Examination of Witnesses (Questions 80
WEDNESDAY 24 OCTOBER 2001
MILBURN, MP, MR
80. Of all these 12 factors you were taking
(Mr Coates) That is risk transfer.
81.what is the difference in the four
schemes? It is only purely a financial difference, is that what
you are saying?
(Mr Coates) There are other reasons why these schemes
went ahead. It is recognised that certain schemes are not PFI
friendly. We do not waste time and money in testing for PFI procurement.
Shall I continue on the question? My personal view is it is no
surprise the figures are very similar, because there is very little
difference between the two bags of numbers we are playing with.
We are looking simply at operational costs for the hospital, the
30 per cent of costs that are non-clinical. If you say, what would
it cost to build a hospital and operate a non-clinical service
from the private sector or the public sector virtually all of
the figures are the same, so it is not surprising you get the
small difference, because the numbers are the same. We should
not thinking that as a failure, we should be thinking that as
a good result, we are quite rigorous about it. Finally, and this
is really a pragmatic point, I always feel that if you are going
to thieve you have to thieve big, there is no point in massaging
the figures for a quarter or half a per cent. We get so much grief
over it, we take the view of doing it properly and we defend our
figures and the robustness of them because we have it right.
(Mr Milburn) That does not mean that in future we
are going to thieve big.
82. The point that emerges is that people do
not really trust that when you say things like, PFI is the only
game in town and you think the figures are rigged. Why is it that
there is this widespread misconception?
(Mr Milburn) Basically because people have it wrong
about PFI, to be blunt about it. I think we have to be blunt about
our own failures, across government we have not successfully defended
PFI as well as we should have. Basically, we have had this out
with the Committee before, I think PFI is a good thing not a bad
thing and I think so for a number of reasons. The first thing
is that although in the public sector comparator what we assume
is there is public sector capable available to build a spanking
new hospital, and remember we are building lots of new hospitals,
we have already built eight, we have 50 at financial close, with
building works on the way, we have a total of now 68, including
the PFI ones, coming through the pipeline. The National Health
Service has never seen anything like this. Although we make the
assumption in the public sector comparator that capital is available,
as we all know, despite the fact that we are putting more capital
into the National Health Service through the Treasury than we
have ever done that would not be enough to meet our ambitions
around this. For example, UCLH, which I signed off recently, is
going to be probably the first half billion pound hospital in
the National Health Service. The idea that if half a million pounds
was not available through the PFI route it would automatically
be available from the London Regional Offices Capital Fund that
is not the case, because there are finite resources. What the
PFI is fundamentally about is about bringing experts from the
city into the National Health Service and we just have to recognise
that as a perfectly pragmatic and sensible thing to do. On average
we are getting it at 1.5 per cent cheaper than procuring it through
the public sector route, that is true, but we are getting other
advantages with it too. I was very much struck when I was Chief
Secretary when I went to open the first PFI school in North London,
and I talked to the head teacher and said, "What is the great
advantage from your point of view of this school being built through
PFI, apart from the fact it is a fantastic-looking school?"
He said to me, "The big thing is I no longer have to worry
about broken windows. I no longer have to worry have about vandalism.
I no longer have to worry about the fact this beautiful asset,
which is great on day one, by day 30 is going to be in a deteriorating
condition." That is the beauty we get with PFI. We get the
asset, we get it maintained as new for a period of 25 years or
60 years, or however long we want it, at the end of the period,
it comes back to the National Health Service, owned by the National
Health Service. As my predecessor once famously said when asked,
"Isn't PFI just privatisation?", Frank quite rightly
said, "The only thing which will be privatised through the
PFI is the cost over-run and the time over-run." I plead
guilty to that one.
83. PFI is so confusing it is an accountant's
dream. I want to ask two questions about best value which I really
do not understand. How can it be best value from these two points
of view? Most trusts pay something like 8 per cent of their income
in capital charges, which is recycled into the Department of Health.
Trusts that have PFI schemes are paying 12 to 16 per cent of their
income to investors and that money is lost to the NHS. That is
the first point, shall I go on to the second?
(Mr Coates) I can answer that first if you like. I
did some research for the Committee last year on what would a
publicly-funded hospital cost a trust, and I went to the accounts
of Chelsea and Westminster and they paid in the year ending 31
March 1999 14.5 per cent of their income in capital charges and
84. So that figure of 8 per cent is wrong?
(Mr Coates) If you look at the entire stock of the
NHS, which is 50 years old, I would imagine it is about right,
but not if you look at a new hospital against a new hospital,
not an old hospital against a new PFI one.
