Examination of Witnesses (Question Numbers
119-212)
Andrew Hudson, David Pitchford and Andrew Rose
15 June 2011
Q119 Chair: Welcome
Mr Hudson, Mr Pitchford and Mr Rose, and apologies for keeping
you waiting. The Treasury has championed PFI over time in the
past, and I think some of us have some sympathy with the purpose
of it, which was to renew our infrastructure when public finances
were not freely available. Could you have done more to stop the
taxpayer getting as ripped off as we feel we are?
Andrew Hudson:
What we have done over time is to strengthen our guidances.
We have always been committed to doing PFI when it is value for
money. That was the principle that we operated under the policies
of the previous Government, and since the election we have intensified
that drive for value for money. Without accepting your accusation
of being ripped off, we have championed it on the basis that people
should go for PFI where it offers value for money for the taxpayer,
and we have sought to learn the lessons as we go along and strengthen
our assessment of value for money so that has improved over time,
and we are continuing to do that.
Q120 Chair: Let
me just put it to you, whether or not you accept it, this is a
crossparty view on whether we have had value for money,
it is not a partisan view, and I think crossparty there
is probably a recognition that we may need a form of PFI as we
go forward if we are going to continue renewing our infrastructure.
There is a real interest in finding out what has worked, what
has not worked, to inform future policy. One of the justifications,
for example, has been transfer of risk. That is one of the ways
in which you have attempted to assess value for money. To be
absolutely honest, if you are looking at a 30 to 40-year period
your ability to model that in a way that has any validity is pretty
questionable. You cannot really assess the transfer of risk:
am I not right in that? Does not all the evidence we have on
the profit that appears to have been made by some of the companies
involved—or the cost of the service provided—suggest
that there has not really been a proper transfer of risk?
Andrew Hudson:
I think we have. Our business case methodology does look very
closely at transfer of risk. As I have said, over time we have
improved scrutiny of business cases.
Q121 Chair: Do
you really think you have done it? Do you really, really, really
think that the assessments by Treasury properly reflect that transfer?
I just think that is a laugh.
Andrew Hudson:
Yes, I do, because this is an intrinsic part of the assessment.
Some of the risks that have been transferred have come out in
the discussion earlier on about what happens when something is
not done, when the hospital is not maintained properly. Now,
it is clear that that risk lies with the operator under PFI: that
is being transferred, that is part of the deal. I remember in
the late 1990s, when I was in charge of the Health team in the
Treasury going round and visiting some hospitals where the maintenance
plainly had not been done and patients and staff were suffering
because of that. That is an example of where PFI deals—properly
done, properly specified, properly evaluated; I accept that this
is absolutely essential if the taxpayer is to get good value for
money out of this approach to procurement—have their place.
Q122 Nick Smith:
Mr Metter was very bullish on that. What he said was, "Customer
satisfaction rates are very high." Is that your experience
of all these PFI projects across the country, then?
Andrew Hudson:
Mr Metter is an operator; he will know about his own business.
I have not got data right across the board. But the experience
is that these deals are now out there, they are happening and
they are working. They are delivering the services. We certainly
want to improve value for money wherever we can, and we are looking
for opportunities to do that, for example the pilot that is going
on in Romford about operational savings at the moment. We are
not at all complacent about where things are, but we have done
an evaluation and we expect the standards that have been set in
those contracts to be delivered. If they are not, then the private
sector operator is on the hook.
Q123 Nick Smith:
How do you explain the contradiction? When I go to Ebbw Vale
High Street, and like Mr Baker, I talk to people about PFI deals,
they all say "isn't it just a big rip off?" That is
what we all think, but you are here saying that you think it works;
Mr Metter is very bullish. Explain this contradiction to us.
Andrew Hudson:
Your original question was about whether the services are being
delivered, and Mr Bacon acknowledged a few minutes ago that the
Norfolk and Norwich was a good hospital, while making his criticisms
of the costs very plain. There have been quite a lot of media
stories about rip-offs, and some high figures estimated. One
of the points that emerges from the NAO Report—which we
are working with them on, because we share their concern, and
we discussed this with the Committee in October when we were last
discussing PFI issues with you—is the question of equity
returns, which is the topic that seems to attract most attention
when people are discussing "rip-offs". We share the
NAO's concern in the current Report that the information on this
could be better, and we are doing a joint piece of work with the
NAO to improve our understanding of that topic.
Q124 Chair: But
if that is the case, why do you not accept that people can FOI
private sector companies where they are involved in private sector
contracts? Why did you reject that? Why the hell do we not do
it now? I cannot see the reason for it. There is a public interest
in knowing whether or not we are getting value for money out of
these contracts that might sit in the private sector but are financed
through the public purse. Why can't we have FOIs on them?
Andrew Hudson:
I was not involved in that decision personally, but I will answer
the question. I think it is that these are private deals, they
are commercially sensitive.
Q125 Chair: It
is public money.
Andrew Hudson:
I can understand; it is public money, but I come back to the
point that it is about the inner workings of private sector companies,
which are not subject to FOI in other contexts.
Q126 Chair: There
is a suspicion around that we are not getting a good deal, and
you think we are, and the previous witnesses also thought we were.
One of the ways of killing this whole argument is to actually
open up the books.
Andrew Hudson:
If the issue is about greater transparency generally, then I come
back to the point I was making, that with the NAO we are looking
for ways of getting better information on equity returns.
Q127 Chair: Why
not FOI it? Why not allow the FOI rules to apply? That gives
you the transparency.
Andrew Hudson:
For me, that opens up a wider range of issues about the applicability
to FOI.
Chair: Why?
Q128 Mr Bacon:
Surely the issue is your answer when the Chair asked that question
first time around: these are private companies. Her point I am
sure would be—as mine is—it is taxpayers' money, through
the annual unitary charge, that is funding all of this. My concern
is not merely that you cannot follow it all the way through and
see what is going on; we as a Committee cannot, and the National
Audit Office cannot, the authorities themselves cannot in the
deals. If you look at page 17 of the Report, figure 2, "the
Ministry of Defence identified the potential to transfer risk
to the contractor on the Future Strategic Tanker Aircraft PFI
contract. It had access to some cost data but was unable to determine
if it was paying an appropriate margin for the aircraft, as it
never gained visibility of the subcontractor costs." So
even inside these deals there is not sufficient transparency,
let alone a high degree of transparency further back for committees
like ours and for auditors. Where is the upside in not having
this transparency? I will tell you where it is: it is for the
people making the money out of it, not for us as taxpayers.
Andrew Hudson:
I think I am right in saying, in the example you are talking
about certainly, the procurement process began several years ago.
One of the changes that I talked about, and one of the improvements
we have made in the way we manage and assess the PFI procurement
process, is to improve the transparency in deals. We have other
initiatives underway to try to do that. If it is about transparency,
then yes we do want to do more.
Mr Bacon: It is about
transparency.
Chair: FOI is entirely
about transparency. I was very careful to say we should be able
to open up the books of these private companies where they are
dealing with public sector contracts. You are limited in that
way.
Andrew Hudson:
As I say, we are pursuing the transparency agenda in different
ways which we feel are more appropriate.
Q129 Ian Swales:
At our previous hearing I remember speaking about the fact that
these PFI deals suffered from a degree of obfuscation, in the
sense that service contracts were wrapped up with capital and
construction costs typically. I think that still is one of the
problems, and as we heard from Mr Metter 20 minutes ago, he sees
the provision of services as entirely different from the flow
of capital on the back of the deals and is quite relaxed about
how those service contracts might be managed, changed or whatever
over the longer term. So I would first of all question what the
risks are that we thought we were passing in the service contracts,
but much more importantly I now understand from Mr Beazley-Long's
evidence that the capital side of it is also in two parts. There
is the risk associated with the construction, then there is the
riskfree long period of capital receipt after that, and
as he rightly said it is very difficult to sell bonds in a speculative
construction project but it is very easy to sell bonds in a certain
flow of public money later. A lot of these companies, like Innisfree,
that have made a fortune have made that fortune extremely quickly
because the value of a bond, for example, doubles if you halve
the rate of return you expect to get. This is what we have seen.
