Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 1 - 19)

WEDNESDAY 21 NOVEMBER 2001

SIR ANDREW TURNBULL KCB, CVO, MR PETER GERSHON CBE, MR JAMES STEWART AND MR PAUL LEWIS

Chairman

  1. Good afternoon and welcome to the Public Accounts Committee. Today we are looking at the funding competition used to finance the Treasury building PFI deal and we are very happy to welcome Sir Andrew Turnbull, who is the Permanent Secretary of the Treasury, Peter Gershon, Chief Executive of the Office of Government Commerce, Paul Lewis, Managing Director, Exchequer Partnership plc, and James Stewart, the Chief Executive Officer of Partnerships UK. Could I ask you this, Sir Andrew: paragraph nine states that all parts of the PFI deal are usually obtained in a single procurement. Was the decision to use a separate funding competition a departure from previous Treasury guidance?

  (Sir Andrew Turnbull) Yes. The title of the document is "Innovation in PFI Financing." This was a first and we were trying to see whether this was a development which could be successful and, if so, to extend it into other areas of PFI.

  2. Based on your experience, are you going to be looking for a funding competition arising in many more PFI deals?
  (Sir Andrew Turnbull) The whole of chapter two is trying to identify where a funding competition might be possible and where not and recommending that at least it should be a question that is always considered and that people should give themselves the right to opt for it if they want it. It does not say you should always have it; indeed, it indicates some circumstances in which it would not be appropriate.

  3. Can I ask you about paragraphs 1.13 and 1.16? It states that the key to the success of the competition was the appointment of skilled advisers. Was it necessary, do you think, to rely so heavily on advisers?
  (Sir Andrew Turnbull) It was a complicated deal and we equipped ourselves with a good advisory team. If the implication is that we were over-dependent on advisers and that the team we had ourselves was insufficient, I would rebut that. At the time, we had within the Treasury the Treasury Task Force who have now grown into PUK. That was a very important source of advice and we drew on them to be our advisers. The answer is that this was a deal in which there was a balance of both strong, external advisers but also strong, internal advisers.

  4. Based on your experience of this deal, do you think that there is a case for Whitehall to have more internal expertise in this area so it does not have to rely so heavily on external advisers?
  (Sir Andrew Turnbull) That was a conclusion which led to the setting up of PUK, a feeling that throughout the public sector there were too many people inventing the wheel, putting together teams of advisers, very heavily dependent on outsiders for the first time. What PUK has done is taken what was the Task Force, put it into this separate entity and we now have a group of people who work full time on PFI cases. As they finish one case, they are available to be redeployed on another. This should create a cadre of expertise which is available for use throughout the wider public sector.

  5. Mr Lewis, paragraph 1.50 shows that all of the benefits of the competition accrued to the Treasury. What incentives were there for Exchequer Partnership to obtain the best priced financing, given that all the incentives went not to you apparently but to the Treasury?
  (Mr Lewis) The funding competition was one of the criteria that we were given for carrying on the project.

  6. That was the incentive?
  (Mr Lewis) Absolutely.

  7. You had no choice obviously?
  (Mr Lewis) Not really.

  8. There was no other incentive for doing it?
  (Mr Lewis) We knew that because of the negotiation procedure a funding competition was probably the best route to go.

  9. How heavily involved were the Treasury? Would it be fair to say they were all over the funding competition, standing at your shoulder the whole time?
  (Mr Lewis) The funding competition was run by our financial adviser but he did consult with the Treasury advisers.

  10. Mr Gershon, paragraph nine of the executive summary states that there may be a role for funding competitions in future PFI deals. Do you think they should be used in every deal?
  (Mr Gershon) No, I do not. This is a sophisticated technique which needs to be used very carefully in certain circumstances and the report sets out the sort of criteria that might point clients towards situations where a funding competition might be appropriate.

  11. If they are not going to be used in every deal, and you seem to be throwing a bit of cold water on this presumably because of the complexity, are they really a credible option in the PFI process?
  (Mr Gershon) They are certainly a credible option in projects that meet the sort of criteria that are set out in the report but as the report also indicates there are other ways in which clients should take a close interest in the bidder's financing, which need not necessarily mean running a funding competition; looking to what extent the competitive tension is producing good financing arrangements by, for example, benchmarking. There are also other techniques that could be used to establish whether the financing is of a competitive nature. For the future, we are in the process now of producing revised standardisation for PFI. We will certainly be recommending to all the public sector clients that they always reserve the right to require a preferred bidder to run a funding competition. We would expect that, by reserving that right, that would introduce additional competitive tension into the process to drive through competitive financing arrangements.

