Examination of Witnesses (Questions 1-19)|
GERSHON CBE, MR
WEDNESDAY 12 DECEMBER 2001
1. Welcome to the Public Accounts Committee.
We are considering the Comptroller's Report on Managing Relationships
to Secure a Successful Partnership in PFI Projects. We are delighted
to welcome back Mr Peter Gershon, who heads up the Office of Government
Commerce, and we also welcome Mr Colin Busby who is Chairman of
the Major Contractors Group and Chairman and Chief Executive of
Kier Group PLC. Perhaps I could start with a question to you,
Mr Gershon. Can I refer you please to page 2, paragraph 7, where
it says: "In total 81 per cent of authorities said that value
for money was currently satisfactory or better". To what
do you attribute this positive outcome?
(Mr Gershon) There are a number of factors,
Chairman. There are competent staff applying good practice and
guidance. There is management focus on value for money as a priority
and the involvement of specialist experts to help get and keep
projects on track, in other words what was the Treasury Task Force
and has now become Partnerships UK. There is the discipline that
PFI gives about the focus on outputs and service levels. I would
also add that if you also take into account figure 36 on page
35, which shows some of the underlying trends, there is no room
for complacency in that 81 per cent achievement.
2. Can I question you a bit more about that?
Can you tell us a bit more about the way in which you are monitoring
the extent to which the expected value for money improvements
for PFI contracts are being delivered? Are you monitoring it?
(Mr Gershon) The overall responsibility for looking
at individual projects rests with the individual accounting officers.
Within the OGC we are looking at a number of sources of feedback.
Firstly, as the Gateway review process cuts in, which I have referred
to on a number of occasions when I have appeared at this Committee,
the so-called Gate 5 Review is a formal review post the start
of operational service to see whether the benefits in the original
business case have been confirmed and to confirm what the clients
are doing about the ongoing monitoring of value for money. As
we get feedback from those reviews that will help inform us. We
also get feedback from Partnerships UK, monitor National Audit
Office reports and other reports on individual projects, and there
is established networking with departmental private finance units
which gives us additional feedback.
3. Are you convinced that your department and,
more importantly, other departments, are coping with change as
these projects have very long lead times30 years? Are you
convinced that they have got their finger on what is going on?
(Mr Gershon) First of all, not all of them are 30
years in length. Some of them are of rather shorter duration.
Am I convinced? The short answer to that question is no, I am
not convinced. Through things like the Gateway process we are
helping to sharpen the focus on the whole life aspects of these
and other forms of complex projects in public sector procurement.
I think this report has acted as a very useful wake-up call about
the importance of post-award contract management. Following the
discussion and agreement at the last meeting of my Supervisory
Board, the OGC has now commenced a programme of work in conjunction
with departments looking at what we call the wider commercial
skills agenda which explicitly includes a focus on contract management,
and in due course that will result in a number of measures to
help improve skills and capabilities in this area, for example,
the introduction of new training courses and encouraging certain
people to see that they can build careers in this sort of practitioner
4. Would you like to turn to page 33? I just
want to open up a number of areas that my colleagues can explore
further. At paragraph 3.39 you will see there that 23 percent
of authorities who gave us their current perception of value for
money considered that value for money was not as good as at contract
letting. I want to pursue this point about value for money being
eroded during the life of a PFI contract. Have you got any more
comments on that paragraph?
(Mr Gershon) Of course this can happen in conventional
procurement as well. I do not think this is unique to the Private
Finance Initiative. I am dealing with one case of conventional
procurement at the moment where I am very concerned about the
potential deterioration in the value for money in the life of
the contract. I use that as an example. What are we doing to improve
client capability in this area? First, we have the introduction
of the Gateway review process. As I said, there is also a greater
focus on trying to get much more professionalism and stronger
capability into the practitioners who are involved in disciplines
like contract management. We want to build up a contract management
network of PFI practitioners as the NAO has suggested in this
report. Over time we will see a sharper focus about testing ongoing
value for money in contracts. For example, in many long term contracts
to do with property and construction, somewhere around the five
or the seven year point in the life of a contract, the client
has the option to go to the market again to re-run a competition
for the provision of soft facilities management services. There
are other mechanisms such as benchmarking, but we all have to
look at how we can introduce stronger governance mechanisms through
looking again at our advice and guidance to help improve clients'
capability in this critical area.
