Examination of Witnesses (Questions 20-39)
HM TREASURY &
PARTNERSHIPS UK
6 FEBRUARY 2008
Q20 Mr Bacon: Presumably though,
if some extra goes on balance sheet, then there is going to be
an effect on department budgets and for people who have a PFI
project where they are already paying an annual unitary charge
which includes capital, when it goes on balance sheet they are
going to get a double-whammy, are they not, because they are also
going to have to pay a capital charge?
Mr Kingman: We have made clear
to departments that we strongly support the present programme
of PFI procurement. If there were to be any balance sheet change
that had a budgetary impact, that is something we would discuss
with departments, but we have made clear to them that they should
continue to progress projects that are currently in the pipeline.
Q21 Mr Bacon: If there is a threshold,
which I think is 40% at the moment, would you just move the goalposts
slightly? At the end of the day, it is only an accounting change,
is it not?
Mr Kingman: Firstly, what happens
to the fiscal position depends on what the ONS conclude. Secondly,
the Chancellor would have to decide at the time anything that
relates to the fiscal rules.
Q22 Mr Bacon: You are being admirably
cautious Mr Kingman.
Mr Kingman: Indeed; it is my job.
Q23 Mr Bacon: I would like to ask you
about competition and in case example 6 on page 21, this was the
East Riding schools, a local authority project, it points out:
"As the project developed, it became apparent that there
were opportunities to enhance value for money outcomes where the
work was being sub-contracted. The Authority therefore sought
to introduce more transparent competition where changes are sub-contracted,
if necessary using contractors from the SPV's contract partners
or those from the Local Authority's approved contractor list.
The SPV has now agreed to follow the Local Authority's recently
revised competition requirements". Why do all projects not
follow that example which seems to be rather a good one?
Mr Stewart: As a general point,
it is interesting to say: "Where are the incentives both
for the public sector and the private sector to change what is
extant in existing contracts"? Slightly surprisingly, you
may be surprised to hear that the private sector is sometimes
as incentivised to change some of the variation protocols as the
public sector and particularly that is true on small changes.
On small changes, if they are not handled properly, it becomes
a complete pain in the neck for both private sector and the public
sector. What we have seen is a willingness from both sides to
put in place variation protocols. As you probably know, we put
in place recent guidance, but part of that guidance is not actually
saying that no-one has put in place a variation protocol for the
last five years because that is just not true. People have put
in place new variation protocols and what we are trying to do
now is to get a standard variation protocol right across the piece.
We would support what is said in the East Riding case as good
practice and in fact it is consistent with the guidance that has
come out.
Q24 Mr Bacon: I am quite surprised
to hear you say that the private sector have been supportive of
those changes as well. Figure 11 is a description of how the private
sector make extra money out of changes and how they justify extra
charges. They say, for example, that they have to take account
of the cost of tendering out the work to the sub-contractors,
although as the NAO points out, that is done for the vast majority
of cases. They say they have to consider the change and make sure
it can be implemented under the project agreement, although in
practice that is hardly ever an issue. They say they need to evaluate
lifecycle and risk implications, but actually in practice few
special purpose vehicles need to consider it for small works and
they need to bear in mind the cost of re-running the financial
model, although they should be re-running the financial model
anyway. The point is that for each of these things they have been
making money, between 5% and 25% on top of all the other charges.
Mr Stewart: What the guidance
does now, is distinguish between small changes, medium-sized changes
and large-sized changes. For instance, for small changes it is
quite explicit that no-one should be even considering re-running
a financial model. The guidance does differentiate as to how both
the public sector and the private sector should behave for small,
medium and large. I would say your comments are definitely true
for the large changes, perhaps true for some of the medium-sized
changes but not true for the small changes where a different procedure
is needed. What we have talked about in terms of the small changes,
is agreeing a schedule of rates between the public sector and
the private sector and that that schedule of rates should be revisited
at the beginning of each year. Even if you have a schedule of
rates, you have to bear in mind that some of these changes will
fall outside what is defined in that schedule and therefore a
discussion has to take place.
Q25 Mr Bacon: Could I ask for your
comments on a quote from a focus group on page 22? At the top
there is says: "Early on we had a proper project director,
we had commissioning teams, a commissioning nurse—we had
a full range of people. And, as soon as the contract was at the
operational stage, the director of facilities disappeared, they
all disappeared". Going back to the Chairman's point about
not having full-time contract directors, my sense is you have
a group of people, mostly in London, mostly working either for
investment banks or law firms or accounting firms or, like yourself,
for a sort of hybrid or for the Treasury, who all know each other,
so a fairly small world, who are in many cases extremely highly
paid and whose great interest is in the next deal. Once it is
done then you get on to the next deal and there is less interest
in the ongoing operational contract side. I can see someone behind
you nodding; the last time I said that the person rapidly stopped
and he has as well. It is interesting to see that nod because
it just reinforces my suspicion that what you have is this group
of people going round drinking each other's champagne in London
and some poor soul in a prison up in the north of England is trying
to run a contract without enough help, without enough guidance
and without enough support.