This is why these companies have made so much money, because
we thought we were selling the risk over a long period, but actually
we were only selling the risk over a short period. Now that there
are certain flows of money coming in these bonds have effectively
massively increased in value. I think both of those things, connecting
service contracts with the capital and not understanding at what
point risk occurs, are the reasons why we are sitting here having
this conversation today.
Andrew Hudson:
I remember our previous exchange about this. I will say something
about the reasons why—so far at least—these services
have typically been bundled in with the financing, and then I
will ask Andy Rose, if I may, as a career finance professional,
to talk about the financing aspect of your question. The reason
for bringing the longterm maintenance and services in with
the original construction in the deal is because the way the building
is put together has implications for the cost of the maintenance.
If we do construction completely separately from maintenance
then there is less incentive—arguably no incentive—on
the people designing and building the asset to do that in a way
that makes it easy and economical to maintain. I guess to a lesser
extent I accept the same would apply to how easy it is going to
be to clean and things like that. But that is the reason. The
thrust of PFI is to do a longterm deal that is not about
getting a building but about getting a building that remains fit
for purpose over the lifetime of the deal with an incentive on,
as I say, the people designing and constructing the thing to do
that in a way that maximises the chances and minimises the cost—
Q130 Ian Swales:
Are you seriously suggesting that by separating those things
we would have had a whole load of buildings that had blind corridors
and things that were impossible to maintain, that we could not
have designed that out, and there is not then a separate market
in the whole maintenance field?
Andrew Hudson:
There are certainly separate markets. I am not saying we could
not; what I would say is that we did not, all too often. I am
coming back to incentives: you are right, clearly it is not impossible
to put requirements on people building. In our public sector
procurement we are looking to sharpen up our act, as we have been
for some time, and there are initiatives in play that David Pitchford
may be able to say more about, if the Committee would like, about
how we do a better job at specifying how we have better skills
available to do that. But if the incentive is actually with the
company that is doing the design and construction, then they have
a sharp financial incentive to get that right up front. That
is what I am saying.
Q131 Chair: Andrew
Rose.
Andrew Rose: This
comes back, I think, to the first question about whether there
was actual risk transfer. I think the reality is that risk can
be transferred in a number of ways in a PFI deal. One is the
upfront construction cost. I think there is plenty of evidence
where contractors have taken cost overrun and protected the taxpayer
from those cost overruns in the PFI model. Two is the equity,
and that is obviously the topic that is being focused on today
and we can come back to. Three is the debt side of this, and
I think the reality is there a lot of banks who have signed up
to very longterm loans that they would now say are below
their own cost of funds. I think there has been real risk transfer
by locking in some longterm margins. Four I think is the
soft services, which we are talking about here. Some PFI contracts
now do not have those in there, and they tend to be benchmarked
every five years or so, so there is a price reset mechanism.
Then the last one is—because PFI bundles these all into
one contract—is there benefit by having the whole life cost
of the asset priced upfront or not? One of the things being discussed
earlier about the model that we heard in Canada is that having
the public sector pay down some of the debt quite quickly after
construction might be an attractive alternative and maybe provide
more flexibility.
If I may, I'd like to maybe try to clear up a little
bit on the earlier discussion of the code of conduct. So what
have we done since the last PAC? One is we have issued some operational
guidance around how public sector procurement authorities should
try to get best value from their contracts, and that is consistent
with the Cabinet Office initiative in a much wider sense. We
issued some guidance about that, and then we floated a concept
of a code of conduct, which we fully expect to sign up with, with
the private sector. To be fair, I think there was some confusion.
There was an old financing code of conduct. We plan on doing
a new code of conduct once we have concluded the operational savings.
We are very close to concluding. There is a pilot project in
Romford where we are doing a deep dive: this was something piloted
after Philip Green's work with the Cabinet Office, where four
pilot projects were identified, PFI being one of them. We are
doing a deep dive into Romford; two of my colleagues are out there
today. When we have analysed that, we will be giving advice to
Ministers about what we feel to be the best way for the Government
to engage with the private sector. At the moment that advice,
until we have concluded that, has not taken place. We have not
advised Ministers yet, and that will be subject to Ministers'
decisions. I think why there is confusion around the code of
conduct is while we have discussed it with these parties as a
concept, and it is in the draft guidance from January, we have
not yet presented to the private sector the code of conduct we
expect them to sign up to.
Q132 Chair: I
am going to pick up, because it is my local hospital, the Queen's
Hospital. On my understanding of the way in which you are trying
to cut costs, if I can just raise a number of issues. One is
that there is a view that the standard on some of the maintenance
is too high, and you are looking at things like cleaning contracts
and whether it is too high. I just have to tell you, as the local
MP, when I went into A&E and saw blood on the floor I do not
think that the maintenance contracts are too high, and if that
is the way you are cutting costs, it is going to make questionable
service even poorer.
Andrew Rose: I
am not sure why that view is held.
Q133 Chair: The
other thing I understand you are looking at is, for example, taking
the change of law reserve; as I understand it, were there to be
a change of law, at the moment the risk of that happening is met
by the PFI contractor. You want to shift that on to the hospital
itself. My understanding is twofold: one, the Trust tells me
that negotiating that out would cost them £200,000, and secondly
the risk transfers to them and they are already in financial schtuck.
I do not see the point of that either.
Andrew Rose: First
of all, we have not yet provided any recommendations to Ministers
about what we are going to recommend, so it is very hard for me
to speculate on what Ministers will say. But to be fair, if there
were a law reserve change, that would be money coming back to
the authority.
Q134 Chair: But
you are not looking at lowering maintenance standards and quality,
are you?
Andrew Rose: Again,
while I would like to go into some of those things, I feel—and
I hope the Committee understands—that speculating on what
Ministers say in terms of engaging with the private sector, some
of which will be quite commercially sensitive negotiations—
Q135 Chair: I
hate to hide behind that. I have an interest: my local hospital.
I do not think Carillion provided a good service. If part of
the negotiation to save money is a lowering of that already questionable
quality of service, I am concerned. I think I have a completely
legitimate interest in that.
Andrew Rose: I
have heard no one talk about wanting to lower quality of cleanliness
or anything like that. So while I understand the sensitivity
of it—it is very difficult—however much it seems like
hiding behind giving advice to our Ministers and having our Ministers
articulate how they want to engage on this, that is the current
state of that pilot project.
Q136 Austin Mitchell:
I cannot see why you are sticking so obstinately to this claptrap
Treasury line that it is anything to do with value for money.
PFI is nothing to do with value for money: it was a means of
getting hospitals and schools and things on the ground without
having them on the public sector borrowing requirement. It was
offbalance sheet financing of a kind that has brought such
disaster in the neobanking sector. It never had anything
to do with value for money because the costs were inherently higher,
the private sector bodies were paying higher interest rates, the
civil service was not qualified to evaluate the terms they were
being asked to inspect, and inherently it was going to be more
expensive. So nothing to do with value for money. You might
say that in the context of more expensive contracts, bad deals
at an excessive rate of profit for the private sector, you are
trying to get a little bit of value for money and desperately
running after it with a little begging bowl, saying "Please
give us something from the equity gains," pathetically, but
value for money was never a part of it.
Andrew Hudson:
We evaluate the value for money in every deal that goes forward.
That is a key part of the assessment process; it is a key responsibility
of the Departmental Accounting Officer. As you say, where the
financing cost will be higher, the point of the evaluation is
to look at the other factors, the risk transfer and other things,
to assess—
Q137 Austin Mitchell:
What risks were transferred?
Andrew Hudson:
—is this overall a better deal for the taxpayer? And that
is the process that we have been going through from the start
of PFI, and as I say we have sharpened up the way we do it and
learned lessons over time.
