Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 60-79)


17 OCTOBER 2005

  Q60  Greg Clark: The "enabling" word again.

  Mr Stewart: One thing to point out is that one of the objectives of LIFT was to put decent facilities in deprived areas and in that sense it was addressing a market failure. These facilities are generally going to deprived areas where the third party developers were not prepared to invest. In that sense we were not dealing with an economic market situation, we were dealing with market failure and therefore in that sort of situation enabling funds are appropriate.

  Q61  Greg Clark: I assume that these were not areas where there were no GP surgeries.

  Mr Stewart: No, but they were extremely rundown and there was a reluctance on the part of GPs to invest. We always joke about the leafy suburbs of Surrey where GPs are prepared to invest in their properties; it is indeed part of their pension. The majority of the investment in LIFT has gone into deprived areas where that sort of investment is no use.

  Greg Clark: Everyone wants a bright shiny new surgery and Dr Kohli has said how delighted he is with his, but some hard choices have to be made and I am not sure there is enough transparency between the allocation of funds into shiny new buildings and providing a more day-to-day treatment of patients.

  Q62  Jon Trickett: I am really very uneasy about this Report. I do not think it demonstrates value for money and we are meant to be a value for money committee. There appear to be two references to this and I am going to put all my questions to Sir John or his assistant. Paragraph 2.21 says ". . . value for money has largely been demonstrated by there being a competitive procurement" process in the main. So we are resting the proof of value for money on the fact that there is competition. Then at the end in Appendix 1, under Methodology, it says in paragraph 4 "The local LIFT models appear to be an effective mechanism clearly demonstrating value for money", but that is not the conclusion of the NAO, that is the conclusion of a kind of focus group type of operation called a Dinner Party. When you read the Report carefully it is actually bereft of financial analysis frankly. I read it twice and then I went to the methodology and in the methodology there is only one reference to financial analysis, the rest of it is qualitative analysis based on focus groups, expert panels, case studies and the case studies are just looking at document reviews and interviews with stakeholders. The vast bulk of the work which has been done has been qualitative. Paragraph 6 in the appendix on methodology talks about Operis. This firm appears to have been sub-contracted by the NAO to do the financial analysis. Why?

  Ms Leahy: Operis is a firm which specialises in looking at financial models and we do not have that specialist expertise in-house. We contracted with Operis to carry out a number of analyses on the basis of the information we had available and then there was a dialogue. They did not just produce information which we put into the Report.

  Q63  Jon Trickett: How many contractors were invited to tender for this work by the NAO?

  Ms Leahy: We appointed them on the basis of a framework agreement that we had with them which meant that because it was for a relatively small amount of money we did not have to go out to tender.

  Q64  Jon Trickett: As I thought; there was no tendering process yet the NAO rests the whole of its financial analysis basically on an iterative process with Operis where they appear to have been the sub-contractor. Was the NAO aware of the work which Operis does on LIFT schemes throughout the country?

  Ms Leahy: Yes.

  Q65  Jon Trickett: I just went to the Operis website 20 minutes before this meeting started and I discovered that on 30 September they advised a range of banks and other financial institutions on the Doncaster LIFT scheme, on 24 May they advised bankers and other private sector people on the Medway LIFT scheme and on 9 February they advised the same groups of people on the East Hampshire LIFT scheme. It seems surprising to me that we have not been out to tender, yet we have delegated the whole financial analysis to a company which is up to its neck in LIFT schemes, supposedly to advise us on an analysis of LIFT. How can it be that a company which is involved in LIFT schemes was used by the NAO to give the Committee of Public Accounts an appraisal of the content of LIFT schemes? How can that possibly happen?

  Ms Leahy: They ran the analysis through standard models and it was basically a mechanical exercise that they do very often and are familiar with and they gave the output to us. We have checked—

  Q66  Jon Trickett: You used a student at a university to assist you with your financial analysis of the Operis scheme, did you not? This appears to be another sub-contracting. Did we pay Mr Arshad Mahmood?

  Ms Leahy: He received a very small amount of money for the work that he did, but he did not check the Operis work, it was additional to the work.

  Q67  Jon Trickett: Did it not occur to you that the Committee of Public Accounts has to be above and beyond reproach and the advice we receive, which is to Parliament and therefore the taxpayer, has to be absolutely unimpeachable. You employ 700 or so accountants. How is it that we have chosen a company which is involved in a whole range of private sector schemes, but particularly LIFT schemes, to do the analysis of LIFT? How can that be? What reliance can we as Members put on this Report?

