Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 79 - 99)

WEDNESDAY 16 JANUARY 2002

MR DAVID MITCHELL, MR KEN BARTON AND MS JO CONNOR


Chairman

  79. Mr Mitchell, good afternoon. I am grateful to you. The Committee has agreed to switch the sessions round and to take evidence from British Telecom first. I would like you, if you would, just to identify yourself and your colleagues, for the sake of the shorthand-writer; could you do that?
  (Mr Mitchell) Certainly. My name is David Mitchell; to my right is Ken Barton, to my left is Joanna Connor.

  80. Thank you very much. Your memorandum really concentrates on two specific areas, the PFI/PPP and the framework agreement contracts. Could you tell us, very briefly, the main issues that concern you?
  (Mr Mitchell) I think, for the purpose of today's Committee, what we would like to talk about, on behalf of BT, regarding the Office of Government Commerce, is probably those two things; both the PFI side, in a sort of overview level, and our experiences with the OGC in doing so, and then move on, if that is convenient, to the framework contracts, maybe the experiences we have had in going through those, and how we have been engaging with OGC, and some ideas maybe of how we might take things forward.

  81. OGC has now been running, I think, just under two years; have you noticed an improvement, do you think they have got their act together?
  (Mr Mitchell) I think it is fair to say that we have seen an improvement in the 18 months, two years, that they have been in place; it is an evolutionary organisation within Government, and it is fair to say that it has gone through an evolutionary cycle. But, to answer your question, yes, we have seen an improvement, and hope to see, obviously, a continued improvement over the next stage of its evolution.

  82. And does that judgement extend to the Departments themselves, given OGC's role in spreading good practice; do you think the Departments now have the appropriate procurement skills that they should have?
  (Mr Mitchell) Obviously, it is a difficult thing for me to comment on, in terms of their own competence, and I am sure that OGC will have a view on that. I think what I can say is, there are dealings with the various Departments, we have seen the same sorts of levels of improvement in their procurement knowledge that we have seen with OGC. It is a very positive influence that OGC has had.

  Chairman: Thank you.

Mr Ruffley

  83. Mr Mitchell, could I just draw attention to your memo, which I think we found very helpful, and you refer to the fact that PFIs and PPPs are becoming increasingly important, but more difficult for you, as Government appears to be taking less risk, unwilling to accept risk, guarantee income and specify detailed requirements. I just wonder whether this is a reflection of officials in Departments getting tougher on procurement, is it actually evidence of them being better negotiators?
  (Mr Mitchell) One would hope, would like to think, that that was one of the things that we are starting to see. I think, PFI, if we talk about that specifically, when it first started, I think the ones that we saw were very appropriate. PFI, if it is going to make sense, really needs to have clearly-defined outcomes upon which both parties that are entering into it are happy and understand and can work with. So, therefore, I think there was a little bit, maybe, of the low-hanging fruit being taken in the first instance. I think we did see a situation where, maybe, the answer was PFI; what was the question, in some instances. So, therefore, some inappropriate opportunities were being looked at with a view to going down the PFI route and they were not really appropriate. So I think we saw a little bit of that.

  84. May I interrupt, because this is very interesting; are there any examples you draw attention to?
  (Mr Mitchell) I would not like to give any specifics and I do not have any specifics to hand, but I think there are certain parts of the market that are more mature, in working through the PFI opportunities, and some markets that are not; and I would say information technology in general was one that was not yet as mature as it needs to be, with regard to PFI. But, to go back to your point directly, is there an improvement in the way that the various Departments are negotiating, I think, yes, there is.

  85. Would you say that early PFI deals, in retrospect, were overly generous to suppliers?
  (Mr Mitchell) No, I would not say that, I would just say that the early ones were very appropriate PFI deals, and therefore I think it made a lot of sense. There were clearly-defined outcomes, agreeable by both parties, so I think it was easier for both parties to agree on a PFI framework. I think what you have now is, you also have, OGC have brought in the comparator, so when you want to go with a PFI you have to have a comparator available as well, and I think that has actually informed the discussion better; so actually what you are getting, if you like, is a more rigorous check before PFI decisions are being made.

  86. So you think, with the establishment of the OGC, there is more rigorous checking; you see that as something the OGC has brought to the process?
  (Mr Mitchell) I think it is a very positive step, yes.

  87. Are there any other benefits that you can discern that OGC has brought to PFI?
  (Mr Mitchell) To PFI, in particular; I guess it is the way that they are generally engaging with the Departments prior to the Departments, if you like, engaging with potential suppliers; and I know that is, let us describe that as, a bit below the water-line. I cannot give you, again, chapter and verse how they have done it and what they have done, but the general feeling is that the discussionary work that goes on prior to a Department coming out and hoping to engage in a PFI is making it a more quantified opportunity before we, the private sector, start to enter into the discussions. So I guess the "below the water-line" activity that they must be doing, to engage with the various Departments, is a good thing.