Mr Stewart: I suppose my only
response to that can be that we did take the initiative and, under
the auspices of the Treasury, set up the operational taskforce
in March 2006. For example, to deal with the regional point, we
have run nine regional workshops right around the country and
that is right across the UK, inviting all the contract managers
from projects to attend those workshops. We have probably had
between 40 and 50 people at each of those workshops. We have now
followed that up with training courses which are running at around
one a month where we have got, on average, 20 to 25 people coming
to those training courses. So we have made an effort to go out
and talk to people. I checked the stats this morning on our helpdesk
and we have had 461 calls and, as of today, that represents 206
different public sector organisations who have contacted our helpdesk.
Q26 Mr Bacon: Phoning you up and
saying: "Help. What do I do here?".
Mr Stewart: Yes, that is what
we are here for.
Q27 Mr Bacon: I am glad you have a helpdesk.
You are not all too busy signing off new deals then?
Mr Stewart: No.
Q28 Mr Bacon: I would like to ask
Mr McKechnie a question. You are Head of PFI Policy. I have always
been slightly worried about the fact that the Head of PFI Policy
in the Treasury always appears to be a secondee. I take it your
predecessor, Mr Abadie, has gone back to PricewaterhouseCoopers,
has he?
Mr McKechnie: Yes, he has.
Q29 Mr Bacon: And you are from Deloitte,
is that right? Is your salary paid by Deloitte?
Mr McKechnie: I am a partner of
Deloitte and I am paid by them.
Q30 Mr Bacon: You continue to be
paid by Deloitte so your being inside the Treasury is not a burden
on the public purse, so to speak?
Mr Kingman: There is a contractual
arrangement between us and Deloitte, as you would expect. I am
surprised that you are surprised. From my point of view it is
absolutely vital to have in the Treasury people who have done
this and really know where the bodies are buried.
Q31 Mr Bacon: It is just that the
phrase "PFI policy" kind of suggests that it is being
driven by outsiders.
Mr Kingman: It is not driven by
outsiders at all, but we do need to formulate policy in a way
that is savvy. I honestly think this Committee would be the first
to criticise us if we just had a bunch of bright young Treasury
civil servants doing their best; we would be skinned alive.
Q32 Chairman: On this question of
changes, what is your response to what is said in paragraph 1.10?
There does not seem to me to be value for money. "One in
five projects responding to our survey stated that work requested
as a change since they became operational had been considered
for inclusion in the original deal. In just under half of these
cases, work was taken out of the original deals for reasons of
affordability ... It is likely, however, that these projects will
have paid more to introduce this work after they were operational".
Mr Kingman: I would agree with
you Chairman. On the face of it, it does not appear to be good
value for money but it does slightly depend. If it is something
you knew you were going to need, then it is obviously silly not
to put that in the original contract rather than pay a price for
it later. If it is something that you might or might not need,
then it may be sensible to bring it into the contract later.
Q33 Nigel Griffiths: A lot of money
is expended in political commitment on PFI and this Report gives
the impression that you have a team that works on guidance, protocols
and how it should operate. It then gets shoved out to the deliverers
of projects that are very high cost; I am not saying they are
not value for money. Then you almost step back and if they start
messing up, you say: "Oh well, that is the price of local
democracy". Is that account an accurate one?
Mr Kingman: I do not believe we
have a political commitment or we are operating under a political
commitment as it were to pursue PFI for its own sake. We are quite
studiously neutral as between PFI and more conventional forms
of procurement. Our view is very clearly that you should only
pursue PFI if it is better value for money. We require every project
to be compared against a public sector comparator. It is true
that the Treasury cannot and does not have the capacity to second
guess every procurement judgment that is made out there. I do
not actually believe we are expert to do so and individual accounting
officers are responsible for those decisions. For the very largest,
we obviously take a close interest. We do have policies and, as
James has described, one of the reasons we set up his organisation
was so we could actively go out and hold people's hands out there.
Q34 Nigel Griffiths: You made a statement
which is not in the Report but which certainly raised my eyebrows
and that was that the impression given is that PFI is inflexible
on the ground. Whose fault is it if that is the impression?
Mr Kingman: I am sorry. My comment
was that I feel that people do have that perception.
Q35 Nigel Griffiths: Well whose fault
is that?
Mr Kingman: I do not know whether
it is anyone's fault, but people do have that perception.
Q36 Nigel Griffiths: It is the perception.
Mr Kingman: I think it is unfortunate
that people have an inaccurate perception; yes I do.
Q37 Nigel Griffiths: Whose job is
it to give them an accurate perception?
Mr Kingman: Ours and others, including
the NAO. That is one of the reasons this Report is helpful.
Q38 Nigel Griffiths: So it has been
a failure which is being addressed which is why the Report is
helpful.
Mr Kingman: It is not a good thing
if people have an inaccurate perception.
Q39 Nigel Griffiths: How have you
dealt with that?
Mr Kingman: We are out and about
all the time trying to put the case for intelligent approaches
to procurement. As I said earlier, we are not in the business
of proselytising for PFI for its own sake. We do think that it
has a place.
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