Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 40-59)



  40. How much more than 50 per cent? At present you are at something like 80 per cent; is that right? Somewhere in here I think I saw a figure of that sort.
  (Mr Gershon) I am clear what number we should aim for.

  41. That is not the point. What are you getting?
  (Mr Gershon) What is my belief?

  42. Yes.
  (Mr Gershon) How many would be better than satisfactory?

  43. Yes, satisfactory or better by the end of the contract. How many of the authorities will still think that these were good value for money contracts when they come to their final year?
  (Mr Gershon) At least the same number who think they are satisfactory or better today.

  44. Really?
  (Mr Gershon) Yes.

  45. Although it seems to be falling, and yet you are saying that from now on it is not going to fall any further at all?
  (Mr Gershon) First you asked me a question about what would happen at the end of the contract, and that was the question I answered. As I said, I think we are taking a number of measures that will help clients' capability to manage these contracts and strengthen the ability to derive value for money from them.

  46. I hope you are right. Probably neither of us will be here in the year when these contracts end.
  (Mr Gershon) I sincerely hope that at periodic intervals the NAO will do similar reviews to this so that we are all able to monitor what is happening and the effectiveness of the management actions that are being taken.

  47. It will be very interesting to see how this graph changes over the years, and no doubt the NAO will wish to reproduce this graph as years go by. Mr Busby, may I ask you a question? Twenty five of the firms concerned have had deductions made as a result of failure to fulfil the contract terms totally.<fu2> Are you not a bit worried about the figure? It seems to be quite a lot. Presumably if they were, as one hoped they all were, tendering for the minimum price which would nevertheless give them a reasonable return on the amount of capital employed and the workforce employed, and 25 of them have actually not got that price because they have had deductions made as a result of failing to fulfil the contract, is that not rather bad news for the contractors?

<fo2>  C&AG's Report, para 1.22.

  (Mr Busby) It certainly puts pressure on contractors. If I can use the example of the hospital, the contractors will get paid for two things in hospitals on the service side. One is the provision of the service and the other is the availability of the service. For example, if a ward is taken out for maintenance the authority involved would be entitled to make a deduction for that particular non-availability and would in fact do so. It is that area where I believe the deductions have been made. I do not think it is a fundamental assessment of the performance under the contract. It is a process within it that allows for deductions to happen in those terms.

  48. So you are saying that this is not a case in which they are making less of a profit than they thought they were going to make?
  (Mr Busby) It could easily be that, yes. I would expect the deduction to reduce their profit undoubtedly.

  49. I may want to come back to that later because it was not quite how I understood it. Mr Gershon, are you aware of any cases in which deductions could have been made but were not?
  (Mr Gershon) I personally am not aware of any such cases.

  50. Can I ask you now about the timescale for putting these contracts into place? It seems to me from experience, particularly in my own constituency, that very often putting a PFI contract into place takes a hell of a lot longer than going down a straightforward paid-for-by-the-government-out-of-public-funds type of contract. Is that correct, in your experience?
  (Mr Gershon) Yes, I think that is a fair top level statement to make.

  51. In that case what notice is taken of that when you are deciding to go one way or the other, because clearly if we are talking about providing public services, if you can provide a public service perhaps at a slightly greater price now or at a slightly lower price in five years' time and add on the extra time taken to set up the contract, is notice taken of that in making the decision as to whether you go one way or the other?
  (Mr Gershon) Yes, but offsetting those delays is the better performance that we are seeing of the private sector in PFI contracts bringing the assets in on or ahead of the schedule demanded by the contract compared to what we regrettably have seen too often in the past, that through traditional procurement the assets come late, sometimes many months, sometimes years and years later than the original plan. Therefore, although yes, you may get additional time at the beginning, you have to look at what happens overall in the life of the project.

  52. We are looking surely at value for money in both cases. If you have a straightforward contract and it comes in late, then presumably you have got something in the contract that says you get some money back or the price is lower.
  (Mr Gershon) I am sorry, that is not always the case. In traditional procurement methods often the cost of the overrun fell to the public sector, both the direct cost and the consequential cost.

  53. There is no reason for that, is there, if you write the contract properly?
  (Mr Gershon) But historically most public sector contracting was not done on a prime contracting basis. It was done using more traditional procurement methods where the client in effect acted as his own prime contractor.

  54. What you seem to be saying is that if you go for a traditional procurement method but you introduce into your contract some sort of penalty clause then that is very often going to be better value for money than going for a PFI scheme?
  (Mr Gershon) No, I am not saying that at all, because there is a cost to the public sector of the asset coming in late in terms of delayed services. The point you make about the additional time is absolutely right. We are in discussion at the moment with the industry association of which Colin is the Chairman, where they have drawn to our attention a number of areas where the time that was being taken is a matter of concern to them and I am in dialogue with a number of the departments to understand what is driving these excessive timescales which are giving rise to additional cost for the private sector and the public sector to see what we can do to shorten the timescales in PFI contracting. It is not a given. There is no fundamental law of nature that says it should take as long as it does for some of these contracts to get awarded.

  55. But it has done up to now.
  (Mr Gershon) It has done up to now and it is a matter that I am paying attention to.

Jon Trickett

  56. I do not feel comfortable with this report in some ways. Its methodology is really an opinion survey of a number of people chosen we do not know quite how. I am not sure that measuring perceptions tells us very much, especially when you are asking people, "Are you in favour of motherhood or apple pie?" Underlining some of my questions will be that general theme, that we have here an opinion survey rather than any objective study of value for money or anything else, although there is some interesting information coming out of it. Sir John, are you in favour of motherhood and apple pie? It seems to me that the culture of this place now is that PFI is the latest flavour of the month. Personally I am not particularly in favour of it but I guess if you asked the majority of civil servants, "Are you in favour of PFI and do you get value for money?", it is a bit like saying, "Are you in favour of motherhood and apple pie?"
  (Sir John Bourn) Yes, but that of course was not what the survey was about. The survey was about the experience that people had of working the PFI contracts and the experience showed that there was a degree of satisfaction. The experience also showed that satisfaction was declining. The experience also showed that on both sides people had ideas on how to make things better. It was—and I do not claim for it any more than it was—a survey of those people who were responsible for this work and a survey of what their experience was. As Mr Gershon has said, this is the first time that an attempt has been made to provide information on this area at all and that does not mean to say that we will not do further work which examines this from other bases.

  57. I have no doubt that there is useful information in here but you really are asking people about perceptions: "Do you perceive that you have had value for money?", and then we have made a table which members have made much of about whether the people who are managing accounts perceive that they have achieved value for money. I guess most people are going to say yes, and in a way it is a self-fulfilling approach. That is my view and I just want to say that some of the people of whom we have asked questions are clearly not equipped to give answers. I will demonstrate that in the questions which I am going to address to yourself and others. First of all can I ask on what basis you selected the projects? There were 400 projects altogether. You chose 121 of them. Actually you did not even manage to get some of them to reply, did you?
  (Mr Finlay) The sample that we chose was virtually all of central government PFI contracts.

  58. Every one of them?
  (Mr Finlay) At the end of 2000 which had been in force for over a year. That was the basis of the sample.

  59. Not everybody replied though, did they?
  (Mr Finlay) Not everyone replied but we did get a high proportion who replied. What I would also say is that although you have mentioned that we asked perceptions about value for money, which is absolutely true, we also asked a series of much more detailed questions to build up a very close understanding of the mechanics of what was going on.

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