Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 220-239)



  220. That is a very helpful answer, thank you. I would like to ask you about the position of PFI in the firmament generally. To what extent do you think PFI is understood by public servants, by politicians, by the public, by journalists?
  (Mr Gershon) I think there is still some way to go, particularly in the wider public, to communicate the real benefits of PFI and to try to clarify some of the conceptions that people have around PFI. I think amongst public sector procurers there is recognition that PFI is a powerful acquisition tool to use in some, but not all, circumstances and can be a powerful way of getting value for money, but not the only way; it has to be considered on its merits. I think the perception of the tool is rather different from the reality of the tool and we have to do further work to change perceptions.

  221. Your answer is incomplete. You mentioned the public and you mentioned public sector procurers but perhaps wisely you did not mention politicians. The impression I have is that it is not particularly well understood by large numbers of people in all sorts of facets of life. Would you say that is totally unfair?
  (Mr Gershon) Not well understood. You said do I think that is totally unfair, no, I do not think that is totally unfair.

  222. Right. I will not press you further on that.
  (Mr Gershon) I think we have to demystify some of it. Some of the language we use to describe it does not help improve understanding of it. When we talk about it in terms of complex financial engineering I do not think it is reasonable to expect normal human beings to understand what things like net present value and internal rates of return and all that stuff mean.


  223. Do not go into it now.
  (Mr Gershon) I have no intention of doing so, Chairman. I do not think we help ourselves in communicating what the benefits of this are about.

  Mr Bacon: Chairman, I asked the clerk for a seminar on net present values and rates of return.

  Chairman: You can go to it.

Mr Bacon

  224. That being the case, there is plainly a big communication job to do and you are the adviser and guider for Government departments on how they should assess the value of these projects and whether to go ahead with them, but as with many things the communication is very much part of the answer. What steps are being looked at by your office or others in terms of improving the level of communication and understanding about PFI?
  (Mr Gershon) With which community?

  225. With the wider public. They were the first people you mentioned in your earlier answer.
  (Mr Gershon) In that area I think we have to look for direction from ministers as to what they would like to see done and I do not regard that as something I can do off my own bat.

  226. But you accept there is a need to do something?
  (Mr Gershon) We clearly input. I just said I think on the clarity of understanding of the benefits and some of the currently held conceptions there is always room to do better. That is my personal opinion, which I may get shot for when I leave.

  Mr Bacon: I think that is absolutely right. Thank you very much.

Geraint Davies

  227. A general question about risk transfer, in particular for longer contracts. Can you just comment on this suggestion that basically if you go into one of these long contracts and the public sector has a duty under all circumstances to deliver a public service, to what extent is there a real opportunity to actually exit and either provide another provider or provide something directly? Do you want to make a general comment?
  (Mr Gershon) Under the standardisation of PFI contracts there are termination provisions included in the contracts that define the circumstances in which a client can terminate, which include termination where there is contractor default.

  228. For argument's sake I will not carry on. If I have a contract with you and you are the supplier, as it were, and you provide a standard service over time and in the future unit costs go down but the balance to the consumer goes up and the whole specification begins to change and I try to negotiate with you because I want to change, how easy is it for people in the future to exit—this is public sector—without facing massive penalty clauses? I am just wondering what your view is down the line, whether Government agencies will find themselves in a situation where with new consumer demand alongside lower unit costs and very clever lawyers they will find themselves in a position where they provide sub-standard above cost.
  (Mr Gershon) That is why standardisation places great emphasis about what authorities now need to do in PFI contracts to configure the contracts to cope with change and satisfy themselves that change will be delivered on a value for money basis through the life of the contract.

  229. You are satisfied we can deliver that?
  (Mr Gershon) We have the standardisation route and those sorts of issues are things which are tested during the Gateway Review process. We have a number of mechanisms in place now which are helping authorities get a very clear focus on this important aspect of PFI.

  230. See you in a couple of years.
  (Mr Gershon) Does that mean there may be scope to take further action in the future? There may be. We need to keep the matter under review.

  Geraint Davies: I will leave it there.

Mr Steinberg

  231. It struck me that really we are talking about risk and transfer of risk but at the end of the day if anything goes wrong you are going to bail it out, are you not?
  (Mr Gershon) No, I am not.

  232. You are not?
  (Mr Gershon) No.

  233. That is what it says here.
  (Mr Gershon) Which one is that?

  234. The renegotiation of the PFI for the Royal Armouries Museum in Leeds. The Department for Culture paid £10 million to bail it out. You are not going to let a hospital close, are you?
  (Mr Gershon) You made a general statement to which I answered.

  235. You answered no.
  (Mr Gershon) I answered no to your general statement. Things do go wrong, costs overrun, things like that, which are costs which are picked up by the private sector.

  236. The answer was not right, it was not accurate, because there is one which has been bailed out and if my hospital closed you would bail it out. You could not let a hospital close, could you?
  (Mr Gershon) I made it very clear that there are some risks which the public sector can never transfer to the private sector. One is the risk that in the ultimate you have to keep providing public service. Let us suppose your hospital closed because the contractor went bust. In that contract, if it followed standardisation, the client will have step-in rights to take over the running of the hospital.

  237. That is my point.
  (Mr Gershon) You are looking at catastrophic failure.

  238. Was that a catastrophic failure?
  (Mr Gershon) That was catastrophic but many failures are not catastrophic and the tab is picked up by the private sector. The risk of catastrophic failure can never be transferred to the private sector if there is the provision of public service involved. Whether it is passports, hospitals, whatever, we all have the responsibility to continue to deliver a public service. That is a catastrophic failure which has low probability but very high impact. There are other risks which may have a high probability of occurrence and a lower impact which will be picked up by the private sector.

  239. If you had been sitting there three or four years ago and somebody had said that the Royal Armouries would need £10 million to bail it out, you would have said that was a catastrophic failure and it would never happen, would you?
  (Mr Gershon) Where there is demand risk involved, which there was in the Royal Armouries, the number of people who would actually come through it, there is no doubt that both the public and the private sector have learned from those sorts of experiences about how much demand risk the private sector can sensibly take in a PFI.

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