Examination of Witnesses (Questions 1-19)
HM TREASURY &
PARTNERSHIPS UK
6 FEBRUARY 2008
Chairman: Good afternoon, welcome to
the Committee of Public Accounts where today we are looking at
the Comptroller and Auditor General's Report, Making Changes
in Operational PFI Projects. We welcome John Kingman and Gordon
McKechnie from the Treasury and James Stewart from PUK. You are
all very welcome. Before we start, it is a pleasure to welcome
a new Member to our Committee, Paul Burstow. We have to ask you
whether there are any changes from your declaration of interests
in the register of the House.
Mr Burstow: No, none whatsoever.
Q1 Chairman: You are very welcome
to the Committee. Mr Kingman, would you like to look at paragraph
2.4 on page 13 of the Comptroller and Auditor General's Report?
You will see there that there is a criticism that about 30% of
large changes worth £84 million had not been competed for,
even though they might have been. Why is that?
Mr Kingman: I believe it is the
case that the great bulk of the 27% described here was accounted
for by three very large projects. We operate a very strong presumption
in favour of competition but there are sometimes reasons why procuring
authorities can legitimately decide not to compete things. In
this case there were two prison projects and one hospital project.
In those three cases, there were reasons that were thought by
the procuring authorities to be good reasons not to compete.
Q2 Chairman: Is this a problem to
do with existing projects? Would new projects not have this kind
of difficulty? Would you be more on the ball with new projects?
Mr Kingman: The principle is the
same for any project, that is there is a strong presumption in
favour of competition, but there may sometimes be legitimate reasons
why a project is not competed. In those cases we would certainly
very strongly expect the project to be compared with a public
sector comparator. We would also expect prices to be benchmarked.
Q3 Chairman: Can we look at paragraph
2.13 and figure 9? This has received considerable publicity in
the press and one can understand why but there is a serious point
behind it. If you look at figure 9, you can see the cost of comparable
jobs carried out in 2006 often varied substantially across and
within projects; supplying and fitting an electrical socket, for
instance can vary from £30 to £302. There is clearly
something wrong with your benchmarking, is there not?
Mr Kingman: I think there is a
striking degree of variation but there is going to be variation.
My understanding is that, if one looks for example at the most
expensive socket here, which was at the top of a 30-foot high
ceiling in a school requiring scaffolding and all sorts of things,
that will sometimes be the case. From our point of view, we would
certainly want to see procuring authorities procuring these things
cheaply.
Q4 Chairman: But it is an extraordinary
variation and even if you have to go to the top of a very high
ceiling, it seems a lot of money to pay, does it not? What strikes
me about this whole Report—and this is a general comment
but you can reply to it—is that a great deal of time and
effort goes into drawing up these contracts originally, but sometimes
money leaks away because you do not have the staff to keep an
eye on these projects. Is that a fair criticism? You take your
eye off the ball in other words.
Mr Kingman: That can be an issue
and it is certainly something that procuring authorities need
to be careful about when they go into a PFI deal. A lot of people
have a sense that PFI is inflexible and it is interesting that
when the NAO went in to look at this, their overall conclusion
was that PFI can be flexible, that these deals are responsive
but there are also reasons to be careful about value for money
and we agree with the Report on that completely.
Q5 Chairman: Because the contractors
have always got their eye on the ball have they not? They are
always going to be looking at maximising their profit, so the
public sector has to be as good as they are all the way through
the contract.
Mr Kingman: Yes.
Q6 Chairman: Are you instilling that
ethos across the public sector? You cannot just put all this time
and effort in at the beginning and then walk away from a project
and expect it to look after itself.
Mr Kingman: I do entirely agree
with that, though I would add that it is just as much of an issue
in relation to a conventional procurement, where we have very
major challenges, to raise the public sector's game as a procuring
authority. PFI is particularly complex, but we have challenges
across the piece.
Q7 Chairman: This point is highlighted
in paragraph 3.8 where we see that over 15% of PFI projects do
not have a full-time contract manager. It is not surprising that
these contracts get themselves into a position where they cannot
be well managed, if they do not have a full-time contract manager,
given the amount of money often involved.
Mr Kingman: I would certainly
want to see PFI contracting authorities having the capability.
I do not know whether it is necessary in every case to have a
full-time contract manager, maybe one of my colleagues may want
to comment on that.