Q138 Matthew Hancock:
Can I just follow that question up, because we heard earlier
that under the PFI contracts the interest costs are higher, and
the argument is that you then have to balance that against the
improved incentives and management ability of the private sector
to deliver the contracts, so I understand that argument. Firstly,
could you explain a little bit about how you make an assessment
of what the costs would be under public sector direct procurement?
Andrew Hudson:
What we do is work out what we call a public sector comparator.
So we look at the cost of delivering the service
if it were done purely by the public sector and compare that with
the bids that we get under the PFI deal.
Q139 Matthew Hancock:
And has there ever been a case where something has gone ahead
as a PFI deal when PFI came out as more expensive than the public
sector comparator? I am not asking on average is PFI cheaper
or more expensive, I am saying was there ever a case?
Andrew Hudson:
PFI deals only go ahead where they are value for money for the
taxpayer.
Chair: That does not
answer the question.
Q140 Matthew Hancock:
Sorry, could you answer the question: are there cases where PFI
deals have happened when the public sector comparator was cheaper?
Andrew Hudson:
No, not aware of any.
Q141 Stephen Barclay:
Can I just clarify on that: is that not because, if one takes
the Air Tanker in 2004, the PFI project team advised that it would
fail the public comparator test. It is for that reason that the
comparator was adjusted with the discount rate, and also—that
is why I pick those two from the various PFI contracts—if
one looks at the Manchester incinerator, aside from the political
imperative given the jobs in the north-west and the number of
marginal seats up there in 2009, from a financing point of view
that was done I think, from memory, at 350 basis points as opposed
to 300 basis points. We had an exchange on it at one of our previous
hearings.
Andrew Hudson:
I will ask Andy to comment on those details.
Andrew Rose: The
FSTA one was done many years ago, but my understanding is that
the discount rate applied for new procurements changed from 6%
to 3.5% for those procurements already in place: for all projects.
Q142 Stephen Barclay:
At the time it was 3.5%, you went to what it was at the start
of the contract. You changed your own guidance, in that sense.
Andrew Rose: My
understanding—and again, this was many years before I was
involved—is that it was consistent for projects that were
being reevaluated. They used the discount rate that was
applied at the time the project procurement was evaluated, not
the updated.
Chair: Had they used
the updated rate it would not have been value for money. And
because it took them so long to negotiate it, it is ridiculous.
Q143 Stephen Barclay:
The reality is, there was a defence need to do it; that is why
it was done.
Andrew Hudson:
If I may say, while, as Andy Rose explains, this is the reason
why the higher discount rate was used, I understand that VFM comparisons
were conducted later at both the 6% and the 3.5% discount factor
rate, and the NAO Report on the subject made clear that the deal
was favourable on all but one of those value for money comparisons
out of the eight that were done.
Q144 Matthew Hancock:
But when we had the Department of Health in front of us they
said that in a number of cases, the quotation was "PFI was
the only game in town"; that is to say that the Treasury
would not allow the spending as standard capital spending, so
if they wanted hospitals they had to have hospitals that were
not as good value for money as if they had been provided, directly
procured. Now everybody knows that under PFI, or under direct
public provision, you still borrow the money: it is just borrowed
in a different way. However, the accusation from officials at
the Department of Health was that the Treasury would not allow
projects to go ahead if it was not PFI. Now, this happens to
coincidentally fall into a political argument that PFI was used
in order to keep spending off the balance sheet, which I am not
asking you to comment on. But why do you think Department of
Health officials felt that PFI was "the only game in town",
and direct, onbalance sheet procurement would mean that
they would not get their hospital?
Andrew Hudson:
There is always a constraint on public sector capital at any
time, and so it may be, simply, that public sector capital is
not available, in which case people will look at PFI to see whether
that offers value for money for the public sector. The Treasury's
role is to ensure that where the use of private finance for the
delivery of infrastructure projects is proposed that it offers
value for money for the taxpayer.
Q145 Matthew Hancock:
But PFI gives the public sector a string of future liabilities,
so it is a debt in the same way, is it not?
Andrew Hudson:
It is not a debt in the same way, in that we are buying something
different. Rather than just buying a building, we are buying
a stream of services and we are transferring risk in a way that
does not happen under conventional procurement.
Q146 Matthew Hancock:
Do you think that the Department of Health officials were wrong
to say that, according to the Treasury, under the previous Government,
PFI was "the only game in town"?
Andrew Hudson:
I would have to study what the precise detail of that exchange
was.
Q147 Matthew Hancock:
The reason that they came to say that was because they were having
to defend PFI hospitals that were shown to be more expensive under
PFI than under standard procurement, but done under PFI anyway.
Mr Rose, I warmly welcome the fact that we have a career long
finance expert on this stuff. It is great news, the more the
merrier. But you said earlier that you had not come across any
example of where PFI was more expensive but it was still used.
Andrew Rose: I
have not come across it, but to be fair I have not been in this
role for a great deal of time, so I do not feel that is a terribly
profound statement.
Q148 Chair: David
Finlay can help us. Very quickly, because we have a whole bunch
of people.
David Finlay: We
did, in one of our earlier reports on PFI and roads, identify
that one of the four projects went ahead that was more expensive
under PFI. The rationale for it was to build up the market in
roads at that time.
Q149 Mr Bacon:
I am slightly amazed we are having this discussion, because it
sounds slightly academic to me, and I think it is not just a story
on the back of the Clapham omnibus that you heard from the passenger
sitting next to you. Everyone knows, for a long period of time
PFI was the "only game in town."
Chair: And probably will
be in the future.
Mr Bacon: And, by the
way, just in parenthesis, I remember the Chief Executive of the
Norfolk and Norwich Hospital sitting where you are sitting now,
saying he would have loved a refinancing clause in the contract
but he was told he could not have one by, guess who: HM Treasury.
I would like to move this on a bit, because the Report says,
"There is no clear data to conclude whether the use of PFI
has led to demonstrably better or worse value for money than other
forms of procurement", and you say you are trying to sharpen
up your act and get better at it. One of the most obvious ways
to make sure, to test which route is better, is to create clusters
of procurements that are similar so you will be comparing apples
with apples a few years hence, whether it is a cluster of primary
schools, a cluster of high schools, very similar hospitals, and
to do some one way and to do some the other way, and then one,
three, five, eight, 11 years out to get somebody sensible like
the National Audit Office with a group of agreed metrics that
you agree at the start to apply to both of them, and then to see
what works best. What is staggering about this is that after
such a long period of time there is still such poor data: there
is such poor data about the performance; there is such poor data
about the returns made by equity investors and so on. Do you
think that what I have suggested might form part of the future
approach, so that you have something to get your teeth into and
to work on a few years hence?
Andrew Hudson:
We are certainly looking to improve our evaluation processes,
yes.
Q150 Mr Bacon:
That was not my question. I am talking about the performance
audit after the event of having done two different kinds of procurement
in parallel of similar clusters of activity.
Andrew Hudson:
I understand where you are coming from, and would not totally
rule that out. At the moment, given the scaling back, I think
we would have to be very careful that we had realistic baskets.
We are coming off a period where there has been a lot of public
sector procurements, some via conventional procurement—big
capital spending in the last few years, when public sector capital
spending has been running at high levels—some under PFI.
The National Audit Office will speak for themselves, obviously,
but they, like us, also find it difficult to do this comparison,
and going forward, if we had a sufficiently big basket that was
genuinely comparable then it would certainly be an interesting
thing to do. Since I think that may be tough, we are looking
at other ways of improving our evaluation.
Chair: I am conscious
that David Pitchford has not contributed, so unless people go
for questions that he can answer, then I will intervene again,
but I am going to try to keep the Committee going.
