Examination of Witnesses (Questions 520
THURSDAY 15 NOVEMBER 2001
520. There is nobody from that department involved
in your team?
(Mr Deegan) No.
(Mr Gritten) If I may pick up the point about the
flexibility offered by the public sector. Two years after the
original business case was signed up it was recognised there were
not going to be sufficient beds as a result of undertaking a whole
system review in which we involved primary care trusts, social
services, the health authority we got agreement to increase the
number of beds. The issue here is that although we were in the
middle of a scheme we were able to redesign the scheme and to
respond very quickly to increase the number of beds that were
being delivered. Furthermore, we have been able to build into
that to provide development zones, so that if necessary we can
increase the beds still further. I accept that that is common
practice but the issue is in the middle of PFI would you be able
to respond that quickly and at what price, that is the point I
(Mr Davis) I think it is an extremely valuable point
you have made, there is no difference between PFI procurement.
Quite frankly the Health Service did not know what they wanted
during the extensive negotiations and we redesigned the hospital
to accommodate different needs both during the negotiations and
then we changed it afterwards. There have been significant capital
changes which have improved the mix of refurbishment to new build
within the Unitary payment at no extra cost to the trust. I do
not think you could have done that with traditional funding.
521. Are you referring to the Halifax Scheme?
(Mr Davis) I am referring to the Halifax scheme.
522. You will be surprised to know that the
MP for Halifax, Alice Mahon, said to me how desperately short
of beds they are.
(Mr Davis) I think that is possibly still the case
but there are more beds than were originally planned by the Health
Authority, it was planned originally for 400 new beds and 100
short life beds, we now have over 600 beds embedded in the scheme
and a winter ward on top, so the bed count has gone up. The point
I would like to make is we were able to switch revenue with capital
in the PFI to get rid of that awful 1970s maternity block, which
was dysfunctional and in poor condition but was to be refurbished
in the PFI scheme. We have actually demolished it and have put
it into new build into the new block and it is a far better environment.
It has been at nil net cost to the NHS by doing that because we
have swapped long term revenue liability for maintenance into
523. This is a question to Jane Herbert I wanted
to ask, in the evidence of the financial issue this is something
quite key, because a lot of the things we have spoken about during
the Inquiry it is not clear to me that anything is of particular
benefit to PFI or public sector. A lot of it, it seems to me,
comes down to the basic question, is this some sort of accounting
trick. Your section 2.5 on financial issues glosses over quite
a lot of how things were done, I would like a bit more meat on
the bones. In the end you say, "our business case demonstrated
value-for-money in a PFI scheme over an entirely Treasury funded
option. Ultimately this was justified through the benefits of
an early delivery of the PFI solution". That seems to me
to be saying there was not actually much in it financially, which
comes back to this financial question. To pick up again on what
we were talking about earlier, this six per cent return on assets,
does that go to servicing the PFI in effect?
(Ms Herbert) It does not compare directly on the balance
sheet largely because it is below the line in our accounting terms.
524. "Below the line", I do not understand
(Ms Herbert) Profit and loss. We also have a large
amount of real estate which is still publicly funded, so I cannot
answer your questions because we have not done a direct comparator
of those two sets of figures. I would need notice of the question.
525. I think that it would be useful for this
Committee if we could have a direct comparison. This is what a
lot of us are getting quite hung up about.
(Ms Herbert) Could I answer the underlying issue,
I would certainly agree with you that the case for value for money
is very marginal. I would not like to say at this stage, less
than six months into our occupation of a new hospital, whether,
in fact, over a 35 year period that value for money will prove
to be one way or the other or in balance. All I can tell is you
that the case that was made was very much in balance, it was quite
marginal but it came out in favour of PFI.
Chairman: You have been very careful on that
point. You are not clear how it will turnout. We could have you
back in 35 years were you not careful.
526. Would it be fair to say that had public
sector capital been available it would have been quite easy to
tweak the arguments and go for that scheme?
(Ms Herbert) It was a marginal case. We would have
needed to change underpinning assumptions. I would not suggest
for a moment we deliberately fixed the value for money case, we
did not. That, it seems to me, to be the corollary of your question?
527. Was there an option for public sector finance
at the time?
(Ms Herbert) Not immediately, no, not for some years.
528. If you wanted a new hospital you
(Ms Herbert) It was PFI or nothing.
529. It is in your interest to make a strong
(Ms Herbert) That is clearly so.
530. I just wanted to turn to the issue about
the NHS and the position as a contractor for the private sector.
Mr Stone in his evidence I think said that the quality was maintained
through the penalty mechanism and through the contracting system.
Mr Stone, earlier, I think you said something along the lines,
if services are not delivered you do not pay. In the trusts' evidence
we get a very different picture, the trusts keep talking about
a long term partnership with the private sector, so they would
not want to be making problems by asking for their penalty payments,
creating a confrontationthat is the adversarial relationship
between the twoyou seem to be saying that you are expecting
the public sector to do that because that is how you in the commercial
world would operate and they seem not to want to operate that
way. Is that a fair summary?
(Mr Stone) It is an interesting summary. I think the
comparison is important. Whether or not the trusts choose to make
deductions and whether or not they choose to pay for what they
get, which is fundamental to what this is all about, it is one
of day-to-day management, what has certainly happened as the process
has developed over the last five or six years is that the NHS
and the more recent trusts have become much more aware of the
extent to which a catalysts are content to be paid for what they
do. The payment mechanisms by which the trust makes deductions
are not penalties, they are deductions for either poor or missing
service, that is an important distinction. This is not a large
baseball bat, this is payment for what you actually get. The more
recent schemes, the way that the payment works, has become much,
much cleverer, a much more direct link between the quality of
service delivered and payments made. This is an evolving involving
art, it does not have to be something which is adversarial at
531. Does that suit you if they are not adversarial?
The public sector traditionally has not had to scrap it, that
is not their job, are they letting you off too much, do you think?