  12. In the context of funding competitions perhaps not being used on many occasions, can you tell us a bit more about the way pressure can be exerted on the preferred bidder to obtain best value financing?
  (Mr Gershon) For example, in PFI competitions, the public sector client will have advisers. He should look to his advisers to give an input as to whether they feel the financing that the bidder is putting forward is of a competitive nature and to what extent the bidders have explored the various ways in which the project can be financed to ensure that the keenest terms are put on the table.

  13. Sir Andrew, who was the manager of this particular project?
  (Sir Andrew Turnbull) There was a structure of relationships. There was a senior responsible officer in the Treasury, who is one of my immediate deputies, advised by a steering group, who then employed a manager from GTMS. It followed the structure of relationships which is advised by OGC.

  14. Was there continuity in the management of this project, as far as the Treasury was concerned, or were personnel changing during it?
  (Sir Andrew Turnbull) There was a remarkable degree of continuity. The Treasury team, with the exception of one person who has retired, is the same team that started on this thing in 1996.

  15. So generally this would be considered a success. Just as a matter of interest, why is it that a project manager in Whitehall does not ever become a permanent secretary?
  (Sir Andrew Turnbull) There is a particular skill set that has been thought to be needed to be a permanent secretary. You are heavily involved in policy advice, working very closely with ministers. I do not rule it out in the future. I think that skill and experience in project Management will become more highly rated in the future. We are all a product of 20 or 30 years of history. If we are looking 20 years hence, it may well be different.

  16. Mr Gershon, you are not a product of 20 or 30 years of history in Whitehall. What do you think of this?
  (Mr Gershon) I am an anomaly. There is a difference between someone coming into the sort of job that I have come into, which is of a fairly specialist nature, where it is not necessary to have a deep understanding of Whitehall ways and skills. I can relate private sector experience and try to bring it to bear in a public sector environment, but I do agree with Sir Andrew. Now there is a tremendous shift in emphasis onto successful delivery that is going to result in project management skills having much greater significance and importance in the future than I sense that they have been in the past, where the emphasis has been much more about the policy aspects of the job rather than the delivery aspects of the job.

Mr Gardiner

  17. It is really nice to be on a Public Accounts Committee where we are not having to say, "Why the hell did this go wrong?" and I think it is the first NAO report that I can remember where, on the contents page, part one begins with, "The Treasury competition was a success". I hope that sends out the message to Whitehall that we do not always go digging for muck and spreading it around. Sometimes we can say, "Well done." It is also worth exploring when things do go well. Having said that, one of the things set out—I refer to page two, paragraph 4(a)—is, "The Treasury had two objectives in requiring such a competition: a) to persuade banks and other project funders to accept standard contract terms for future PFI projects. . . . This was intended to streamline the procurement process and reduce costs for both the public and private sectors." If we go forward to paragraph 1.19, what is said there—correct me if I am wrong—is that the evaluation criteria in determining who was going to get this contract set out that bidders were to be evaluated on three criteria, one of which was the acceptance of the standard terms and conditions. Presumably, if you were wanting to get those standard terms and conditions accepted, but you were only going to accept bids that do accept those standard terms and conditions, is it not rather a circular way of proving that these standard terms and conditions can be successful?
  (Sir Andrew Turnbull) I think it would have been slightly odd if we had said—and I think there was a demand for this from bidders—"We are going to devise some standard terms reconciling a number of different things that have appeared in different contracts"; then to have produced it and said, "We are not going to use it in this particular case." It is not saying you then had to produce a bid that was standard so there was no scope for imagination in the solution offered. It is the terms that are being standardised; it is not the bid itself.

  18. What I am not saying is that if you are trying to establish a model of standard terms and conditions then you should not incorporate that in the model that you are seeking to pilot it with. What I am saying is that if you are going to evaluate those bids that come in for the contract and say, "We are only going to accept those bids that go along with this rather than any bid that deviates from those standard terms and conditions", that is a bit circular. Am I being unjust?
  (Sir Andrew Turnbull) If the standard terms were saying something about the nature of the solution that was being offered, you would be right because we would have been cutting out the scope for innovation but this is trying to reduce the transaction costs of this for the benefit as much for bidders as for the public sector.

  19. Of those companies that in the end decided not to bid—I think there were nine—none cited anything to do with the standard terms and conditions?
  (Sir Andrew Turnbull) Not to my knowledge although I was not there at that time. I do not think that was the case, no.


 
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