Q151 Mrs McGuire:
I have two principal questions. One is I would like clarification—you
listened to my questions to the previous witnesses—about
whether or not there has in fact been a series of talks with the
industry regarding a voluntary code of practice. I hark back
to the Financial Times, which indicated that the Treasury
said it "continues to seek a voluntary code … to ensure
their positive engagement in reducing the costs", and I think
there is still a lack of clarity about whether or not those discussions
are taking place, have taken place; people are sticking their
thumb in their mouth and saying they do not want to play.
Andrew Rose: Basically,
in February the Commercial Secretary announced there would be
this pilot project that has previously been discussed. We have
had very active engagement with the private sector about a voluntary
code of conduct.
Q152 Mrs McGuire:
Can I clarify, I am not talking about the pilot project. That
appears to be a different issue from the comment from the Treasury
that said, after six months of inconclusive talks, they are not
getting any co-operation from the sector, so let us leave Romford
hospital to one side.
Andrew Rose: They
are exactly the same; if I may, I do not know who made that quote
in Treasury. It certainly was not me. We have actively engaged
with the private sector. What we have told the private sector
is that we would like to complete the Romford pilot project; we
would like then to get advice from Ministers, and then we would
like to come forward to them for a voluntary code of conduct.
That is the sequence of events that we have articulated to the
private sector. We have had very active engagement, both with
individual contracting groups, investors and representative groups
like the CBI in talking to them about this concept. I cannot
tell you who made that quote from Treasury, but it was not me.
Q153 Mrs McGuire:
Do those talks include Innisfree?
Andrew Rose: Yes.
Q154 Mrs McGuire:
They have included Innisfree?
Andrew Rose: Yes.
Q155 Mrs McGuire:
Right, fine, thanks. Could I just go on to a slightly different
tack: how many PFI contracts have been signed in the last year?
Give or take one or two.
Andrew Rose: 30
projects with a capital value of £2.1 billion up to
16 March 2011.
Q156 Mrs McGuire:
How many are currently under active consideration?
Andrew Rose: There
are 61 projects in the pipeline, with a capital value of £7 billion.
Andrew Hudson:
Sorry, just to add, in 20112012 to date, a further six
projects have closed, so that is 30 up to March of this year,
six in this financial year.
Q157 Mrs McGuire:
Given the recommendations that the National Audit Office have
made in their Report about the identification of data—however
you pronounce it—the skills that were needed to negotiate,
overseeing complex projects, setting expectations for the service,
etc, you know them, they are on pages 9 to 11, how many of those
contracts that have been signed since last year and are currently
under consideration are taking those recommendations into account?
In other words, are you doing it under a different due diligence
than some of the projects that have been raised here today?
Andrew Hudson:
As I said, we have improved the rigour that we apply to PFI projects,
and indeed conventional procurement over time, and so there are
successive tranches of Treasury guidance that have achieved that.
For instance, in the 2007 iteration of the guidance, term of
art, SoPC 4 includes stricter provisions on transparency, which
will lead to better data down the track. I think I am right in
saying that the NAO's comments apply for the portfolio of PFI
projects over the years—is that fair?—rather than
the recent ones, and I would expect the recent ones based on that
guidance and the rigour in which we are interpreting it to be
stronger on those grounds. In terms of the skills that are brought
to bear, again there has been a programme of upskilling. This
is not the first time that the NAO have drawn attention to it,
and we have taken heed of that. There are some fresh initiatives
coming into play now to go further, but I would expect that the
skills of the people working on these recent deals would be stronger
than, say, five years previously.
Amyas Morse: I'd
like to believe that.
Q158 Mrs McGuire:
I was just wanting to be really clear about whether or not the
skills that you have in place just now, dealing with the current
batch of PFI projects, and indeed the projects that have already
been approved over the past year, have taken into account the
differences that the NAO, over many Reports, have highlighted
to the Treasury that would make a significant difference in value
for money of PFI projects, and I just get the impressions that
you are hedging your bets just a wee bit there—if a Treasury
man bets, that is.
Andrew Hudson:
And the Comptroller and Auditor General, his body language suggests—
Mrs McGuire: He is not
impressed.
Andrew Hudson:
That he is not impressed. As I say, there were certain initiatives
taken. What I do put more faith in is that there is more push
behind this now, and David Pitchford may want to talk about some
of the things that the Efficiency and Reform Group are pushing
forward on that front.
Q159 Joseph Johnson:
In paragraph 4.8 of the Report it says that the Treasury has
announced a pilot review of a public sector hospital contract
to identify possible learnings for other projects. Can I just
ask which hospital contract you are doing?
Andrew Rose: That
is the Romford one.
Q160 Joseph Johnson:
Terrific. Can I ask you to include in your pilot review the
South London Healthcare Trust, which is lumbered with two massive
PFI contracts on the PRU and on Queen Elizabeth Woolwich? I raise
this because, as readers of the Financial Times will have
learnt in recent days, the presence of two large PFI contracts
within the South London Healthcare Trust is having incredible
unintended consequences on the unPFI encumbered hospitals
within the Trust, severely impacting on the operational flexibility
of the Chief Executive of the South London Healthcare Trust to
organise himself in a remotely rational way. What is happening
is he is having to carve to pieces the nonPFI hospitals
within the Trust because he is prevented from reorganising the
PFI hospitals. What is happening is financial interests are taking
a clear precedence over patient interests, and how he would, in
a normal world, want to organise himself. Clearly, that cannot
be right. What I really want to get a sense of from you is one,
please can you review the South London Healthcare Trust PFI contracts
and two, going forward, do you really think it is appropriate
for PFI—long term, rigid, inflexible PFI contracts—to
be applied to hospitals?
Andrew Rose: If
I may, again, the pilot came out of the work that Philip Green
did with the Cabinet Office identifying PFI as an area. From
a resource point of view, we had to select one. The whole purpose
of picking a pilot is to roll it out across the whole programme.
Subject to this Minister's advice, we will be updating our guidance
because we actually want all procuring authorities to learn the
lesson from this and apply it to their own contracts. The idea
of running a pilot is so that we can give advice to all procuring
authorities; it is all about the initiative from Government to
make sure its suppliers are giving it the best deal, and we are
very keen that it is rolled out to all contracts, and that is—
Chair: I have to interrupt
you there. All I am telling you is that I know what is coming
out of there, and you are not getting much that is going to enable
you to cut the costs unless you cut the service, bluntly.
Q161 Joseph Johnson:
Can we get some answers to the points I was making about the
suitability of PFI for hospitals?
Andrew Rose: Again,
I think it is really a decision for the Department of Health,
how they want to proceed with their hospital programme. I think
there are some interesting comments that have been made about
different types of models that can apply different levels of flexibility,
but I think it is a decision for the Department of Health, how
they procure their hospitals.
Q162 Stella Creasy:
How many of those PFI projects that you have in current process
involve hospitals? How many of the ones that you are currently
negotiating?
Andrew Rose: There
only is one pilot at the moment that is for a hospital.
Q163 Stella Creasy:
No, sorry, of the PFIs that you are currently negotiating—I
think you were talking about 19 of 61 projects.
Andrew Rose: I
believe it is eight.
Stella Creasy: Eight;
so there are eight that fit Jo's model.
Q164 Joseph Johnson:
Mr Hudson, you were going to come in and make some points.
Andrew Hudson:
I was going to come back on your point about flexibility. If
I might ask—I am afraid I am not familiar with the detail
of the South London case—these two are both reasonably new
hospitals, are they?
Q165 Joseph Johnson:
Yes, but it has the biggest deficit of any Trust in the country,
so it should be very high up on your priority list of things to
look at in terms of where PFI is going wrong.
Andrew Hudson:
The point I want to explore is about decisions and where the
costs come, in that I accept that PFI is less flexible than others,
and I explained in earlier answers as to why that is. I think
we all understand that. Are they new hospitals, Mr Johnson?
Q166 Joseph Johnson:
The PRU is about 10 years old.
Andrew Hudson:
If two hospitals have been built within the last 10 years then
one of the decisions maybe that led to this was to go that far
and have that big an investment in that area. I am sure they
are valuable to the patients, but that in itself creates a cost,
whether or not you do it through PFI, although I am not denying
that PFI makes things less flexible and harder to move around.