5. Can I ask you about one contract for the
sake of example? I am told that in the Department of Work and
Pensions there is a property deal called Prime. If we look at
the management team in the department, nobody involved in the
management team was involved in the original deal and nobody in
the private sector side was involved in the original deal. This
is rather worrying. Do you know about this particular contract?
6. I am aware of that situation. We have seen
some of the consequences of that. Certainly in the advice that
we are giving to departments we are strongly encouraging them
that there is a level of continuity between those people involved
up to the point of contract award and those who are involved post-contract
award. I do think that is important to help the partnering relationship
get off to a good start, particularly in the early years of the
contract, because if there is complete loss of memory on both
sides about what led to particular agreements around the contract
at negotiations, then it must increase the risk that the partnering
relationship does not get off to a good start.
7. And you knew about this particular situation
with Prime, did you?
(Mr Gershon) No, I did not. It did not go through
the Gateway Review process. It was too far down the track to go
through it. If it had done that issue would have been picked up
because we explicitly test in these reviews for what the client
and the supplier's contract management plans are in terms of resourcing.
8. Will you now go back to page 17, and if we
look at paragraph 2.8 you will see there that it says: "There
were, however, many authorities which had provided little or no
training in contract management skills either before staff took
on contract management duties or in the form of follow-up training."
Are you not worried that this is putting the public sector at
risk on these important long term contracts?
(Mr Gershon) I am concerned, but if you asked me the
same question about non-PFI complex or novel projects I would
give you exactly the same answer, Chairman. The key is about the
actions that we are taking, some of which I have referred to already,
which will lead to improved client capability to commission and
manage projects which is in the area of advice and guidance, the
use of the Gateway review process and the actions that will flow
from a stronger focus on wider commercial skills.
9. Can I ask a question now of Mr Busby? Can
you please turn to page 20? If you look at paragraph 2.17 you
will see that many contractors highlight the need for authorities
to understand the operations of commercial organisations. That
is a fairly obvious statement. It is a bit of a naive question
but in what ways would such an understanding lead to improvements
in the delivery of successful PFI contracts? It is a very easy
question to let you have your say about the public sector.
(Mr Busby) It does not sound very easy. It is in the
area of risk allocation that most of the detailed debate happens
in the early days of the contract negotiation side. A greater
understanding in that particular area would be helpful. That is
what I interpret as the commercial aspect. The particular point
that concerns my organisation is one of time. Frequently during
the leading up to and award of contracts, the time pressures are
allowed to slip and it is an area that the private sector feels
as though it struggles with. One gets the impression that a lot
of the public sector organisations do not understand the importance
of time to the private sector. Time is money in that area and
the request that we would have would be to try and get a greater
conforming to the timetable as laid down. It is in that type of
area where most of these issues affect my particular members.
10. If you go back to page 8 and look at paragraph
1.11, you will see that 79 per cent of authorities thought the
risk allocation was totally satisfactory but only 53 per cent
of contractors had this view. Do you want to tell me why you think
that contractors and authorities had differing views on how risk
transfer is worked out?
(Mr Busby) There always will be a difference. I would
suggest that the public sector would be worried if 100 per cent
of contractors thought the risk allocation was ideal. The fact
that there is debate in this area I would consider fundamentally
healthy. I think it comes down to detail. There is the Gateway
process that I know Peter's office has issued various announcements
on. The fundamental criteria there as I understand it is that
risks should be allocated to the party that is best able to manage
them. That is a principle that we agree with. The debate that
happens is on which party is best able to manage each individual
risk. I feel as though it is a learning process. We are talking
here of PFI. It is a process that has been around for a relatively
short time. There are very steep learning curves in this process
and one assumes that as PFI continues the detail of risk allocation
will become a procedural rather than a discussion point.
11. Mr Gershon, if you look at page 14, paragraph
1.38, you will see that 55 per cent of these authorities have
already used the change procedures to update their contracts.
How are you going to encourage authorities to achieve successful
outcomes to any new service requirements?
(Mr Gershon) If behind that quote was
that this level of change is contributing to lack of success rather
than success . . . I am not worried about this level of change
because one of the things that the NAO have given us in general
terms about the nature of these changes is that in the main they
do not reflect very substantive changes to the contract post-award.
A lot of them are of a fairly minor nature. The sort of example
you might expect, I know from one or two contracts, is where the
contract was placed on the basis that the supplier would do a
set of testing and then the customer would do a set of testing.
