Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  1. Good afternoon. Welcome to the Committee. I think this is the first outing of the Office of Government Commerce before the Committee. Perhaps you could identify yourselves.
  (Mr Gershon) Yes, I am Peter Gershon, Chief Executive of the Office of Government Commerce. Sitting to my right is Bryan Avery, Principal Establishments and Finance Officer of the Office of Government Commerce.

  2. This is an inquiry, as you know, into the role of the Office. We are grateful for the submission you have made to us in writing. Can I begin by asking you very broadly: you have been going for a year-and-a-half now and your own review—which led to the setting up of the Office—identified a whole range of weaknesses in government procurement. How satisfied are you that those have now been addressed?
  (Mr Gershon) I think it is important to understand, Chairman, that we are at the beginning of a long-term programme of fundamental reform. We are dealing with some issues which, as I have identified in my review, are not issues that are subject to quick fix; we have to change culture, behaviour and attitudes about procurement within central, civil government. So the approach that we are adopting is to try and get a balanced mix of short, medium and long-term actions. I am reasonably satisfied with the progress we have made in the first 18 months. I am sure the submissions you have invited from some of the departments will give you some of my customers' perspectives on our progress, but I would emphasise that this is a programme of long-term fundamental reform that I am embarked on.

  3. You have been set up to replace a whole number of bodies. I think I recall one of them being The Buying Agency, which itself was set up to remedy some of these weaknesses in procurement. To put it at its very basic: why should the OGC necessarily be any more successful than all the bodies it replaces in reforming government procurement?
  (Mr Gershon) Firstly, we have not replaced The Buying Agency. The Buying Agency was one of the organisations which the OGC inherited at its formation, along with two other executive agencies and two parts of the Treasury. In fact, the role of The Buying Agency has now been extended and renamed and it has incorporated some of the trading activities of what was the old CCTA. The work of the Agency is very much alive, well and kicking, and fulfilling an enhanced role in our own overall objective. What I am trying to do, overall within OGC, is to get government to take the sort of strategic approach to procurement which large organisations do in the private sector. It is that strategic approach which distinguishes what is happening now from what has happened in the past.

  4. You were established, as I understand it, not as an executive agency but as an independent office of the Treasury. Could you explain to us what the main differences are and what advantages or disadvantages it confers on you?
  (Mr Gershon) I am going to invite Bryan Avery to address that question. He is more able to address you than I am, coming from the private sector.
  (Mr Avery) Thank you. Chairman, when the OGC was formed we were formed as an office of the Treasury, I think, for two principal reasons: one is that we were fulfilling a role which was already, in ministerial policy terms, part of Treasury ministers' direct responsibility in terms of procurement policy, but, I think, more importantly than that, we have been set up with a rather unusual supervisory arrangement, or Board, which is chaired by the Chief Secretary and has senior representation from all of the major spending departments. That is an unusual arrangement. We think it is very important in helping us to get the right steer for our strategy and, also, to get understanding and buy-in to the initiatives that we are undertaking. I think it is that Supervisory Board arrangement which led to our creation as an office of the Treasury rather than an agency of the Treasury or some other arrangement.

  5. So you operate independently but you are accountable to the Treasury?
  (Mr Avery) Yes, Peter Gershon is the second accounting officer of the Treasury. We work within the Treasury. So, for example, our finances are part of the Treasury's resource account, but we have a number of independences which are important to the way we need to work. For example, we have a number of independences concerned with areas of personnel or financial arrangements or auditing, which give us the freedom of action that we need in order to pursue the policies that the Supervisory Board have set out for us.

  6. You are accountable to your Board and not to the Treasury. Is that right?
  (Mr Gershon) No. I am accountable, in civil service terms, to Sir Andrew Turnbull, as my Civil Service boss and to Andrew Smith as my minister. I am accountable, in a constitutional sense, to Parliament.

  7. That is why you are here.
  (Mr Gershon) Yes. Can I just add, when I undertook my review what I observed was that in the central activities that were split between the Cabinet Office and the Treasury there were a lot of good people, very well-intentioned, but, in a strategic sense, they were not well engaged with the departments. Coupled with that, procurement was not on the agenda of top officials in the departments. If we were going to succeed with the reform, we had to find a way of getting procurement on to the top management agenda and engaging the departments in such a way that what the centre was doing was something that they thought was adding value to what they were doing and was relevant. That is why I proposed the Supervisory Board. It seemed a very natural thing for me to do. It was only subsequently we kept saying this thing was very novel, but it certainly does not seem very novel to me; it seems an entirely natural thing to do. The role of the Supervisory Board is to ensure that, basically, what we do is command support from within departments. So if we were trying to do a relevant thing, they would give us a steer, keep us on track and they would endorse our strategy. However, I am not accountable to that Board. Both Andrew Smith (who chairs it) and Sir Andrew Turnbull sit on the Board, and it would be unusual—and it has certainly never arisen—that something has been agreed on the Board and they have come back to me in their other roles and said "We do not like that, we want you to do something different".

Mr Beard

  8. The Private Finance Initiative is under your supervision in several ways. Could you say under what circumstances you see Private Finance Initiative being a beneficial way of contracting for services or projects?
  (Mr Gershon) I have policy responsibility for PFI and, as we said in our submission, we see PFI as one of a number of tools in the weapons in the procurement armoury to be used where it gives best value for money compared to other methods of acquisition.