(Mr Stone) I think they do need to be aware that they
can properly deduct for failure to deliver and recognise that.
Provided that is done in the open way which it is intended to
be done it does not create a problem at all, it balances the relationship
with the partnership. What is also interesting is to look at the
response of the funders in these schemes to the payment mechanisms,
you have a completely mixed approach. In the earlier days the
funders fight like mad to avoid any reductions at all, once they
are in place the effect of deductions happening causes the funders
to put pressure on the management of the delivery mechanism.
532. I can see how that makes sense in principle,
but in practice I can see the trust fund feeling that they have
to give those services to people come what may if there is an
unacceptable souring of the relationship. They cannot afford to
get into that position, so these are in some senses paper penalties
and they need to make sure people are going to turn up and make
sure they do what they are meant to do.
(Mr Stone) If the service is not there, if the spillage
is not cleaned up, if the gas is not going to the theatre there
should be deductions. The more modern payment mechanisms make
this much more straightforward and much less emotional than there
might have been in some of the early schemes. There has been a
lot of learning in this process. It is simply about producing
a fair and honest behaviour between both parties, just the same
way as if you employ a contractor to paint a window and he does
not paint the window you do not pay him for that window. There
is a rateability proportionality intended. In terms of the effect
on interpersonal relations it does not necessarily have to cause
a problem. If you go and visit some of the early schemes in place,
some of them in London, here, Greenwich and Dartford, it has not
produced any sour relationship at all, far from it. Again the
anecdotal evidence from the Price Waterhouse Report, there is
evidence that there is support for this sort of behaviour. It
is incumbent on all of us to make sure we do pay for what we get
and no more.
(Mr Davis) I would like to make two points, if I can,
we actually have far more scrutiny and regulation than the public
sector has. Secondly, any sanction is enforceable, which it is
not enforceable on the in-house team. We have scrutiny by media.
We have scrutiny by this House, by this Committee. I have had
a personal experience of being scrutinised by the Community Health
Council in Halifax on 19th September, it was a great lesson in
humility. I think they are doing a great job and I hope the Secretary
of State allows them to carry on doing it.
533. Controversial stuff!
(Mr Davis) The point I want to make here is the impact
of private capital being invested puts another discipline on us
which is lacking in the public services at the moment. I think
it adds to the quality of service and regulation over the long
term. Under the contract the sanctions can be enforced and I think
Professor Pollock touched on that as though it was a negative
point, the banks had to be paid out if we failed. I will point
out, first of all, that we are putting in risk capital, 10 per
cent of our money is going into schemes which is entirely at risk.
We take a huge risk on our payment stream. We will lose the entire
monthly payment for non-availability and a succession of performance
failures. There is a real risk in these schemes. The positive
aspect is that the private sector is being driven by the impact
of capital having to be paid for. We can now deliver a new acute
DGH, a large one, in three years from signing contracts. It has
never been done before. Not only can it be delivered in three
years but it can be delivered on time and to a fixed cost that
was quoted three years before. I have to say also I think better
quality is being procured.
534. One of the difficulties we are getting
towards is in the old days if you built a new hospital with public
money people could have paid for service improvement by failing
to maintain the infrastructure, that is what happened if you want
to eke out money, but here the trusts do not have that flexibility.
(Mr Stone) Which I think is a good thing.
535. It might be a good thing because you know
that everything is going to be better, better facilities and they
may get savings, that is essentially one of the key differences.
(Mr Stone) The key difference is that these premises
will be fit for purpose and safe to use for 30 years under the
536. Or your money back.
(Mr Stone) This is a huge benefit of PFI. It is not
about inflexibility, it is about guaranteeing the sustainability.
I think this is a good thing.
537. Do you think we need get more hard nosed?
Do you think they are inviting that kind of commercial relationship
and the NHS need to do that more?
(Ms Herbert) It is a new relationship, because traditionally
we either have a service in-house or we let a contract for maybe
a year and we can change that contract and the terms of that contract
fairly regularly. We have signed up for 35 years and the one thing
we can be sure about is we will not have thought of everything
in the contract that we signed. I believe we have to develop a
more responsive relationship that allows us to change the service
as the service to patients changes. I do not believe it is appropriate
to have an entirely hard nosed relationship in the same way you
would if you had a one year contract, it has to evolve over time
and be more flexible.
(Mr Stone) I quite agree.
(Mr Deegan) I think it clearly is about partnership.
We need to have very clear and measurable standards. We need to
work on joint monitoring arrangements and link that directly to
the payment mechanism. These are long term relationships we need
to work through, that is critically important.
538. One of the points which was raised in a
previous evidence session was the question of monitoring and ensuring
the service is being provided. Because of the cosy relationship
that developed there was a reluctance to impose the penalties
when the service was not being delivered?
(Mr Deegan) From personal experience if, for example,
cleaning or catering is not being provided appropriately to areas
like wards, ward sisters are, quite rightly, becoming increasingly
vocal to set out when things are not working, so I do not think
it will just be managers in monitoring teams, it will be frontline
clinical staff saying this is not being provided to the standard
you assured us it will be.
539. Back to extra beds, using the Worcester
PFI as an example because they have discovered, the authorities,
that 474 beds was not enough and they need at least 100 more,
how is that actually funded?
(Mr Davis) The core PFI scheme was 454. There are
very high quality retained estate beds in the south block.