  88. And just to get a feel for this, what sort of activity do you think the OGC officials are engaging in that is leading to these improvements; what do you think they are getting up to that is improving the process?
  (Mr Mitchell) I think it is general education, general awareness; there is a lot more information, we understand, flowing through OGC to the various Departments. I go back to things like the Gateway process, the Gateway reviews that are in there, and the fact that it is now common knowledge that Departments are going to be subject to that sort of Gateway review means that we are getting not perfect, please do not let me paint that picture for you, but we are getting better-qualified opportunities coming out for discussion, with regard to PFI.

  89. And you would attribute that to the work of the OGC?
  (Mr Mitchell) I think it would be inappropriate for me to say that that is the only thing that is going on, because I am not 100 per cent familiar with what else may be going on within those Departments to improve, if you like, the professional procurement approach within those Departments; but one would like to think that some of it was attributed to the work of OGC.

  90. The OGC have told us that they were not experiencing any resistance to PFI contracts from private sector contractors. I just wonder if, the problems you have mentioned in your memo, regarding risk, return and banks" willingness to lend, have any of those problems led you, as a company, not to bid for a PFI contract?
  (Mr Mitchell) None that I am specifically aware of. I still say, in terms of the decision to engage in a PFI, it revolves around the quality, the qualified ability of the outcomes; and if you can have that and you can agree that with the customer then PFI discussion is a valid route to go down. So I do not think that any of those external circumstances have stopped us from going down a PFI route; what is more likely is that we do not feel that those outcomes, or the thing that we are trying to do is quantifiable enough for us to enter into a successful PFI deal.

  91. Can I ask just one, quick question, which is not directly related to the foregoing? Have you sensed any problems relating to PFI post the decision to put Railtrack into administration?
  (Mr Mitchell) I cannot comment directly on that, from BT's point of view, I am not the PFI specialist. I have not been made aware, in any of the briefings that I have received, that that has had a negative impact on the way that we have been approaching PFI.

Mr Beard

  92. Just before we leave that, did I understand, Mr Mitchell, you were saying that you felt that some of the projects now coming forward were inappropriate to PFI treatment?
  (Mr Mitchell) If I can just clarify that. I think, at some stages during the start of this, we did start to see PFI being the answer; and what was the question, so to speak. So, I think, previously, and I am going back now probably 12 months, we felt there were a lot of cases that were coming through that were being considered by the Departments as PFI that turned out to be inappropriate, and they were only inappropriate due to that point, that I made earlier, about, for the private sector to engage in a PFI, the outcomes must be very clear and must be understandable by both parties. It is the outputs; that if you try to do a PFI based on inputs we found that to be a problem area, where both we and the Departments spend a lot of time in not being productive.

  93. I understand what you are saying, and you are saying that if you cannot specify the output you are getting, from whatever system it is, it is no good going for a PFI?
  (Mr Mitchell) That is my belief and our experience thus far.

  94. I am surprised that that seems to be fundamental to the concept of a PFI. So you are actually suggesting that Departments are being a little naïve about it?
  (Mr Mitchell) I would say that, in recent ones that we have looked at, that has not been the case, and now, and, as I say, let us hope that, as part of the education process at OGC and that the Departments themselves have been going through, we are now not seeing such inappropriate PFI options coming out; the ones that we are seeing now, which we are engaging in, and I am sure there will be others, we feel now are quite appropriate, and we are quite happy to consider them as valid options.

  95. Did you also hint, when you were answering Mr Ruffley, that you thought that IT projects were probably not as appropriate to this?
  (Mr Mitchell) Hopefully, I did not hint at that; what I would say is, I think that the market, if you like, the information technology, IT, market, has a way to go in its maturity towards PFI-type opportunities. I think some markets, construction, obviously, being an example, seem to be far better developed, have gone further, if you like, through their evolution, and therefore are far more comfortable for PFI.

  96. But is not that curious, in that one of the founding principles that make PFI an advantage to Government is that the projects are able to bring in an expertise that Government Departments do not have, necessarily, and this is, par excellence, in the IT field? So, if you are saying these are not appropriate, that is locking out an awful lot of the benefit that, potentially, comes to the Government from having a PFI?
  (Mr Mitchell) I think that, as we get a better understanding, and that is "we" the industry as well as the Departments, PFI opportunities using information technology will improve, and we will be able to articulate better the points you make about delivery of knowledge, knowledge management-type agendas and consistency will become far better. I think it is about market maturity, from both the customer and the supplier, that maybe is causing some concern. I think the history, in some instances, of PFI using technology, leads us in that direction; one would hope that it would improve.

  97. But are you being reticent; is this because the IT people, in-house, say, in a Government Department, actually are not giving you the outcomes but they are telling you how to do the input and how to do the job, is that it?
  (Mr Mitchell) No.

  98. You are getting second-guessed by the IT people in Government Departments?
  (Mr Mitchell) I think it would be inappropriate for me to say that that was the case.

  99. Can I tempt you to be inappropriate and say what you think?
  (Mr Mitchell) It is my opinion that we are now seeing appropriate information technology PFIs coming out, and we are happy with the ones that are coming out. That is as far as I would like to go, on this one.


 
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