  9. Do you have any view on the sort of general circumstances in which PFI is likely to be preferred over traditional forms of contract.
  (Mr Gershon) There are generic examples where public sector clients are able to define their requirements clearly in terms of outputs rather than inputs, where there can be an appropriate transfer over a long-term basis, where there may be, for example, the construction of a physical asset and the long-term operation of that asset by the private sector and the private sector then, in a sense, taking over the risk for that asset becoming ready for service on schedule, taking the construction risk and having a very clear focus, and taking the risk that they have got the right trade-off between what you design into the asset and the implications for the long-term operating costs of that asset. We have seen PFI used as a technique but not the only technique for procuring different forms of construction based projects—roads, prisons, hospitals, etc.

  10. The normal practice that seems to have been established is to have a comparator to the PFI project to see whether traditional forms of contracting would be better. Are you satisfied that those are fair comparisons, because there is criticism that those comparators are really straw men and that if someone is determined to have a PFI project that is what will emerge?
  (Mr Gershon) As is set out very clearly in the advice and guidance we give to departments on the construction of a public sector comparator, the public sector comparator is not a simple pass/fail test, it is a quantitative way of helping to inform judgment. As is set out clearly in the advice, the value for money assessment must also include factors such as the value to the public sector of the additional risk that the private sector is going to accept with a PFI arrangement; the likelihood that, for example, in a private sector construction risk, the asset is more likely to come on stream on or ahead of schedule compared with traditional methods of procurement. So that there are other factors that Accounting Officers and departments will have to take into account when they are making the overall, value for money decision—using value for money in the sense that it is the optimum combination of whole-life costs and quality to meet the customer needs, which is the basis of all public procurement decisions, not just PFI.

  11. Are you experiencing any resistance to PFI/PPP contracts from private sector contractors?
  (Mr Gershon) I cannot comment. I can only comment on those PPPs which are PFI. There are other forms of PPP which are handled by the Treasury, not by myself. For example, the Wider Markets Initiative or the injection of private sector equity into public sector-owned enterprises are not within my remit. Are we experiencing resistance? No, but clearly there is continued scope for improving the process. The private sector have identified to me areas where they have concerns about the bid costs incurred in bidding for this type of work, and we are in discussion with the relevant departments about what might be done to reduce those bid costs. Could there be greater standardisation, building on the standardisation work that has already been done, to help reduce these sorts of transaction costs? Are we running into problems where there is a sort of overall concern that there are not enough private sector bidders coming forward in this area? In general, no.

  12. What central record is there of information on PFI projects and to what extent are PFI projects monitored that are now in operation?
  (Mr Gershon) That responsibility rests with departments.

  13. With the Treasury?
  (Mr Gershon) No, with the individual departments. They are responsible for monitoring the performance of their own projects, whether they are PFI or non-PFI.

  14. Could you then explain your responsibilities with respect to PFI projects in the departments and, also, your responsibility/relationship to Partnership UK?
  (Mr Gershon) I am responsible, as I said, for leading PFI development and promulgation of policy and guidance to continue to improve PFI as a procurement technique, recognising we are also taking steps on a wider front to improve the use of other procurement techniques—for example, primary contracting.

  15. Does that involve information coming back to you?
  (Mr Gershon) Yes, and we look, for example, to PUK, who have an operational role, to work closely with individual departments and individual projects—PFI and other forms of PPP. That is a very important source of feedback to us about where there is scope for improving either the advice and guidance or in suggesting areas where we should consider policy changes. In addition, as we said in our submission, we have introduced this year the Gateway Review process to assist the management of all large, complex, novel central civil government procurement-based projects. That covers both PFI and non-PFI, construction and IT. We can get feedback from individual project reviews, but these are happening at different points in the individual life-cycle, to see again where there are areas where either there is a need for new advice and guidance or we need to enhance or clarify existing advice and guidance. So we are getting that direct feedback, both from PFI and non-PFI. That is another source of input for us.

  16. Could you say what is the relationship between your organisation, the Office of Government Commerce, and Partnerships UK?
  (Mr Gershon) The main Treasury is responsible for the Government's equity investment.

  17. Which is Partnerships UK.
  (Mr Gershon) Yes, because it is in itself a Public Private Partnership. So that equity is with the Treasury. Our role is one of working closely in a co-operative relationship, within a framework agreement which has been set up between Treasury and PUK, which defines the nature of the sort of services that we are looking to Partnerships UK to provide, both to the Treasury and to the OGC.

  18. How do you establish your links with Partnerships UK? Is there a board of which you are a member?
  (Mr Gershon) There is an Advisory Board of Partnerships UK, of which I am one of the public sector members. Our relationship is based on the fact that we know these people, we work very closely with them. Many of them were people who were in the old Treasury task force, so that there are strong links that pre-date both the formation of the OGC and the formation of Partnership UK, and we have continued to develop and strengthen those links.

  19. Do I take it, from what you were saying earlier, Mr Gershon, that you do not have any responsibility for Public Private Partnerships, it is all with Partnerships UK?
  (Mr Gershon) No, no. The role of Partnerships UK is to provide practical support to departments on individual PPP projects, both PFI and other forms of Public Private Partnerships, which they do on the basis of bilateral agreements that they strike with individual departments and other parts of the wider public sector. The overall focal point for the total PPP policy is within the main Treasury. I take the PFI policy out of that because, basically, it is a method of procurement but not the only method of procurement and we want to present departments with a balanced portfolio of procurement tools so that they choose the one that generates the best value for money in particular project circumstances.

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