the public sector. I shall highlight some of my causes for concern, which, as is the nature of the Committee, are pragmatic rather than ideological. It seems to me that, in general terms, the PFI has been biased in favour of the private sector. That has happened in many different ways, as the reports describe. I shall focus on the principles, not the detail.

First, the rate of return that the private sector has achieved from the PFI is substantially higher than that which it would achieve from other contracts. We were told that by the chairperson of the Major Contractors Group—the person who brings together all the building firms that work under the PFI. He told us that the builders were achieving a rate of return on turnover at least 1 per cent. higher than they would achieve on non-PFI building contracts. That is a huge amount of money, given the hundreds of millions of pounds involved. That suggests at the very least a lack of competition between the private contractors.

Secondly, as other hon. Members have said, the discount rate that the Treasury established—6 per cent.—was unusually high and has now been reduced substantially. We were told that it was high because the

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Government wanted to encourage the creation of a PFI marketplace, but the discount rate was extraordinarily biased. It probably cost the public purse tens of millions of pounds.

Thirdly, in the early days at least, PFI contracts had no provision to cover the situation where the financier refinanced the scheme after winning the contract. That produced windfalls of tens of millions of pounds of additional profit. As we all know, if we remortgage our house when interest rates are reduced, we can achieve a windfall. Contractors were doing that deliberately and there was no provision in the Government contracts to claw back any of that money. That has clearly changed now but, in the early days at least, refinancing was a major windfall for the private sector.

Fourthly, the risk that was allegedly being transferred from the public sector to the private sector when we went through the PFI, which has been given a number—millions of pounds of public money were involved—was rarely transferred. It would be unimaginable for a school or hospital to be allowed to go bankrupt; the Government would have to stand behind them as a lender of last resort. Precisely that happened in relation to the Royal Armouries museum; the paper is quite clear, so I need not go through it. Even the Treasury accepts, I think—the Committee certainly did—that the public sector stood behind the risk. In that sense, no risk had been transferred.

I want to mention one or two other points about the way in which the PFI operates. First, it must be said that the skill of the civil service in handling contractors has been lamentable. Hon. Members need not take my word for it; that statement was made to the Committee by the Office of Government Commerce, the official Government body now dealing with PFI contracts.

The National Audit Office conducted an opinion survey of those people in the public sector who were handling the PFI contracts. Mr. Gershon accepted in evidence to the Committee that he was unhappy about the blend of skills that the public sector had in negotiating the contracts. In 17 of 72 contracts there was a wholly inappropriate mix of skills among the people handling the building contract.

Worse, Mr. Gershon accepted that after the contract had been let, a wholly new team of civil servants was brought in to handle the contract. The people handling the contract were usually different from the people who had let the contract. The private sector would not make such a mistake. Mr. Gershon accepted my contention that two thirds of all the contracts being managed by the PFI were being managed by civil servants who had little or no involvement in the procurement of the contract—another fundamental error. It is lamentable that, by having inadequate management processes in the public sector, we have allowed the private sector to drive so much of the agenda.

The way in which the PFI was handled in relation to funding competitions raises many questions. Other hon. Members have said that more detailed analysis of its operation is needed. The Committee supported the statement made by the NAO that public finance would be much cheaper than private finance, and the only way to square the circle and be able to claim that the contract as a whole is cheaper in the private sector than it would

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be in the public sector is—to use a phrase that I have often used—by loading the dice against the public sector.

During our discussions on the PFI, it emerged that the private sector invented an entirely new way of handling contracts through the use of so-called due diligence. It struck me that that use of due diligence, which was invented by the private sector, is a tool that might well now be available to the civil service in its handling of contracts, and that much of the risk that we say we take if we retain contracts in-house could be obviated in that way. Sir Andrew Turnbull and I engaged in what could only be described as a round of shadow boxing on the subject, but I maintain that the use of due diligence by the civil service might well have obviated many of the risk factors that we supposedly handed over to the private sector through the PFI.

When the Committee interviewed the chair of the Major Contractors Group, it came as a surprise to me to learn that the various building contractors who allegedly compete with each other for PFI contracts meet regularly to discuss general matters, though not specific contracts. The fact that such a body exists suggests to me that if they do not discuss such matters at the table, with minutes taken, such discussions may well take place afterwards on the golf course—although I should say that the gentleman we met made some excellent points and I have no wish to impugn his professional integrity.

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