  Ms Leahy: I am sure you can rely on those figures. I am confident—

  Q68  Jon Trickett: There are no figures.

  Ms Leahy: I am confident that those figures are accurate figures.

  Q69  Jon Trickett: Which figures?

  Ms Leahy: The figures in Table 10 which came from the Operis report, the internal rates of return (IRR) percentages and the residual value. These figures came from putting numbers that we obtained through a model to get consistent information from the different parties.

  Q70  Jon Trickett: Let me ask you this. There are other ways of funding GP surgery buildings and the normal procedure for the NAO to advise the Committee of Public Accounts is to test what the market is saying against a public sector comparator. Why is there no public sector comparator?

  Ms Leahy: These schemes do have public sector comparators. We did not put that information here because value for money is not just the cost side of it and the costs over the period we are looking at would be very uncertain. Our definition of value for money which we put in the Report is a mixture of the whole life costs of the project compared with the benefits and the quality one can get—

  Q71  Jon Trickett: At the end of the day, certainly I as a Member of this Committee, expect to be able to have some kind of financial analysis. I accept that value for money is all about quality of service delivery, but with Dr Kohli saying that the costs of the scheme, and generally this is a GP view, tend to be very high and the fear therefore that money is being diverted into LIFT schemes from other types of financing I would have thought you would have thought that the Committee would be interested in the financial implications. In the London improvement zone mainstream NHS grant funding is available for enhancements to GPs' surgeries. What analysis have we done as to the cost of that relative to the cost of the LIFT scheme? Surely it would have been a direct real life comparison for us to analyse whether LIFT was giving us value for money in financial terms or not?

  Ms Leahy: The private development schemes are usually done in many different ways.

  Q72  Jon Trickett: This is not a private development, this is NHS grant, mainstream funded. Has any work been done on that? Public sector comparators can be either conceptual, as they often are, as we have debated many times, or they can be based on real life experiences. There are real life experiences inside London. There is no reference in this Report, no evidence that the NAO was aware of that. There is no attempt to build a comparator. Frankly this document is simply unsatisfactory. I could not possibly say, nor could anybody frankly, that this document demonstrates value for money. Mr Coates actually said—and I wrote down his words—"We will not know for some time whether value for money and success have been achieved" or not. Those were Mr Coates's own words; I wrote them down. Given that statement, does this Report, in your mind, demonstrate value for money? Sir John, I want to put you on the spot.

  Sir John Bourn: I think you make some good points about our financial analysis and I recognise that, although Ms Leahy has given some replies, we have not been able to take you with us. I will also say that we do echo your fears and also what Dr Kohli said because we have mentioned, for example in recommendation 9, the importance of actually evaluating whether these projects do turn out to provide value for money. We may not have been able to convince you that so far they have, but we certainly stand with you on the need for a framework, an evaluative arrangement to see how they work out in practice and to Report to the Committee on whether they work out well or badly.

  Q73  Jon Trickett: Is it possible that you knew what the answer would be if you did a financial appraisal and therefore you have adopted a methodology which actually avoids posing the very difficult questions as to whether these are developing value for money at all? That is the conclusion I have come to. You have side-stepped it.

  Sir John Bourn: That is not how we approached it, but I take the points you make and I shall reflect about them.

  Jon Trickett: I just feel that this NAO Report takes a major step, a step change from quantitative analysis based on a financial appraisal through to a qualitative analysis such that it is impossible for this Committee to express a view. Here we are asking a range of stakeholders, all of whom have a stake in the success of this scheme, what they believe has happened. These are the views of people. It is not an objective quantitative appraisal of the kind I would expect to come before this Committee. I protest actually about the way this has been put before us. Certainly I shall not be agreeing to this.

  Chairman: Is that a fair criticism, Sir John? We do not often have this sort of questioning put to you and that is why it is very important that it is taken very seriously.

  Jon Trickett: Particularly, Chairman, given the fact that we have used a contractor who is up to his neck in the LIFT schemes to advise the Committee.

  Q74  Chairman: Is there anything more that you feel you could have done to provide some quantitative as opposed to qualitative assessment to this Committee?