85. Okay. One firm has said in public that PFI
projects account for 20 per cent of their sales but 40 per cent
of their operating profits. It seems you are allowing private
companies to take profits from the taxpayer at twice the rate
they can make it in a competitive market.
(Mr Coates) I think they are saying, are they not,
that 40 per cent of their profit comes from PFI, not they are
making a 40 per cent profit.
86. 40 per cent operating profits.
(Mr Coates) All that means is that their sales are
40 per cent in the PFI field. It does not mean they are making
40 per cent profits. If you are saying that 40 per cent of their
profits come from PFI, it means that 40 per cent of their sales
come from PFI, not profit.
87. PFI projects only account for 20 per cent
of their sales but 40 per cent of their profits.
(Mr Coates) Sorry.
88. Which strikes me as though they are getting
taxpayers' money at twice the rate they could have got it in the
(Mr Coates) We have obviously looked at the returns
made by the construction and operations industry in PFI to determine
if there is excessive profit-making in the PFI field. You only
have to look at the wafer-thin margins of both service companies
and construction companies to see that they are making an average
profit of around 1 to 2 to 3 per cent of turnover, which is not
sufficient to give a good return shareholders and have a robust
company in terms of investment of profits. If they are making
that ratio of return, it does seem to me it is still in overall
terms not making excessive profits.
89. That they are making excessive profits?
(Mr Coates) No, if those figures are correct, bearing
in mind what their overall profit and returns are, it does not
seem to me it is excessive if they are only making 1 to 3 per
cent in returns.
90. I cannot argue with an accountant on the
figures but it strikes me as remarkably odd that you can make
40 per cent of their profits from 20 per cent of their sales.
(Mr Coates) But until you see what is in the cost
of sales, it is hard to draw a firm conclusion from those numbers,
because you would have to look at what the costs are.
(Mr Milburn) Richard, can I just make a general point?
You are not saying this but I have heard it said about the Private
Finance Initiative that it is an appalling thing because it allows
firms to make profits out of the National Health Service. As far
as I know, before we had PFI, the companies who were building
hospitals were not building them free. I do not think most of
them work as co-operatives. Bovis, Tarmac and all the other big
boys are in it for one reason, and that is to make some money
out of it. The key test for us is whether it represents value
for money for the taxpayer and whether it helps to deal with the
Committee's concerns today, which are about expanding capacity
in the National Health Service. I think the answer to that, for
all of the ludicrous horrifying stories we read in the national
newspapers about PFI, is that it is a huge success story. It is
a huge success story for the NHS, so much so that, as I said in
the memorandum, what I now want to do is take PFI and the successes
it has achieved in the acute sector out of the acute sector into
primary care, community services and social services too.
92. This is exactly what we are going to discover,
Mr Milburn; if it is a huge success story. That is what this Committee
has to dig out somehow in the next few months.
(Mr Milburn) The people who have been waiting, as
I might have said last week, forgive me if I did, in Bishop Auckland,
15 miles from my constituency, for 30 years for a hospital, think
it is a success story to have a new hospital. The people in Greenwich,
I suspect, rather like their new hospital. The people in various
parts of the country, communities which are now getting new hospitals
with all of their teething problemswhich are as common
to the public sector as to the private sectorrather like
the idea that we are building new hospitals rather than asking
patients to go to old ones and staff to work in old buildings.
93. When we were looking at this before we were
looking at some of the repayment costs post-PFI, and from the
figures which were before us, if you remember, in the last session
in April, some of the revenue consequences seem higher than were
anticipated. Can you say what assessment was made of the capacity
of trusts to meet repayments on PFI projects from the revenue
(Mr Coates) I think we made that return to last week's
Committee. All I can talk about is my experience of working with
the Treasury in terms of monitoring PFI schemes, and each year
we report to the Treasury our total revenue calls against PFI
schemes as a proportion of our total HCHS revenue. The last time
I checked it was around 2 per cent of our total HCHS expenditure
on signed schemes, and I think that included the revenue costs
and the services costs attached to those schemes as well. I am
happy to confirm that figure to you in writing because I have
not got the papers with me from last week's Committee.
94. You say, Mr Coates, that your economists
are proud of their rigorous assessing of one scheme against another.
When do they start becoming proud because the NAO Report on the
Dartford and Gravesham Hospital showed that the public sector
comparator was overstated by some £12 million.
