Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 200-219)



  200. I am not talking to somebody in the Department now.
  (Mr Gershon) This is not good. 15 per cent showing in refinance is clearly not acceptable. I have already indicated, the action we have taken is to move the position that it will become the norm in PFI contracts that there are explicit refinancing gains in all contracts for 50:50.

  201. Okay. Just very quickly. On figure 8, the 15 per cent refinancing benefit within a year, that will be near 100 per cent?
  (Mr Gershon) We cannot retrospectively do that.

  202. I know that.
  (Mr Gershon) If you took a sample of contracts going forward, let today, you would expect to see that number become 100 per cent.

  203. Open booking accounting, 55 per cent now, is that going to move to 100 per cent?
  (Mr Gershon) There are a range of other techniques to establish ongoing value for money. I would not necessarily expect to see open book accounting used in all contracts. I would expect the percentage to become much higher. I would not necessarily expect to see all VFM mechanisms used in all contracts.

  204. No, but if you have a target. This cloudy language means people think they do not have to do it. I am talking about your focus on benchmarking, open book accounting, and you have already said about sharing of refinancing.
  (Mr Gershon) Yes, and the Gateway Reviews explicitly test how the department is planning in the pre-contract phase to secure ongoing value for money in the post-contract phase.

  205. You would expect benchmarking and open book accounting in the future, is that true, just so we are clear where you are going and where you have been?
  (Mr Gershon) Yes.

  Mr Davies: Thank you.

  Chairman: That is a good way to answer on that. Thank you, Mr Davies. Mr Bacon.

Mr Bacon

  206. Mr Gershon, it is a pleasure to see you, although I feel on this occasion you will be singing to me rather than the other way round. The question which interests me is this question about whether the public sector is "managing the contracts well". You have said a number of times that you are taking specific steps to improve the ability of the public sector to manage these processes well. Can you just expand on the specific steps a little for us?
  (Mr Gershon) Yes. Take, firstly, the Gateway Review process. That is testing various points in the life cycle of the project, from the very earliest stage. You could relate that to the earlier comment about women and sex, I am not sure I would use it, to describe the very earliest stages of conception of a project through into the operational phase, whether the departments are taking account of best practice using sound management techniques, how they are planning to resource the teams and whether they are resourcing the teams with people of the appropriate skills and experience. As we get a body of projects that have been through that process, and given the period of time it takes for projects to move from conception through to operational service, is going to take a number of years before we see the full benefit of that but we will see a growing body of projects that are on much stronger foundations than a number of public sector projects which have come in front of this Committee all too often in the past. That is one of the steps we are taking. We are looking in a number of areas to provide better advice and guidance, that is both at what I describe as the operational and business level where the OGC inherited an enormous volume of advice and guidance from its antecedent organisations, and we are going through a process of updating it and making it more coherent. Some of the advice which came from different origins was inconsistent and in some cases in conflict with each other. As an example of that, we are planning that by the end of next March we will have provided revised operational guidance in the area of contract management because we have looked at our contract management guidance and it is inconsistent and it needs updating to take account of helpful reports like this and other reports which have shown the need for better contract management advice. We have also identified that there is a need to provide much more focused advice for accounting officers and their management boards because in my experience it is very difficult to expect a very senior busy manager to read a 50 or 100 page advice document that is designed for middle management and practitioners. We have produced these fold out two page documents which are trying to help Accounting Officers focus on critical issues. We have done three of those, two of which I think are relevant to this hearing, which are about managing partnering relationships and why service contracts can go wrong. We have another one on the stocks, as I alluded to earlier, which is about how value for money can be assessed and determined, the sorts of factors that need to be taken into account in identifying value for money. Whether it is PFI or non-PFI the generic issue is the same.

  207. Can I interrupt you because it is all very interesting and actually you have raised a couple of other questions but I know I am going to run out of time if I do not interrupt you. It leads on to a question I was going to ask later about the position of the OGC in the firmament. One of the things you said much earlier was if the OGC is consulted by departments they get a very clear steer. To what extent is your job about getting the attention of Accounting Officers and to what extent can you invoke powers to require them to do what you want?
  (Mr Gershon) I said that I want to win hearts and minds because I am great believer that if you have people's hearts and minds you can achieve far more change than if you instruct them what to do.

