Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 180-199)



  180. I know that but I asked you to give me an indication of the spread of return or do you have no information at all?
  (Mr Gershon) We do not have that data, as yet.

  181. You have begun that review but you have no information at all having begun the review, is that correct?
  (Mr Gershon) I do not expect to have until the external reviewers are ready to report against their assignment.

  182. Have you any idea, a rule of thumb, of the sort of rate of returns you would expect or have you simply no idea what the review will generate? You are a man of considerable business experience, I know that, so what is reasonable, do you think?
  (Mr Gershon) I do not know what the review will highlight.

  183. When you get the figures you will have no idea how to evaluate whether it is fair or not?
  (Mr Gershon) I can only tell you from my own experience, which is largely not to do with PFI, what one might consider to be acceptable rates of return if you were looking at an investment.

  184. Precisely. So what sort of rates would be reasonable for the private sector?
  (Mr Gershon) If you were using the shareholders' own money as opposed to using debt, if you were using equity to find an investment, if it was an investment in a piece of capital not just in a contract, in terms of internal rates of return, post tax, in real terms, you would normally be looking at something in the range of somewhere between eight and 15 per cent.

  185. So eight to 15 per cent. So Mr Kier is not doing very well for his shareholders, is he?
  (Mr Gershon) No, what Mr Busby talked about—

  186. Mr Busby, sorry.
  (Mr Gershon)—was a margin which is looking at a profit to sales ratio, which is not the same as looking at the return on investment.

  187. Fair enough. What is your return on investment actually, Mr Busby, so we are not talking apples and pears?
  (Mr Busby) The targets within PFI, and I think that is the relevant here, are in line with Peter's estimate.

  188. So eight to 15 per cent?
  (Mr Busby) Post tax it is maximum 15.

  189. I will move on, I do not want to get too bogged down in this. Can I just ask the NAO something. I do not want to dwell on this because Jon picked it up, but am I right to say that this report is not really a test of value for money and the like but simply, as has been put, a questionnaire and one of the questions that emerges out of this is when are we going to have a consistent methodology for measuring value for money and PFI projects? This almost masquerades, so I was fooled, but basically it is just asking a lot of people what they think, is that right?
  (Sir John Bourn) It is a report that does what it says it does. It is a report that looks at the replies to a series of questions on 121 projects. It shows what the people who were responsible for the management of those projects believed to be the case on the level of satisfaction as they saw it. It is not less and it is not more than that.

  190. Obviously there are all sorts of bias in terms of who responds and all this as to whether they think it is good or bad, but alongside that, given that PFI is the political menu of the day, there will be a propensity for people to feel they should say "this is great, we get a lot of added value".
  (Sir John Bourn) I do not think there is any greater incentive to say that than if they were people responsible for a traditional procurement, because if that was what they were working on and if you say because they are working on it and in a way their careers are going to be judged on it, there will always be a propensity to say that what you are doing is going well, whether it is PFI or anything else.

  191. Can I ask Mr Gershon, you mentioned you did not know much about the PRIME project, did you not? I was surprised by that.
  (Mr Gershon) I am aware of the NAO report and what I know is based on the NAO report.

  192. I only mention my surprise because I understand from the report that half of the total value of penalties paid for failures of contract, half of £5.6 billion, on page 11, 1.22, was in this PRIME project. I would have thought you would have found out quite a lot about the failures of that but you did not, did you?
  (Mr Gershon) That was an example of where the contractor was contracted to do a defined level of service and in the initial period—I think it was a year—of operation after hand over he clearly struggled with great difficulty to meet the contractual levels, fell short and paid a whopping penalty which then acted as an incentive for him to sort out what he had to do. It had exactly the desired effect in the eyes of the client.

  193. More penalties mean good contract management. Can I ask you about your wider commercial skills agenda. The situation is that in the 1980s and 1990s we had the then Government bringing in skills market testing and a huge exodus of procurement managers from the Civil Service, a valuable asset, went to the private sector. Alongside that we have got a situation now where different people can enter different departments at the same level at widely different salaries and there are big differentials between departments, which stand as pillars, and that undermines the opportunity for you to move procurement managers, contract managers, around the system between departments. Is that a fair summary?
  (Mr Gershon) It is not just looking at procurement specialists in a narrow sense. It will look at things like project management, contract management and other key disciplines that are necessary to ensure the successful management of the whole life cycle of a project. Yes, part of that is because departments have to respond to the business needs that they face and the market conditions at the time. If you have to go and recruit people today —

  194. Are you paying them enough, these people, to match their private sector counterparts?
  (Mr Gershon) I think I have been asked that question on a previous occasion by this Committee when I was examined on the management of the procurement of professional services. I said at the time in a number of key skills areas there were big pay differentials between what the private sector paid for certain practitioner skills and what the public sector pays.

  195. Are there differentials between departments as well?
  (Mr Gershon) There are also in some areas differentials between departments.

  196. Are there incentive systems?
  (Mr Gershon) They have to be careful. In some instances departments need people at a higher grade than other departments and that clearly also drives salary.

  197. Can I ask you something about figure 8. It says in figure 8 we have a situation that only 55 per cent of accounts are open book accounting. We cannot see profit transparency. Only 49 per cent have benchmarking, so if unit costs go down in the market place we cannot track down our costs. Only 15 per cent are arrangements for sharing of refinancing gains. Do you not think all those are very profound indications of failure to deliver optimum value for money in PFI contracts across this sample?
  (Mr Gershon) I did not catch the question.

  198. Yes. All these indications, namely half the people do not bother with benchmarking so if the unit costs of what they are providing slips down they do not track that. Only 15 per cent have arrangements for refinancing. Somebody comes along and says "This is the cost" and they go off after they have shown there is no risk, it was all a pretence or misunderstanding. They refinance and lower costs of capital, make lots of money, there is no arrangement for refinancing in 85 per cent of cases. In 45 per cent of cases there is not transparent open book accounting, as it is called, so both sides know how much money is being made out of the deal. Do you not think that is a disgraceful situation in terms of delivering value for money for the public sector? What is your response to that?
  (Mr Gershon) I think I have been asked that question before.

  199. You keep saying that. Can I have an answer, not the answer "I have been asked that before". What is the answer?

  Chairman: I am afraid in this Committee Permanent Secretaries get the same question over and over again. You have to give the same answer.
  (Mr Gershon) Right. Well, I will give exactly the same answer as I gave before...

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