Examination of Witnesses (Questions 60-79)
HM TREASURY &
PARTNERSHIPS UK
20 JUNE 2007
Q60 Dr Pugh: Does market testing
make any difference to the bids coming in? If I have to sign up
to a contract I am a supplier and it had a very robust market
testing clause in it, that might make me have second thoughts
and might make me put my initial price up rather than down.
Mr Kingman: Let me give you some
figures on that. We are aware of 13 market tests that have taken
place to date from our database and, of those, 46% of the incumbents
have lost.
Q61 Dr Pugh: I was thinking more
of the effect on the initial bid knowing what the contract is
like. I admit that market testing is a more effective way of getting
the price down when you are underway but there is a presumption
that by allowing a reliable way of fixing of prices at a later
date that affects the initial bid price.
Mr Pocklington: I think it is
important looking back at the original bid price for the original
contract for the PFI to take into account the competitive process
under which these contracts are being signed. In our value-for-money
guidance, the framework for which all PFI contracts are obliged
to follow, the decision as to whether or not to include soft services
has to be taken on an objective value for money basis.
Q62 Dr Pugh: Okay, my final question
is specifically on the bidding process. You spoke earlier about
the benefit of competitive dialogue as a way of bringing more
people into the game, as it were, and it is supposed to reduce
the length of the tendering process. Have you got any feeling
for by how much the tendering process in terms of length of time
will be reduced because of better dialogue?
Mr Stewart: I am not sure there
is compelling evidence that it will reduce the tender times. I
think it is designed to improve the quality of procurement. We
will see whether it is going to reduce—
Q63 Dr Pugh: There are two indices,
are there not, there is the question of whether it encourages
more people to come into the game, and whether it reduces the
actual tendering process. One reason why people do not bid sometimes
is because of the length of the bidding process and they incur
significant costs which may not be worth it if they do not get
the contract in the end.
Mr Stewart: I do not think there
is evidence either way. We are in the early days of competitive
dialogue. What I can give you is some target procurement times
for different sectors. Building Schools for the Future
are targeting 19 to 22 months and the first four have come in
at 22 months, although those were under the old procedure. Waste
is now targeting 24 and street lighting is targeting 18 to 24.
They will be under competitive dialogue but, as I said, I think
it is really too early to go either way as to whether competitive
dialogue will reduce or not; there are swings and roundabouts.
Dr Pugh: Thank you, Chairman.
Chairman: Thank you very much. Mr Mitchell?
Q64 Mr Mitchell: It looks to me as
though, amiable chaps as you all are, you are desperately trying
to hold a tiger by the tail. PFI/PPP—it is all a matter
of ideology now and the Government wants it pushed and you can
manage a little bit of control at the margins, but basically it
all roars ahead and you lag behind and there is nothing much you
can do about it.
Mr Kingman: I think that would
be fair if the evidence did not show and the NAO studies did not
show that PFIs delivered markedly better outcomes for the public
sector than conventional procurement.
Q65 Mr Mitchell: It is not cheap
though.
Mr Kingman: On budget, when in
conventional procurement they are 75% over.
Q66 Mr Mitchell: On budget is a different
matter. It is supposed to be providing the buildings and the developments
more quickly and more cheaply and it is not.
Mr Kingman: I think we would say
that it is.
Mr Mitchell: Well, here you have an area
where greedy capitalists are invited into the public sector and
given the freedom on the grounds that they are more competitive
and these are chaps that know how to do it whereas the public
sector is full of stupid people who do not know how to do it.
Q67 Chairman: You can smile by the
way, it is a joke.
Mr Kingman: Thank you, Chairman.
Dr Pugh: There are no cameras.
Mr Mitchell: The dawn of socialism is
next Thursday so let us not spoil it!
Derek Wyatt: Dream on!
Q68 Mr Mitchell: These firms are
pretty skilled and they are well-advised and now they are very
experienced and they can run rings around you, and more particularly
around local authorities and hospital trusts and all the rest
of it.
Mr Kingman: We require every PFI
project to be assessed against a public sector comparator; that
is to say in order for something to go ahead as a PFI it must
be demonstrably better value for money than doing it through conventional
procurement.
Q69 Mr Mitchell: Not at lower cost.