  Sir John Bourn: I would defend the use of a contractor. The fact that a contractor works in an area means that he becomes expert in it and it does not mean to say that he is only concerned with one of his customers. He is a professional person and he is concerned with a range of customers. I take the point that one could have taken a number of particular schemes and compared the cost of those with the ones which have come out of LIFT and one could certainly have done that. Of course what you would have had would have been a range of schemes which cost different amounts of money, partly perhaps because they were funded in different ways, but partly also because they were in different circumstances. One of the points about the whole of PFI in the National Health Service is that the government does not say that PFI is going to be cheaper. It recognises this and is prepared to pay over the odds to get it. Clearly I regret the fact that we have not taken Mr Trickett with us, but I would also make the two points that I have mentioned: you are going to find in some of these schemes that they are going to cost more doing it that way. We have also said that for the future it is necessary to have an evaluative framework which does not exist yet. I accept that we could have done this better, but I argue that the main points are there and ones which ride into the future justifiably.

  Q75  Jon Trickett: It is not for the NAO or PAC to get involved in policy or ideology. If the government decides it wants to do something which is more expensive, for whatever reason, than other ways of doing it that is up to the government. However, we are entitled and in fact should express an opinion as to the additional cost that policy incurs. That is our role and we ought not to duck it.

  Sir John Bourn: I will say that I am quite happy to come back to the Committee with a supplementary report which would have the list of schemes which had been funded directly by the NHS. I am happy to come back and put that information before the Committee.

  Chairman: That would be very useful; before we consider our Report.[4]

  Q76 Mr Bacon: I must say I have a limited amount of sympathy for the NAO's position, particularly relating to the public sector comparator, because this Committee has often criticised the public sector comparator. I suppose there is one sense in which you are damned if you do and you are damned if you do not, but it does seem to me that the answer to that is more information rather than less. I was slightly perplexed by one of Ms Leahy's answers. You described the financial modelling process as a standard, rather mechanical one. It did occur to me that if it is standard and rather mechanical, why is it that there is no in-house expertise and it has to be farmed out?

  Ms Leahy: We do have some in-house expertise, but we did not have it available at the time to do that. The resources were tied up at that time when we needed them and Operis were available and they do the sort of analysis that we wanted day in day out. We have used them for that sort of analysis in the past and it seemed good value to us to go to them rather than use other resources which could have been used on higher priorities in the National Audit Office. We saw it as a very straightforward low key decision to do that.

  Q77  Mr Bacon: This is obviously a financial committee and these are called finance trusts. Can you tell me where in the Report there are tables referring to millions of pounds spent?

  Ms Leahy: We do have the information on the plans for spending under LIFT for the six case studies in particular which we looked at for the Report. We concluded that what mattered for value for money were having a competition, a competitive procurement, looking at the finance terms which we have in a table in here, the cost of the debt.

  Q78  Mr Bacon: So you thought it was better to put in the cost of the debt. Actually you have put it in. I was just checking whether there was anything else I did not know about, that I missed, other than page 38 where there are some numbers. I had to dig around to find them, but they are in Appendix 2 on page 38. A capital sum is given for each of the various case studies. I personally would have preferred more of that sort of information, only in more detail, further up, but that is where I eventually found it. You put the point very succinctly earlier when you said that value for money is a mixture of the costs over the period, over the whole life costs, together with the benefits and the quality. I put that even more simply and it is essentially what this Committee spends its whole time looking at, namely, bangs for your buck. That is the real question. It is not whether the centre that Dr Kohli works in is or is not marvellous. I went to have a look at it the other day and it is marvellous and Dr Kohli himself told us what a pleasure it is to work there, how easy it is to attract staff, there are regeneration benefits, which I shall come onto if we have time, but it really is about bangs for the buck, how much you can squeeze out of the lemon. Dr Kohli, you have some experience of running other GP practices with GP partners in buildings which you yourselves owned before you came into the LIFT scheme. Is that right?

  Dr Kohli: Yes.

  Q79  Mr Bacon: Could you say how many partners, how big the building was?

  Dr Kohli: In 1990 I was a partner in a practice called Market Street Health Group where we had five partners and we built on a brownfield site something very similar to a LIFT concept. In this Report it is called a third party development, but actually we called it cost rent. Cost rent is in my world the original LIFT project. It was a device where GPs were incentivised to build and own and develop high quality premises. They were then the owners.

4   Ev 18-20 Back

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