But in the period between contract award and the asset becoming
ready for service and being introduced into service, the client
and the supplier agreed to a joint testing approach. That would
have to be reflected in a change to the contract. That is a highly
beneficial change and reflects in some sense that the partnership
is working well. On the other hand you could see a scope change
post-contract award because of the needs for example of the prison
service, if the role of a prison is changed to include provision
for under-18 prisoners who require special additional facilities
to ensure their protection. That would then lead to some change
to the contract which was accommodated by the contractor. The
percentage seems high but the nature of change does not lead me
to believe that this is worrying. It might be helpful for Colin
to say on a traditional procurement contract which his company
has been involved in, the sort of level of changes they would
see between contract award and the handover of the asset in a
conventionally procured built contract.
(Mr Busby) I think this whole area of
change is a plus side for PFI. The example that Peter is asking
me to relate to you was for a hospital procurement under the traditional
form. My company has been involved in many of those and it is
not unusual for such a traditional contract to have, say, 15,000
change orders during the construction phase of such a contract.
I am sure there are plenty of examples where 15,000 is significantly
under what has actually occurred. We have just finished a major
general hospital in Scotland under PFI and the change orders through
that process number less than 50. I am convinced that it is the
PFI process that has caused that change to occur.
12. Mr Gershon, you have described this report
as a useful wake-up call. As far as I understand it we are 400
contracts and £100 billion down the road. What happened to
your alarm clock?
(Mr Gershon) I described it as a wake-up call in terms
of helping to focus attention on the importance of contract management,
not in the sense that it is not happening today. It is, but it
is a very powerful reminder that we need to continue to maintain
and strengthen the focus on this area. That is entirely consistent
with the remit of the OGC which was created in April 2000 to look
at procurement in a whole life sense from cradle to grave, whereas
historically procurement much more closely followed what happened
pre-award. The Gateway process is a demonstrable example of how
we have introduced a technique to support that whole life approach.
I use this term in the sense that anything of this nature which
helps draw to the attention of top management across the Civil
Service to the importance of these disciplines I regard as being
entirely helpful to my cause.
13. You do? Do you not regret that they were
not there before?
(Mr Gershon) Of course I do.
14. Are you not alarmed? For example, if I look
at page 11, in banner headlines in the last column it says "Value
for money mechanisms are needed". How is it that they are
still needed at this stage? You yourself said that you are not
actually monitoring; you are getting some information, but there
seems to be no scientific assessment of value for money. Indeed,
in the NAO report it is impressionistic whether it is good value
for money or not. There is no empirical evidence here that it
is good value for money. It is just the contractor saying it is
good value for money and the people who enter into the contract
say it is good value for money, but neither of them are going
to throw up their hands up and say, "We got it wrong",
(Mr Gershon) What this report is looking at is what
has happened over time between contract as contracts move into
their implementation and operational service phase.
15. No, no. The question is value for money.
All we have here is impressionistic analysis of the views of the
authorities and of the contractors on whether it was good value
for money or not. You agreed this report.
(Mr Gershon) Yes.
16. If it does say value for money mechanisms
are needed you must agree with me and with the report and with
your department that indeed they are needed. Why are they so slow
(Mr Gershon) As standardisation and advice and guidance
affects more and more of the contracts they will include mechanisms
for determining the ongoing value for money during the life of
the contract. I referred to one example and, if you recollect,
I was last in this room with Sir Andrew Turnbull when we looked
at GOGGS. That has in it, for example, the provision at various
points in the contract to re-complete the soft FM aspects of the
contract which provides a real test as to whether that aspect
of the contract is continuing to provide value for money.
17. You quoted one example out of a hundred.
You have agreed that there is a need, a gap, for mechanisms. Either
you agree there is a gap or you do not. If you do not agree why
did you sign up to the report?
(Mr Gershon) If you look at the text that underpins
this it highlights what authorities are already doing.
18. Yes. That is what they are already doing
but it says more are needed.
(Mr Gershon) Yes.
19. But it is 400 contracts. You quote one example.
(Mr Gershon) You are assuming that in 400 contracts
there are no value for money mechanisms in place. That is not
the case. In a number of instances mechanisms such as the re-competing
of the soft FM contracts may not yet have been triggered because
insufficient time has passed in the life of the contract because
typically that will happen at the five or seven year point.