  208. I am asking the Lenin question "who whom". Machiavelli said given the choice between having someone fear you and having someone love you he would go for fear.
  (Mr Gershon) My minister is the Chief Secretary of the Treasury responsible for public expenditure and above him sometimes sits Gordon Brown, the Chancellor, and it is known within departments that if I feel they are doing something which is fundamentally not conducive to value for money that I have escalation routes to draw the matter to their attention. I would hope to win that argument on a face to face basis with the departments but if I cannot I have resort to that weapon.

  209. You keep a little button under your desk.
  (Mr Gershon) And I hope I never have to use it because I would regard it as the nuclear option.

  210. The Gateway Review process, as it is now set up, is it something through which every project now goes as a matter of course?
  (Mr Gershon) Yes.

  211. It is not an option for departments, they have to go through it?
  (Mr Gershon) In central civil government.

  212. That brings me to paragraph 2.9. Presumably you are referring to health authorities or local government that do not necessarily go through that Gateway process, is that right?
  (Mr Gershon) At the moment that is the case, yes.

  213. Is that likely to change?
  (Mr Gershon) I do not know. For example, the Byatt review on local government procurement recommended the adoption of a Gateway-like process for big capital projects in local authorities and ministers are considering that recommendation. We are in discussion at the moment with the NHS about how the Gateway process could be used on some of their projects.

  214. Considering the Sunday Times ten days ago reported that between 16 and 20 per cent of all the health service budget is wasted through fraud or inefficiency, I hope you are right and something happens. In paragraph 2.9 it talks about contract management manuals and how useful they can be but "only a minority of authorities had produced such manuals" whereas in actual fact where they were produced people were very likely to regard their relationship as very good. It is basically saying that if people have a very clear idea what they are supposed to do because there is a contract manual then it is much more likely that things will go very well. Plainly that being the case, manuals being a very good idea, yet only a minority of authorities having contract manuals, can you say when it is going to change so that it is utterly standard to have a contract manual?
  (Mr Gershon) What I can tell you is that in the revised guidance that I referred to earlier about contract management, this will feature in that as part of the updated advice and guidance. I would certainly expect in Gateway Reviews that the review team would be testing what methods were in place to facilitate the ongoing management of the contract. Part of the evidence they would be seeking would be a plan to produce a contract manual of the type described here.

  215. When do you think you will promulgate your updated advice and guidance?
  (Mr Gershon) On contract management we are targeting to get that out by the end of next March.

  216. So how long after that would you expect local authorities and health authorities to have taken it up and done something about it?
  (Mr Gershon) As I have just said, my remit does not extend either to local government or to the NHS at the moment.

  217. Nonetheless, this is advice that you are issuing which will be taken up throughout the public sector, will it not, in some form or another?
  (Mr Gershon) Yes. What I have said is we would then see to what extent some of that we could then embody in terms of advice that we do provide to the wider public sector through PFI and encourage that to flow out across the wider public sector.

  218. All I am saying is that I would find it disappointing if we were reading a report like this in a year's time where contract manuals were only issued in a minority of cases even though plainly they have a good effect.
  (Mr Gershon) I would agree. The experience to date is where we have produced updated advice and guidance there is an encouraging level of appetite in the wider public sector to take our revised advice and guidance, even though there is no mandate for people to do that, to take advantage of it. I think it is encouraging that Sir Ian Byatt thought the Gateway Review process had sufficient value to recommend it in his own review.

  219. Can I ask you a specific question about the transfer of risk. In paragraph 1.13 it talks about authorities being tempted to transfer inappropriate risk. Mr Busby earlier said the issue of risk is one where it ought to lie with whoever is the most appropriate holder of that risk. What is the mindset of the negotiator going into a negotiation? Is it, and one might expect it to be, intuitively one would think it would be, "let us offload as many risks as we can" and the commercial provider trying to commercially accept as few risks as possible, or is it in the minds of authorities, do you think, in negotiating consciously to think about keeping risks themselves rather than transferring them because of the consequence down the road?
  (Mr Gershon) In the light of the experience that has been gained, and as risk management processes become more mature within departments, there is a greater awareness about what risks are sensible to transfer, or to seek to transfer, to the private sector and which ones need to be retained and plans put in place as to how those risks should be managed. Catastrophic type risks, like where you still have to provide a public service or the supplier goes bankrupt, have to be thought about. Having said that, however, the public sector will always be trying to extend the envelope of risk that the private sector will take, what may be the optimal allocation today may not be the optimal allocation tomorrow. As the private sector gets a better understanding of the market they may be willing to take more risks. So you would expect the negotiators to be trying to push out the envelope, but to try to do that within a framework that they are not trying to transfer risk which can never be transferred wholly to the private sector.

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