Q8 Chairman: It seems to be just
good practice and something that perhaps you would want to insist
on in the future in all large projects.
Mr Stewart: The guidance is clear
that people should have a full-time contract manager.
Q9 Chairman: So why are they not
doing it then?
Mr Stewart: It is ultimately the
decision of procurement bodies as to how they contract manage.
Q10 Chairman: But it is all public
money. As a result of this hearing, what steps are you going to
take to try to improve your hands-on management in the public
sector of these projects?
Mr Kingman: As James says, we
have guidance and that guidance is clear. We do not have the power
to buy all these things ourselves nor would that be sensible.
We are dependent on the decisions of procuring authorities and
local authorities but we are doing a lot to try to raise the standard
of procurement expertise across Government, we are doing procurement
capability reviews of every government department, we have a new
Head of OGC who is bringing a new energy to this drive. It is
very serious issue for us.
Q11 Chairman: Can we look at special
purchase vehicles mentioned in paragraph 2.20 and it is really
summed up by the heading there: "Management fees charged
by SPVs vary widely, are mostly unjustified and cost the public
sector approximately £6 million a year"? What are you
doing to get rid of them?
Mr Kingman: We are getting rid
of them. We completely agree with the NAO about this. We have
clear guidance which says that these fees are not justified.
Q12 Chairman: So you are getting
rid of them?
Mr Kingman: Yes.
Q13 Chairman: And if we were to come
back to you in a year or two's time, we would see that they were
no longer on the radar screen.
Mr Kingman: We are categoric in
our guidance. I cannot guarantee that every public authority will
follow our guidance but I would expect to see this having a major
effect.
Q14 Mr Bacon: You just said that
guidance is not always followed because it is ultimately up to
the authority to decide how to manage these things. I would like
to continue where the Chairman left off on the subject of management
fees because it says in paragraph 2.20 that SPVs, special purpose
vehicles, are paid for the day-to-day management of PFI projects,
including staff and other administrative costs. You would expect
they had already been remunerated for this and that this had been
priced in at the beginning and that essentially is your position,
is it not?
Mr Kingman: Absolutely.
Q15 Mr Bacon: I take it the guidance
you and I are talking about is this new SOPC4 that came out last
year, is it?
Mr Kingman: March 2007.
Q16 Mr Bacon: Is that the one that
says: "Thou shall not have management fees"?
Mr Kingman: Yes.
Q17 Mr Bacon: Why did it take so
long to come up with this brilliant idea that since you are paying
them to do it anyway, they should not be allowed to charge and
get away with charging on top?
Mr Kingman: What the Report says,
which is correct, is that this has been a growing phenomenon over
time and what we have done is respond to that with the guidance.
Q18 Mr Bacon: They have just been
creaming it basically, have they not?
Mr Kingman: There are fees which
we would certainly agree are not justified.
Q19 Mr Bacon: I would like to go
back a bit actually. I want to ask you a question about the report
in the FT yesterday about PFI because it quotes Ken Wilde,
a partner of Deloitte who is a member of the Financial Reporting
Advisory Board, on the subject of that proportion of PFI which
is not on balance sheet saying that while no-one can yet claim
to know the exact proportion, pretty much everyone now thinks
that all of it, or pretty much all of it will be coming back on.
You very kindly responded in correspondence with the Committee
in answer to queries of mine about the total outstanding annual
unitary charges which on a net present value basis are £91
billion. The FT refers to an extra £30 billion. Presumably
the difference is accounted for by the fact that it is not all
capital. As you said in your reply to us, to add PFI unitary payments
together and say that all of this should be added to the public
sector net debt would be akin to adding up the electricity, gas,
cleaning and food bills for a family home over the next 30 years
and saying that this amount is part of the mortgage debt on the
house. So when you add on, as presumably is likely to happen,
the stuff that is off balance sheet at the moment, it will not
include the facilities and management element of annual unitary
charges, but will include all of the capital. Is that basically
the gist of it?
Mr Kingman: Your understanding
of my letter is absolutely correct. What comes on balance sheet
depends on what the ONS decide and depends on what the new accounting
standard is. We have said that we will move to international financial
reporting standards in 2008-2009. We are in the process of discussing
draft guidance with the Financial Reporting Advisory Body and
with others, but until that standard is in place, until the ONS
have decided how they are going to take that into account in what
they decide for the national accounts, it is not possible to say
what will come on balance sheet.
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