Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 100-119)

MR PETER GERSHON CBE, MR PETER RYAN, AND MR COLIN BUSBY

WEDNESDAY 12 DECEMBER 2001

  100. They do not provide the clinical services?
  (Mr Gershon) No, no, no.

  101. The point I am trying to make, if you will listen, is if the hospital has a certain budget and they have to take from that budget to pay for the contract, at the end of the day that contract is more than was anticipated because they then have to find extra money to pay the extra payments, where will that money come from?
  (Mr Gershon) The extra payments are not triggered by the contractor making losses. I am sorry, although it is true in the hospitals clinical services are not within the scope of PFI, the contractor will probably have an obligation about the maintenance of the ambient temperature inside the building.

  102. Right.
  (Mr Gershon) He will provide soft FM services like catering, laundering, portering, i.e. the non clinical services.

  103. Absolutely.
  (Mr Gershon) Right. He contracts. There are key performance indicators in the contract which define the contracted level of service. If the contractor does not achieve that he gets debits off his payments for failing to meet the contracted level of service. If he has already made losses, because he got it wrong on the building, that is tough luck, you do not get extra money, that is one of the great benefits of PFI.

  104. I hope that is right. My understanding and information that has perhaps been given to me, it might be biassed information, is that at the end of the day if the hospital, out of its budget, has to increase its payments to the contractors —

  (Mr Gershon) Because the contractor has made a loss?

  105. Yes. Then they have to find that money from somewhere else and that means cutting services.
  (Mr Gershon) Mr Steinberg, if you pass me that information, I am very happy to follow that up and personally come back to you on that.

  106. Okay. We will move on. I am almost out of time. That cannot be right. Is it not a fact, the way I look at it, that the track that Jon was going down is absolutely right? Basically you are bound to say, if asked, it is value for money because at the end of the day you have no other option but to say that because there is no other avenue you can go down, therefore you have to justify it. At the end of the day there is only one way that a major capital project can now be built and that is through PFI.
  (Mr Gershon) Sorry. It is not the case that is the only way of building capital projects.

  107. Can you tell me a hospital that is now being built under a public sector contract?
  (Mr Gershon) There are one or two traditionally procured hospitals.

  108. Where?
  (Mr Ryan) Can I just clarify. I cannot give you the names off the top of my head but I know that very recently on four hospitals in the NHS which had been due to be built under PFI it was concluded that after careful examination it was better to do it through conventional procurement. That is what is being done. That illustrates the fact that the public sector comparator is used properly.
  (Mr Gershon) Mr Busby has just mentioned in my ear that he thinks that the one on the Isle of Sheppey is being done through traditional procurement, not PFI.
  (Mr Busby) It fits the definition.

  Mr Steinberg: I had six pages of questions I wanted to ask you, I have asked one and a half.

  Chairman: You can come back at the end if you want to. Mr Rendel, unusually, has now found his reference to the question he was asking Mr Busby so he wants a very brief question to him before he leaves.

Mr Rendel

  109. If I may, Chairman, because I am afraid, I have to apologise, I have to leave in a moment. Mr Busby, when I was asking you earlier about these ones that had deductions, you gave me an answer which I was surprised about. You may remember at the time I said I would look up the reference and come back to it. I have now been helped to find the reference which is paragraph 1.22 on page 11 where the report says that "... 58 per cent of authorities who had an agreed performance and performance deduction review process told us they had made performance deductions in accordance with those processes. 25 authorities told us that they had made deductions totalling £10.3 million". As I understand it, that is when the contractor's performance—as it says in the very first sentence there—falls below certain contractually defined standards. In other words, it is something that is in the contract. When a ward goes into maintenance for a period you do not get the payment during that period, that is in the contract. What we are talking about here are deductions for when the performance falls below certain standards. Now it seems to me if that is true and if this amount of money is being removed from your contractors, given that—as I mentioned earlier, I would hope the contractors were basing their tenders on the lowest possible price to get anything like a reasonable rate of return—then presumably in the end all these 25 contractors had failed to get a reasonable rate of return and I would have expected that to be pretty worrying from your point of view.
  (Mr Busby) I can only repeat what I said earlier. As far as I am concerned, the ones I am aware of, the deductions were made in accordance with the processes which are contained within the contract. There are two fundamental ways on which a contractor is paid: availability of the service is clearly one of them. In the event that there is a problem with that availability, and that can come in all sorts of forms, then a deduction will be made.

  110. Are you saying—let me get this quite straight—that in your view the contractors would have taken into account the likelihood of this level of deductions before they fixed the tender price to give them a reasonable rate of return?
  (Mr Busby) I think they probably would, yes, because it is totally unreasonable to expect every ward to be available for 30 years 100 per cent of the time.

  111. Can I just ask the C&AG, is that how you understand the PFI is supposed to work or perhaps Mr Gershon would like to answer this? Is that what you understand, they are expected to set up their contract prices with an allowance for the fact that they probably will fail to do what they said they will do in the contract?
  (Mr Gershon) Can I put it this way. When I was on the other side and we were bidding for a PFI contract, you would make probably an allowance that certainly in the period immediately following what you describe as the start up phase of the contract, you would probably make some contingency against meeting the contractually defined levels.

  Chairman: I am going to stop you there.

  Mr Rendel: That is fine. I am appalled, but that is fine.

Mr Jenkins

  112. Mr Busby, it is a strange set up, is it not? We go through all this system and I bet you must wish for the bad old days or the good old days again. When we were building hospitals in the good old days, we would start off with a price of £200 million to build a hospital in two years.
  (Mr Busby) Yes.

  113. Then by some miracle we would find things go wrong or things not up to standard, we suddenly found the floor was not good enough, we would call the architect and say: "That ward there would look much better if the floor was wood or the doors would look much better in glass and if they had gold handles on it would be much better, you know". The architect was trying to keep costs down because he was paid a percentage of the final price. He would say "Oh, no, all right" and we would get this extension and it would take three years to build and cost £300 million and you use the three years and the £300 million and then suddenly you got cut back to produce this building in two years for £200 million. Do you not rue the day anybody thought of this scheme? Yes, is the answer.
  (Mr Busby) It was a considerable shock to the industry when the scheme was initially suggested by Government. The industry struggled significantly with the additional risks that they were asked to take on board as a result of PFI but there is no doubt that the good old days—as you describe them—did a number of things. It certainly in the main, if you use hospitals as the example, did not provide value for money to the public sector, of that I am absolutely convinced.

  114. It was awful.
  (Mr Busby) It was awful, yes.

  115. They were all part of the same gang.
  (Mr Busby) The returns that the contractors get, I am fascinated by some of the comments that have been made around the construction industry shafting the public sector. The reality is that my industry probably makes a return on average of about two per cent of turnover, that is the return that we as an industry on average will get. My company has been very proud to announce for the first time it has managed to get one per cent profit margin on its turnover. There are industries which I know contract to the public sector, Mr Gershon, where margins of, let us say, ten per cent are thought to be more appropriate. That does not happen in this industry.

  116. IT Companies are 15 and 20 per cent.
  (Mr Busby) Fine, yes.

  117. Construction is quite well known and recognised. Schedules and rates, for example, you can work these things up reasonably simply and easily. Here is the old building, you have a chance to maintain it, taken over a 30 year lifespan where you have a responsibility —
  (Mr Busby) Absolutely.

  118. You have to make sure it is built right to start with.
  (Mr Busby) Absolutely so.

  119. I am surprised you find it amazing you have to take wards out. You have to take wards out to paint them.
  (Mr Busby) Yes.


 
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