What I would say going forward is that one of the things that
the Treasury looks hard at in our scrutiny of business cases is
the strategic case for new investment, and whether we can build
more flexibility into the deals I think is an interesting challenge.
Q167 Mr Bacon:
Is this not at the absolute heart of it? The thing I have always
found difficult about this is: the historic criticism of PFI is
you cannot possibly write a deal that is flexible enough to take
account of what will happen over the next 25 to 35—
Chair: 35 to 40.
Mr Bacon: —or 60
years or whatever it is. You cannot do it. So you try to build
in all the risks. I have often thought this about hospitals in
particular: the Royal Institute of British Architects sat where
you are sitting and told us that the average cost of bidding for
a PFI hospital was £11 million—that was some years
ago—because it is so expensive. So you try to analyse all
these risks and get them sorted ahead of time, which substantially
raises your costs at the start, but nonetheless, you cannot actually
do it. You cannot write a contract that is flexible enough.
So what happens is that over a period of years, guess what, changes
arise. After you build a flagship hospital suddenly the flavour
of the month—or flavour of the year—is we are going
to do much more at a primary level. Then the contractors, quite
rightly—because they try to identify and price all the risks—turn
around and say we want what the Report calls in paragraph 14 "high
margins on the changes in asset usage which are likely to occur
over a long contract." From the private sector's point of
view, you can hardly blame them: they signed a contract for one
thing and then you want to do something else. But what you end
up with, to go back to this article in the Daily Telegraph,
and this is actually an Innisfree case, is: "It owns four-fifths
of the PFI school in Clacton which has now closed—but for
which taxpayers must still pay it £1.4?million a year, Innisfree's
share of the deal, until 2035", and there are various other
examples. You just described getting more flexibility as a "challenge";
now, Mr Metter gave some interesting examples from Canada of how
you might be able to strip out some of the risks, in terms of
things like services. But fundamentally there is a base level
of rigidity below which you cannot go isn't there? Isn't that
the fundamental problem?
Andrew Hudson:
The question for me is how we have the necessary flexibility
in the infrastructure we are using for things like health care,
because if we put up a building that is publicly funded as a district
general hospital as we know them at the moment that has some inflexibilities
as well. The question is, what methods—whether it is PFI
as we understand it at the moment or some other ways of procuring—give
us the best possible chance of a value for money way of having
more flexibility in our asset base to cope with precisely the
sort of changes in care?
Q168 Chair: So
can you? Can you? Answer the question: can you?
Mr Bacon: Is it not the
case that either the taxpayer gets screwed at the beginning when
you have a dreadful project like the Scottish Parliament or Portcullis
House, or you get screwed later? Is that not really the choice?
Andrew Hudson:
I think we should—as we go forward—look to find ways
of—
Mr Bacon: Not being screwed.
Andrew Hudson:
—doing it better, not being screwed start, middle or end.
Q169 Stephen Barclay:
A lot of weight is being placed on the Romford pilot. The Treasury
Minute says the pilot project will hopefully provide data which
trusts can use to challenge the costs of PFI. How are you going
to ensure that the pilot is adopted by what are independent foundation
trusts, and how are you going to report that back to this Committee?
Andrew Rose: I
do not think we can ensure. I think what we can do is inform
and guide and help. So can we ensure and impose? No, because
there are sensitive discussions about how you might achieve those
savings. I do not think it is our mandate. Hopefully what we
will discover is immensely helpful and procuring authorities,
whether they be health or elsewhere, see the advantages of what
we have learnt from this exercise to save money.
Q170 Stephen Barclay:
Sure, but the point I am driving at is—whether we have
a good contract is open to debate—even a good contract is
only good if it is managed effectively.
Andrew Rose: Totally
agree.
Q171 Stephen Barclay:
I contrast what we know from the Department of Health with the
previous witnesses, Innisfree, who, I understand, have acquired
interest in 24 hospital PFIs. On the one side you have consolidation
and a consolidation of expertise. On the other side we know from
the Department of Health that 40% of Trusts do not routinely engage
with their guidance, which to me raises questions over how effective
the Romford pilot will be in rolling that out. And we know at
a time when they have to achieve the Nicholson £20 billion
efficiency challenge—so they are under staff pressure—that
36% of trusts have less than one FTE managing these contracts
and 12% have no one managing these contracts. So on the one hand
you have the private sector expertise—often far better paid—and
on the other hand you have some hospitals where no one is managing
this at all, and where your solution to this Committee is to say,
"Do not worry, guys, we have this Romford pilot", but
I cannot really see what reliance can be placed on that. Could
you perhaps just update us: of all those trusts now—that
12% that was flagged a good six months ago—is that 12% down
to zero? Could you at least confirm to the Committee that all
hospitals have someone managing these contracts?
Andrew Rose: I
cannot.
Andrew Hudson:
I do not have that information. It is clearly in their interests
to find ways of managing these contracts effectively. I appreciate
that in some trusts resources will be thin on the ground, but—
Q172 Stephen Barclay:
But does it not cut across? You are saying that we are doing
a pilot in Romford: if we cannot even get to a point where hospitals
have allocated someone to manage their contract, surely that is
the starting point, is it not? This was flagged in an NAO Report,
we had a hearing on it, it is in the Treasury Minutes. Why are
we not even at base camp?
Andrew Hudson:
Driving through savings depends on active contract management.
That must be right.
Q173 Stephen Barclay:
What I am driving at is how do we as a Committee get sight as
to whether that is improving? Is that the Treasury? Are you
going to ensure that the Department of Health write to us? We
have contracts here which we know are not being managed. That
clearly is a value for money issue. On the other side we have
consolidation, where there is growing expertise. How as a Committee
are we going to address this issue? How are we going to get visibility
on that moving forward? Are you going to write to us in six months,
12 months? What is the solution?
Andrew Hudson:
I am happy to update the Committee on how that is moving forward:
I just do not have the information at the moment, I am afraid.
Q174 Stephen Barclay:
I know work has gone on from some of the lessons in terms of
the delays around contracts and some of the increased costs, so
perhaps Mr Pitchford could give us insight as someone independently
coming in and looking at this: what are the lessons learnt, and
perhaps how in terms of your reporting, how you are going to report
to this Committee moving forward.
David Pitchford:
In relation to PFI specifically?
Stephen Barclay: Yes
please.
David Pitchford:
Thanks Madam Chair, I thought I was going to get away with it.
Chair: You're not, I'm
afraid. There are quite a number of questions we want to ask
you. It's just we are going to take longer than we thought.
David Pitchford:
Mr Barclay, I need to preface the answer to your question with
an explanation of what I am dealing with at the moment, and the
focus, as this Report finds, of the MPA activities is not PFI
projects per se. The definition that we are working on—the
working definition—is if the project is outside the Departmental
expenditure limit, or is of specific interest to the Government
because of contention or otherwise, then it goes onto the Government
major portfolio itself, but not because it is PFI but because
it is a high value or a high risk project. We have only started
doing this since 1 April, but we are not specifically targeting
PFI projects. We are looking at the large scale projects because
they are high risk, high value and because we have to focus on
that. The answer to your question, I am afraid, is going to be
inadequate, because where I am at the moment I do not have carriage
of where PFI projects are at. My focus is on setting up the assurance
approvals, intervention and oversight and control mechanism to
look at the major projects that meet the definition that I have.
Q175 Ian Swales:
Can I just add a clarification question? We heard that 61 projects,
value £7 billion, are currently under review. How many
of those are you involved with?
David Pitchford:
At this stage, none.
Q176 Ian Swales:
None? So they are not regarded as high value or high risk?
