Examination of Witnesses (Questions 1
WEDNESDAY 7 NOVEMBER 2001
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 reviewwhich
led to the setting up of the Officeidentified 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
(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 OGCbuying.solutions
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 unusualand it has certainly never
arisenthat 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".
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
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 projectsroads,
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
(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 decisionusing
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,
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 techniquesfor example, primary contracting.
15. Does that involve information coming back
(Mr Gershon) Yes, and we look, for example, to PUK,
who have an operational role, to work closely with individual
departments and individual projectsPFI 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
(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.