Mr Kingman: But better value for
money and that is the test I would hope this Committee would want
us to apply.
Q70 Mr Mitchell: Okay, but you have
not been particularly diligent in trying to control it. Guidance
on benchmarking and market testing, as the last NAO Report suggested,
did not emerge until October last year. It does not seem there
is a supreme rush to get control of this situation.
Mr Kingman: We are at early stages
on benchmarking and market testing in the sense that the programme
is not at a stage where a lot of projects have got to that point,
so I would say we are on top of this, we have got a robust policy,
and the NAO agreed with us, I believe, that this is an approach
that will be better value for money than the one that prevailed
before.
Q71 Mr Mitchell: Turning to local
authorities, I cannot see how health authorities, to take the
case examples on page 24 of the Report, case example four, the
great success of Leeds, is paralleled by a much bigger set of
case examples, five, examples of mess-ups and cock-ups and overcharging
and general inadequacy. I cannot see that the small local authorities
and health authorities, which are inexperienced in these matters,
are going to be competent to deal with these powerfully articulated,
very professionally managed firms which are used to it now.
Mr Kingman: We absolutely agree
that that is a challenge and that procurement authorities around
the public sector have not always had the skills that they ought
to have done. What we have done is seek to put in place ways of
supporting them through things like the Operational Task Force,
standardised contracts, which I think help, and practical help
and support through Partnerships UK.
Q72 Mr Mitchell: But how does a small
local authority know the difference between a good and a bad client?
How is it in a position to evaluate the terms it has been offered?
Are we going to get a situation where they are trying to catch
up running from behind?
Mr Stewart: I think the greatest
challenge for any public body, and one of the prime causes of
delays and cost increases, is the problems in setting the specification
and actually defining the requirement they want. I think on the
evaluation side things are relatively okay because, to be honest,
they always have a financial adviser and the financial advisers
have done this in many other cases before and on strict evaluation
they get legal and financial advice which supports them, and so
I do not think the evaluation is a problem. What I think is much
more difficult is articulating and refining the requirement.
Q73 Mr Mitchell: Would it not be
better if you had a Treasury team, a fire brigade, that went in
and advised local authorities that are doing this?
Mr Kingman: We do, in the form
of Partnerships UK.
Q74 Mr Mitchell: You are reviewing
it when it comes in centrally, you do not send people out to advise
them.
Mr Kingman: We do.
Mr Stewart: Partnerships UK had
50 to 60 people during the period that this Report covers and
I think there were probably 200 projects in procurement, so there
is a limit to the extent to which a central team can put people
on the ground on these individual projects. Partnerships UK, as
agreed with our advisory council, which is full of people from
the public sector, the remit that we have agreed and criteria
that we use to select projects is that we will work individually
on large—
Q75 Mr Mitchell: That is a counsel
of despair, is it not, you have not even set up a training scheme
to tell people in the public sector how to handle these?
Mr Stewart: We have not but certainly
the Treasury and other central bodies have set up training schemes
so there is a training scheme run for the public sector
Q76 Mr Mitchell: Which is available
to local authorities and health trusts?
Mr Stewart: It is. I would add
that training can only take you so far. As people have pointed
out, these are complex procurements and there is nothing like
actual experience of negotiating these contracts, and just being
told how to do it for two days or even a week is not really sufficient.
Q77 Mr Mitchell: It is a bit of a
side issue but I can perhaps see the case, although I do not like
it, for a building contract for a hospital or a school but I cannot
see any case for a 30 or 35-year contract for catering. That just
puts an incumbent in an extremely powerful position of dominating
the market, what is the incentive on them to improve matters?
Mr Kingman: As I mentioned earlier,
we are rather carefully neutral. We are not in a position where
we are positively advocating the use of—
Q78 Mr Mitchell: Who is doing it
then?
Mr Kingman: There are situations,
particularly where it is integral to the nature of the project,
where it can work, but we would expect contracts of that kind
to be subject to regular market testing. That is what our guidance
says. That is to say that the incumbent can lose, as they have
done in as I say 46% of those to date.
Q79 Mr Mitchell: Might a bidder for
a PFI contract say, "We will build the hospital we also want
the catering"?
Mr Kingman: That is correct.
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