David Pitchford:
No, my focus, as I say, is on what might be called the conventional
projects base, which is about 90% of where the major projects
dwell, and my task is to set up an organisation that can control
and oversee those. Within that definition that I explained before,
Mr Swales, there are a small number of PFIs on our Government
Major Projects Portfolio, but they are there because they are
specifically high risk, high value in terms of how the Government
is looking at Central Government funded and delivered projects.
That is my space at the moment: Central Government funded and
delivered projects.
Q177 Stephen Barclay:
Just coming back, would it be possible to have a note, whether
it is from you or from the Treasury, firstly on how many people
at the centre are managing PFI projects? I understand there were
only four people in the Department of Health central team; I think
there were even questions over that. I am sure there are resource
challenges within the Treasury. It would be very good just to
have some data on exactly how many people are providing that centre
of expertise to perhaps offset the expertise on the private sector,
and within that, how many are working on policy in order to advise,
how many are on monitoring to pick up on the poor data within
hospitals, which is so often an issue, and how you are going to
report that back to us and what the intervals are so we can start
to assess, not just in hospitals but in other contracts, how that
is being managed. But within the reporting from your area, will
you be reporting quarterly to this Committee?
David Pitchford:
I could appear quarterly; my task is to report to Ministers quarterly
and to the Efficiency and Reform Group board, and of course to
my own board, the Major Projects Authority board, and I have a
task under the mandate issued by the Prime Minister in January
to report directly to Number 10 and to the Government by exception
where we discover a project that has moved—
Q178 Stephen Barclay:
But if something goes wrong in January it is a long time for
us to wait, either for the NAO to look at it or for it to come
round in your annual report at the end of the year.
David Pitchford:
The Government Major Projects Portfolio is really the process
that will inform this. This will be in quarterly reporting tranches.
We are building the Government Major Projects Portfolio list
as we speak. On the portfolio aspect—Madam Chair, I believe
I am coming along next week to describe more fully about this
process, so I will just sketch these now, if that is alright?
Q179 Chair: I
think let us deal with that next week. What I was going to ask
you in relation to today is: Mr Metter said public sector procurement
is lamentable, and the only way is to lock in private sector expertise
through PFI deals. Do you agree with that?
David Pitchford:
No, I do not. I think that there are good people within the
Civil Service here, and I come from outside so I have a good window
to look through. There are obvious things that can be done differently
and better across the board. This is true in my own jurisdiction
and certainly where I was before I came here, in Dubai. The issue
is about skills, or lack of it, and whilst we can talk here about
the processes, what fundamentally needs to happen is that this
skill base needs to be lifted up.
Q180 Chair: Then
the other question I was going to ask you, which is relevant today—I
am just conscious that you are coming back to us—is that
if there is all this expertise, it will always be constrained
within the public sector, and that tends to suggest that the PFI
oversight and control should be managed from the centre, or more
managed from the centre rather than left to individual Trusts
or schools or whatever. There is a tension there between the
localism agenda and the value for money that one could
get out of PFI. Do you recognise that, and how do you intend
to approach it with your role in charge of major projects? Just
on PFI.
David Pitchford:
I understand the tension—believe me, with a capital T.
The reality of life here is that I started off in the area that
I explained to Mr Barclay because of the central Government focus
that I have been given by Ministers, but because of the localism
issue, about 90% of these PFIs have delivered locally and it is
outside of my jurisdiction. But what we are doing—if it
is news to you I hope it will be good news—is to look at
how we can do this across the board differently. When I first
came here there was no tieup between major projects, between
procurement, between ICT projects, and we are moving to bring
those three together, and the partnership with Treasury itself
is a major step forward on that. The work that is going on in
relation to procurement, not only in terms of the successor to
the OGC collaborative procurement, but some really major steps
like the appointment of crown representatives to handle procurement
across the board with certain suppliers, is a major step forward.
We are working together on how to cross over that to make certain
that major projects that have huge procurements as part of them
work—and as we have talked before a lot or some of these
major programmes are 100% procurements, like some of the health
major programmes. I know Andy wants to speak and I will talk
more about this last week—next week, rather: it would be
good if I could do it last week.
Chair: It would.
David Pitchford:
We need to focus much, much more on the startup of the
project, and certainly before they get underway.
Q181 Chair: So
you will intervene more from the centre in the startup?
David Pitchford:
Much, much more in the centre.
Q182 Chair: Even
if it is a hospital trust that is highly independent?
David Pitchford:
If I can be perfectly clear, I am not talking there, Madam Chair,
about PFIs at this point. I am talking about projects that are
on the Government Major Projects Portfolio. We are in discussion
with Treasury and a range of other stakeholders to look at where
this all should sit, and at this point there is no definition
to that yet. Is that fair, Andy?
Andrew Hudson:
Yes. We are working on that. If I could add, Madam Chair, on
the point about localism, I think having local decision making
on these things does not necessarily mean that the local body
has to do all the work itself and is not able to tap into other
sources of expertise, be that the Department of Health private
finance expertise or to collaborate across local areas. Going
back some while, in my last job but one I was Deputy Chief Executive
of Essex County Council, we were working with the district councils
in Essex to share procurement both in terms of bulk buying, but
also ready to use the expertise that we had as a big council if
they wanted to talk to us about how best to do things, so I think
there is scope for that sort of thing all in the spirit of making
the best use of taxpayers' money.
Q183 Stella Creasy:
One of the things I am slightly concerned about when we are making
decisions—you say you have 61 projects that you are still
in train on—is what is changing, and in particular the assessment
between the decision to move towards PFI and the decision to use
another form of procurement, and I am quite interested by what
you are saying, Mr Pitchford, that you are not looking at PFI
per se at the moment, you are looking at other forms of procurement.
What I am particularly interested in with PFI is one of the assessments
that is made is a construct about the amount of tax that will
be recouped or returned to the taxpayer in a general sense by
working with the private sector within the UK. With that in mind,
then, are you troubled by the widespread evidence of the numbers
of PFI deals that now involve offshore tax havens? I will give
you one very good example: we know that HSBC set up an investment
firm called HICL, which in the last six months made more than
£38 million profit from 33 PFI schemes and paid £100,000
in UK tax. Even taking Mr Metter's assessment that your return
is about 8% to 10% for your dividend, £100,000 does seem
rather low. Do you think we have it wrong when we assess the
financial viability and the value for money of PFI and we look
at the tax component of it?
Andrew Hudson:
We have clear guidance on the appraisals stage which says, to
quote the Green Book, "where publicly financed options are
compared to PFI options, taxation differences should be considered
and adjustments explicitly made if not doing so would materially
distort the decision."
Q184 Stella Creasy:
Do you take into account the idea that a lot of this money will
be moved offshore?
Andrew Hudson:
I do not want to comment on specific cases but that is our overall
guidance.
Q185 Stella Creasy:
So do you have an assessment of how much public taxpayer money
we have not got back that we thought we would get back when moving
towards a PFI because the money has been moved into offshore tax
havens?
Andrew Hudson:
What I can say is that in assessing these—
Chair: I think it is
a yes or no, Mr Hudson.
Q186 Stella Creasy:
Yes; have you made an assessment of this?
Andrew Hudson:
I do not have an aggregate figure, I do not know whether Andy
has any?
Q187 Mr Bacon:
This is quite important; I think Stella Creasy is not so much
asking for a specific case as the generic point, and of course
we know the famous case of HMRC's tax offices across the country
ending up owned by a company in Bermuda.
Stella Creasy: It is
not just one overseas tax haven, is it? There are lot of the
firms involved.
Mr Bacon: There is a
lot of it going on; but you are saying you do not analyse it,
you do not take it into account?
Andrew Hudson:
I am saying that we analyse what happens in deciding whether
the deal should go through or not—
Chair: That is at the
start; that is at the start, but it is the monitoring.
Q188 Stella Creasy:
Yes; at the start you make an assessment of the generic amount
of tax that you would return by working with the private sector.
Andrew Hudson:
After that, as with other procurements, these are then private
companies who are conducting their business.
Q189 Stella Creasy:
So Mr Pitchford, are you looking at whether the loophole should
be closed to stop this?