(Mr Coates) I think they would say that the methodology
was correct but the sums done by the trust advisers were incorrect.
They did not criticise how we assembled our numbers, they said
we could not multiply properly.
95. So the economists were happy with the theory
but the numbers might be wrong?
(Mr Coates) The difficulty when you get any proposal
for a major PFI scheme is that it contains thousands and thousands
of lines of data
96. I appreciate that.
(Mr Coates)and hidden formulae to determine
these numbers, and sometimes these errors do get through. We have
responded to the concerns the NAO raised and we have now changed
our approach so we stipulate how we calculate the particular numbers.
That issue, from memory, was around the inappropriate use of differential
inflation and the calculation cost increases and we issued guidance
to help in that regard.
97. Secretary of State, you said that basically
following your predecessor you are privatising cost overruns and
time overruns. It might be useful for the Committee to have a
note or for you to say very simply how you value those. That is,
I think the public find that difficult. How do you assess the
price of the cost overruns? Your evidence actually shows public
sector schemes are getting very good at delivering costs and times
to budget. If you go down the schemes you have listed here everything
is on time and to budget in the public sector.
(Mr Milburn) There have been conspicuous public sector
buildingspeople in glass houses should not throw stoneswhich
have been subject to substantive cost and time overruns.
98. Do you accept the National Health Service
are getting better at managing that?
(Mr Milburn) The point about the way that we procure
traditionally through the public sector regime is there is no
real incentive on the contractor to come in on time or on cost.
By and large what happens in the real world is they know a new
National Health Service hospital is a precious thing, precious
to the trust and precious to the government and they assume that
we will bail them out. The truth is that is what has happened.
Chelsea & Westminster is a great example of that, we bailed
them out, we are still bailing them out today as a consequence
of that. The beauty about PFI is that it lodges the cost and time
overrun risk with the private sector. If they run over they get
penalised and they do not get money until the hospital is built.
That is a very big change. We have a methodology for doing that,
the National Health Service estates have a 20 year database which
assesses the cost and time overruns of different forms of procurement.
We can apply that methodology to the public sector comparator
and do so not in an artificial way but in a way that is built
on real data. Which is why it is so irritating and frustrating
when one hears this is all accountancy-speak and fiddled in order
to get the PFI through. There is a very rigorous methodology,
indeed, which applies real data to how we decide whether to procure
through the public sector or the PFI route.
99. I would like to turn to the cost of the
contracting process. I note from your memorandum, this is worth
putting on the record, 80 million was spent by the Conservative
Government, and not a brick was laid, on PFI. So far 27 million
was spent on advisers' costs on about 15 schemes. That strikes
me as a much better record but still possibly too high. Am I right
that that does not take in the man hours lost through senior trust
staff having to spend a great deal of time managing every bit
and every nut and bolt of these contracts? I was wondering if
you can answer the latter point? Now we have a band of experience
and expertise in the National Health Service managing these complex
contracts do you expect that cost to start falling and is there
any evidence of that?
(Mr Milburn) I can give it to you. I can give evidence
that it is falling and we would share this data with you. The
first deal that we signed was Dartford and Gravesham, the first
PFI hospital to get built, on that one, which I gave the go ahead
for in July 1997, when I was Minister of State, the legal advisers'
costs were close to £1.25 million, the financial advisers'
costs were just under £1 million. The closest comparable
scheme more recently is Dudley, the legal costs were down by one
third to £800,000, the financial advisers' costs have more
than halved to £435,000. There has been a substantial improvement
but we need to take it further still, of course we do. As far
as average legal fees and average financial fees are concerned
between the first wave of PFI and the second wave of PFI on legal
fees we have seen a 41 per cent improvement, 41 per cent cheaper
to the National Health Service, on financial fees a 48 per cent
improvement, 48 per cent cheaper to the National Health Service.
What that shows is as the market matures as we get more expertise
as well we are getting better at doing it. Your essential point
about the time that it takes for trust management to conclude
a PFI deal is one that worries me. Essentially what we are asking
the trust chief executives, who are pretty busy people with complex
organisations, is to undertake a once in a lifetime dealthere
will not be another new Greenwich hospital for some considerable
timeand we put them into a difficult negotiating legal
position with people who know their business well and we ask them
to conclude deals worth 100 million, a quarter of a billion, now
up the half a billion pounds, they only do that once. What we
have to do is give them a lot more support, which is why we try
to strengthen Peter Coates' operation rather than have the wheel