David Pitchford:
No, I am not, because as I described—
Q190 Stella Creasy:
If there is money being lost to the taxpayer as part of this
process that we thought we would get in as part of PFI, do you
think you should be?
David Pitchford:
Perhaps I come back and explain from the other end, Dr Creasy:
my role is to look at the major projects, not the procurement
vehicle at this point.
Q191 Stella Creasy:
Okay, so sorry, that is not something you are looking at. What
about you, Mr Rose or Mr Hudson? Are you looking at closing this
tax loophole, or are you looking at setting conditions for the
contractors that you work with about the amount of work they do
in the UK and looking at their returns, for example, before you
commit to them?
Andrew Rose: I
think there are two levels. One is the up-front analysis, which
I think Andrew has talked about. At the moment we do not look
at PFI differently from any other form of contracting with Government
and how individual private companies arrange their tax affairs.
The answer as of today is we do not have a different assessment
for—
Q192 Stella Creasy:
But you do take an assessment when you decide to go with PFI
that tax return will be part of that assessment about the value
for money for the taxpayer, do you not?
Andrew Rose: There
is an evaluation up front, but at the moment there is not—
Q193 Ian Swales:
To clarify that point, are you now assuming that most of these
deals will end up in a secondary market with most of the capital
return moved offshore? Is that now part of your assessment, because
that is actually the experience, isn't it?
Mr Bacon: You are shrugging—it
is the experience.
Andrew Rose: No,
I am afraid it is not part of the assessment, no.
Q194 Ian Swales:
You do not take any account of what happens past the primary
market, then. Given the massive secondary market that now exists
in PFI, you are not taking any account of that in your assessment;
you assume that the PFI deal will remain with the first person
that you deal with in your assessment. Is that the case?
Chair: They only assess
at the start.
Stella Creasy: How do
you have any confidence in the assessment that you make of the
money that we are going to get back in tax returned when you make
the decision to go with PFI?
Q195 Ian Swales:
Exactly; surely the working assumption now should be that this
will end up in an offshore deal, because just by experience that
is happening in a lot of cases, so that should be the assessment
that you make, shouldn't it?
Andrew Hudson:
There are a number of things about how companies organise themselves
once a deal is done, which we could look into, but we would be
starting to speculate as to how they organise themselves.
Q196 Chair: Hang
on a minute, let's just stick to the actual issue. The issue
is, when you make an assessment of whether to go down the PFI
route you include in that assessment some assessment, again, of
the tax revenue that comes into Government from a company, a UK
based company, during the deal. However, if you are making that
assessment there, why aren't you monitoring later on whether in
fact that is right; or why aren't you changing your assessment
rules to have regard of the fact that most of them go offshore?
We all know that private companies can do what they want, but
it is from the point of view of protecting the interest of the
taxpayer that Stella is putting these questions.
Andrew Hudson:
I understand the issue, but it is not part of our work programme
at the moment.
Q197 Stella Creasy:
So I am clear then that there are 91 PFI projects that are currently
in secondary market infrastructure funds that are located overseas,
and that is not a problem for the Treasury in terms of the tax
take. That is not something that you are actively thinking about
when you are looking at public spending and the money that we
need to get back in to be able to pay for all these is not something
you are considering.
Andrew Hudson:
We do a rigorous assessment of the value for money of the deal—
Stella Creasy: Which
includes the tax.
Andrew Hudson:
—based on the information that is available to us at the
time, including, as I say, an assessment of the tax consequences.
Q198 Mr Bacon:
Can I just clarify, when you say it is an assessment of the tax
consequences you mean an assessment of the likely tax revenue
from that company after the deal is done, assuming it continues
to be based in the UK. Is that what you are saying?
Andrew Hudson:
I would return to the words in the Green Book that I quoted,
which I can quote again if that would help, but I think it is
already on the record. That is the guidance; that is what we
ask people to look at. That is the return, and that is what our
assessment of the deal for the taxpayer is based on.
Q199 Matthew Hancock:
Just briefly, looking at the same question from the other end
of the telescope, we have just heard from Mr Pitchford how he
is trying to drive down costs and get a handle on all of the major
projects in Government, and we look forward to the presentation
in more detail next week on how you are going to do that. In
terms of this judgment that you have to make on whether PFI or
standard procurement is better value for money—and where
we have already heard that in some cases PFI went ahead despite
the fact that it was not better value for money—how are
you going to reassess the traditional procurement route costs
given the improvements that the Cabinet Office are aiming to achieve?
Andrew Hudson:
I would expect that to arise through the progressively better
skills that we are able to bring to bear, not just in negotiations,
but as David Pitchford said in setting the specification at the
upfront stages.
Q200 Matthew Hancock:
And how are you going to drive those into the relative cost judgment
that you have to make to ensure that you get best value for money
for how you procure something?
Andrew Hudson:
The primary method for driving value for money should be competition,
and part of success—
Matthew Hancock: No,
no, that is not my question. You were talking earlier about how
you have your public sector comparator when you are choosing whether
to go PFI or not. We have just heard how hopefully Mr Pitchford
and others are going to drive down the cost of the public sector
comparator. How are you going to get that into your calculations
so that you can go for the best value deal rather than just go
for PFI as you did in the past?
Andrew Rose: If
I may, one of the things we are going to do is completely update
the value for money guidance with specific reference to private
finance, and we are also going to factor in to that an ex post
project, or value and benefits realisation assessment.
Matthew Hancock: Aha.
Andrew Rose: So
one of the things we have already articulated we are going to
do this autumn, as I say, is one, improve that approach to value
for money specifically for private finance, and secondly, as I
say, it is a benefits realisations assessment, and we will reflect
on a lot of the discussions that have taken place in this meeting.
Q201 Matthew Hancock:
As part of that benefit realisation assessment, do you think you
could do a note to the Committee—simply a factual note—on
all of the PFI projects that have been completed, on what was
the relative PFI and public sector comparator at the moment of
the decision, on the basis, at the time? It would be very useful
to find out.
Andrew Rose: As
I say, can we take that away?
Matthew Hancock: Just
provide a note, say, in the next week.
Stella Creasy: With that
note, could we also have what tax expectations you had at the
time as part of that decision, so what you were expecting to get
in tax returns from that.
Chair: You are going
to have to do it on a sample. We have a vote at six, so I am
going to try to close it before then.
Q202 Jackie DoylePrice:
I will try to be quick, but I think really I want to come back
to this issue of skills again, because to be honest I am detecting
a bit too much complacency about the skills deficit that we have
across Government, and I think that occurs for two reasons. Mr
Metter pointed out that procurement in the public sector does
not attract the best brains, partly because we cannot actually
pay them enough from the private sector, and also because, although
Mr Pitchford is right when he says that our civil servants are
very intelligent, they are attracted to policy roles rather than
procurement roles. I know you said earlier in response to Mrs
McGuire that you thought we had upskilled quite a lot. Perhaps
you could say a little bit more just to give me more confidence.
Andrew Hudson:
What I was thinking of in terms of how we have upskilled—and
I am sorry if I sounded complacent, because I am not; I think
that the work that David Pitchford and his colleagues in ERG are
doing on this is really important—is that the Office of
Government Commerce, as then was, ran a series of procurement
capability reviews in each of the big Departments about two or
three years ago. I am not sure whether they covered all of them.
That made a series of recommendations which Departments will
be following through. I am not complacent, and I note that the
NAO Report I think uses the phrase that since they pointed out
this issue in a 2009 Report certain actions have been taken.
We do not have a very warm endorsement from them on this. I think
of the sort of things that David Pitchford has talked about in
general terms, and can explain more either now or later, in terms
of having a greater interchange with industry, having better accreditation,
and making better use of the skills that we have, because while
it is not easy to attract people in, we do nonetheless manage
to get some extremely capable people—I am glad to say—and
we want to make maximum use of their skills.
Q203 Nick Smith:
Very quickly; I was really quite impressed with the health PFI
people that came here, and I was reasonably assured that the hospital
contracts they set up were good value for money, and I saw lots
of new hospitals around the country. I know there are problems
in lots of places, but in the round that is what I came away thinking.
However, the Report pointed to these risks for longterm
value for money and I want to return to the point that Mr Barclay
was making about this management of the tail of these contracts,
and I just do not feel sufficiently confident in the answers that
you have given us this afternoon about managing the tail of these
PFI contracts and all the risks and expense of it.
Andrew Hudson:
As I think I said to Mr Barclay, I will happily look into that
with the Department of Health in more detail as to these problems
that he referred to of shortage of people available to manage
these contracts, because one of the things in the guidance that
we have already put out about operational savings is about active
contract management as a fundamental point, so it is important
and, rather than say any more now, let me work with the Department
of Health and come back to you on that.
Chair: Austin very quickly,
then Richard, and then I think we will probably have a vote.
Q204 Austin Mitchell:
I am glad you brought Mr Pitchford, because I wanted to ask how
many more millions the Palm Jumeirah would have cost if it had
been done on a PFI basis, but my question is local, it is to Mr
Hudson; it does not demand an answer now, but perhaps you could
tell us. We have in Grimsby—
David Pitchford:
It was done as a PFI but with someone else's money.
Q205 Austin Mitchell:
That was not the answer I wanted, but thank you. Grimsby's Heritage
House is part of the PFI deal between Treasury and Mapeley STEPS.
It was built to give a home to public services, to bring them
to Grimsby, and we need the diversity of employment that they
provide. It is a brilliant idea, and it is also conveniently
placed for the best fish and chip shop in Grimsby. But the public
services which were brought there are now all leaving, including
your own Valuation Office agency, including HMRC, including the
Crown Prosecution Service and Work and Pensions; they are all
leaving because the rents are too high, and they are going to
Lincoln and Hull. Grimsby is the kind of place where it is cheaper
than the real world: we could provide a lovely home for public
services, and should do. Is this a consequence of the prices
charged under a PFI deal being too high for the Departments to
pay? Perhaps you could give us a note on it.
Andrew Hudson:
I will happily look into it. I remember visiting that office
in Grimsby and wishing I had more time to look around the heritage
site, which I did not at the time.
Q206 Mr Bacon:
Mr Hudson, we all wish we could spend more time in Grimsby, but
it is just not possible. Mr Pitchford, could I just return to
this whole question of skills and your efforts to increase them.
One of the other things that really comes out of the Report is
this whole deficit of experience capacity, lack of the right challenges,
and it is hugely encouraging to see that you are in a position,
doing the job that you are doing, trying to do something about
it. I met one or two of your guys already and they seem very
impressive. We will hear more about this next week, I am sure,
but some of this is directly relevant to PFI. You said something
rather worrying, which is you do not really have a locus here,
it is all local. The Report talks in paragraph 2.9 about joint
procurement by district councils, a large team of PFI specialists
at Leeds County Council, regular forums of NHS Trusts and all
the rest of it, and I hope you are going to say you can do something
more, despite the limitations and the ghastly phrase "spreading
best practice", because that is what the OGC was trying to
do for the last 10 years, and frankly it did not get us very far.
David Pitchford:
If we start at the back end of that question, certainly the best
practice thing, I have another role that is concurrent with mine;
it used to be called Head of Professions but it changed to Head
of Function for exactly that reason, to try to move this away
from the academictype application into what is this function
all about, how is it best done, how can we roll it out so it is
in the wider public sector, but by showing them what we have done
in the central Government sector, rather than me attempting to
do it across the piece? There certainly is a plan there, and
I am working in relation to that. But in relation to the other
skills thing—and if it is okay with you Mr Bacon I will
be much fuller about this next week and just give you a sketch
about where we are at—the environment here is pretty fraught.
As Ms DoylePrice said, I do have a great view about the
capability of people, but it is the organisation and the thrust
of where they are at, what they have been exposed to and how we
can enhance and deliver that much better, and we are in an environment
where you cannot buy in. As you quite rightly said, you cannot
buy in people through salary boost, you cannot hire consultants
under this operational construct at the moment, so we have to
get innovative about it. The areas that we are looking at to
apply this innovation is with a genuine commercial exchange with
suppliers that we engage with in procurement to come into the
space and provide people to help us who provide additional commercial
and particularly contract management capability. Several of you
have been talking about contract management, particularly Mr Barclay
and Mr Hancock. This is fundamental. One of the critical failings,
in general terms, as Mr Morse will tell you, in projects across
the Civil Service is lack of contract capability in order to be
able to draw up the contract and then manage it so the Government
is the best advantaged party. The second one is commercial understanding
of what you are trying to do in putting the deal together. That
is what we are trying to do. We are also looking to get much
more participation from the Civil Service at the higher level
in review of projects by going to places that we have never gone
before, and that is to seek out at the Director General and Director
level in departments those people who have specific capabilities.
I am also looking—this is a new area as well, I have not
got it quite set yet so I will not tell you the service I am using
as a pilot—at those trading functions that are abroad in
the public sector where there are people who are commercially
100% oriented, and I have struck up a pilot, which I hope will
be struck off on Tuesday of next week, where we will get 12 people
to come and start to educate operational capability into the piece.
Q207 Chair: I
know you have a long list, but I am really conscious we are about
to have a vote. In that whole context you are talking about major
projects in general. Has PFI got a role? This is a PFI inquiry
we are looking at, at the moment.
David Pitchford:
Yes, I know. I have to go back to where I am operating at the
moment, and that is in relation to major projects per se, as we
work through—
Q208 Chair: Is
your view that it has or it has not, or have you not got a view?
David Pitchford:
The operational skill requirement is applicable right across
the piece. I am looking at projects from what they are and where
they are at. PFIs are a particular procurement instrument, and
there are others, but my focus is on the projects that are high
risk, high value and if there are more PFI ones that come into
our patch because they are in that category, then the answer is
yes. But the skills we are talking about here are applicable
particularly at the outset of projects.
Q209 Chair: Okay.
I think we are going to be called in, so could we also have a
note setting out who owns the PFI contracts that have been sold
in the secondary market, and particularly my understanding is
that there might also be some North Korean and Iranian companies
who own them. I do not know if you are aware of that.
Andrew Hudson:
We can let you have a note on the information. Information on
ownership is already on the Treasury website, but we will let
you have a note on that, yes.
Chair: It is the entire
secondary market.
Stella Creasy: Yes, 91
projects.
Chair: Okay. I think
we are there.
Q210 Ian Swales:
Can I just ask one more on the secondary market? We have heard
about the secondary market, and really I would just like to know
how the taxpayer can get more value from the money that is created
in the secondary market effectively by people aggregating public
sector cash flows, creating what is in effect a Government bond
with a very high rate of return. As we heard from Mr Bacon, even
if a school closes, the money still keeps flowing and those aggregators
can pay their Chief Executive—he has gone now—over
£8 million a year. How can we get more of that money,
which is in the end public money, back into the taxpayer?
Chair: Ian, a division
has been called.
Andrew Rose: The
answer is quite a complicated question, so I am happy to tell
you, but it is quite a long answer.
Q211 Chair: Go
on, very quick.
Andrew Rose: Very
quickly, if the private sector aggregates and does a bond off
the back of their portfolio that will create a refinancing gain
that the Government shares in. If they did aggregate their cash
flows and issued a bond against those cash flows, that would be
a refinancing gain where the Government would get a gain share.
Q212 Stephen Barclay:
Was that the 50/50?
Andrew Rose: It
is, so it is 50/50—but that is at a project level. At a
portfolio level we would have to consider that.
Ian Swales: Okay, thank
you.
Chair: Thank you so much.
Sorry it is a bit chaotic, but we had a very full Committee and
we are constrained on time. We probably spent more time than
we should with the secondary market operators in the first instance.
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