Examination of Witnesses (Questions 1060
WEDNESDAY 9 JANUARY 2002
MP, MR ANDY
1060. How do you enforce it?
(Mr Coates) This may be linked to two areas. One is
what happens during the construction phase and the thing does
not get built or it is not done as we like it, and that would
be much more of a major catastrophe.
1061. I think it actually came from our visits
to Durham and Carlisle where it appeared that people were reluctant
to enforce things.
(Mr Coates) The operation of the contract on a day
to day basis for the 25 years is clearly a trust level decision,
but it does seem to me that there would be very good reasons why
they would want to try to negotiate a good working partnership
with the private sector rather than one based on adversary over
contract conditions. I can see very good reasons why they would
want to say to the private sector "There is a bit of give
and take here. We would want you to give some if we give some
and we end up working together as a partnership". Indeed,
one of the outcomes from the recent NAO Report into PFI was that
they felt it was a much more successful relationship if there
was this give and take relationship and it is more of a partnership
than one based on adversary over the contract itself. I can see
very good reasons why a trust would want to try to work in partnership
rather than enforce every letter of the contract. Having said
that, I think if there is a major breach of the contract we would
expect the trust to act on that breach and enforce the contract.
1062. So there is an iron glove behind it?
(Mr Coates) We have got plenty of examples where we
have enforced these contracts. The best example in terms of construction
was at the Mayday where we seized the assets and terminated the
contract. It is not all pretend.
(Mr Milburn) We have exerted the fining power of the
NHSI think we answered a Parliamentary Question on this
last year at some pointin a number of cases for more minor
breaches of contract where the private sector had not delivered
various things that had been promised. There is the capacity to
do that and, where it is appropriate, that is what the NHS trust
1063. Can I get down to the really sexy issue
of discount of cash flow analysis.
(Mr Milburn) I think another cup of tea is called
1064. In assessing value for money it was said
that the discount rate is very crucial and Mr Macpherson told
us in evidence before that the six per cent figure was set as
long ago as 1991 and that it was likely to be revised and the
general feeling was that it was likely to come down. I would like
to know what assessment you have made of the likely value of PFI
if a lower discount rate is applied? Professor Pollock said to
us that if the public sector discount had gone down by even one
per cent then the Carlisle Hospital cost would have been lower
under the public sector comparator than under the PFI. Is that
(Mr Macpherson) I think it is worth putting the issue
of the discount rate into context. What is going on at the moment
is a review of the whole capital appraisal process. The discount
rate is one part of that, and it is an important part, but part
of the review is also looking at issues like the treatment of
risk and uncertainty, both in terms of time and cost overruns.
It is also looking at issues such as tax. At the moment the Green
Book, which is the definitive document, does not actually take
into account possible flow backs to the Exchequer from private
1065. You are suggesting that the current one
is not robust in terms of assessing value for money?
(Mr Macpherson) What the Government said when it announced
the review about 15 months ago was that it wanted to bring the
appraisal guidance into line with best practice, so we are looking
at appraisal across the board. Having said all that, if you were
to change the discount rate in isolation that is bound to affect
the balance between different investment options. In the case
of a classic PFI project and a classic public sector financed
project on balance a lower discount rate would make the public
sector variant more attractive, but that assumes everything else
is equal and, as I say, the capital appraisal review is looking
at a whole lot of issues across the board and I certainly would
not conclude at this stage that the review will change necessarily
the balance between the public sector comparator and PFI projects.
1066. Because it will change other factors as
(Mr Macpherson) We are looking at other factors. No
decisions have been taken but when the analysis is complete I
hope that we will have some guidance which is in line with best
1067. Would you dismiss those sceptics who say
that the only real attraction of PFI is that it is the only game
(Mr Macpherson) I would certainly dismiss it. What
the Treasury wants, and I am absolutely certain the Secretary
of State wants, is good value for money for the taxpayer.
1068. Leading on from that, the impression has
been givenI do not want to blame any of our witnesses in
particularof this idea of it being the only game in town.
Lots of people have put that idea forward and have put it forward
in other ways, such as if we are going to get hospitals built
quickly then it will be the PFI programme and will not be any
other way. Can I put it to you, Secretary of State, is the central
aspect of value for money provided by the PFI process its ability
to deliver the Government's hospital building programme almost
at once rather than in stages, bearing in mind what you said to
us five minutes ago about building up and it is not happening
quite as quickly as perhaps you might have wanted it?
(Mr Milburn) There are two answers to that. The first
is that it simply is not true that PFI is the only game in town
because there have been other games in at least four cases and
then there are more minor projects.
1069. There have been four out of about 30.
(Mr Milburn) No, there are four out of 68, in fact.
The figures, as I remember, are 64 PFI projects worth about £7.3
billion, four publicly funded projects worth about £170 million.
As I said earlier in answer to Mr Burnham, where value for money
does not prove to be concluded in favour of the PFI then we will
build through the Exchequer route. However, I also think there
has to be some degree of realism about this. What I do not want
to do by saying this is give succour to the cynics or, indeed,
to the ideologues who are completely opposed to PFI purely for
ideological reasons actually, to tell you the truth, because in
each of these cases there is an unanswerable case, whether it
be about value for money, the number of beds, clinical staff or
whatever. I think it is important to recognise that in the case
of UCLH, for example, I could not say tomorrow that there is £500
million worth of public sector capital available in the London
NHS region; I could not say that. However, in order for UCLH to
be built as a PFI hospital it has to go through a very tough and
objective process, which we described at the last hearing. There
is a proper public sector comparator. The public sector comparator,
and I think you heard from the private sector, is secret to the
private sector and the private sector do not like that for a whole
variety of reasons. We keep it secret, in part at least, because
we think that induces more competition and potentially gets us
a better deal for the taxpayer, so the process is a real one.
It just so happens when you put these hospitals through this procurement
process most have turned out to be better value for money through
the PFI route than through the Exchequer route, some have not.
1070. Is it just coincidence then that we can
get hospitals built more quickly?
(Mr Milburn) No. Despite the fact that there is quite
a lot more money going into capital budgets in the NHS and they
have grown by around 50 per cent to date, and remember in the
past they tended to be cut rather than grown, there is always
a limited amount of public sector capital that is available. In
theory, at least, there is an infinite amount of private sector
capital that is available because the private sector can borrow
on the markets and so on and so forth to make cash available for
the NHS. I think in the end we can have a huge load of arguments
about the Private Finance Initiative and whether it is good, bad
or indifferent, whether it is good value for money, bad value
for money, and all these different things, but in the end its
compelling attraction as far as the National Health Service is
concerned is that we can get more hospitals built more quickly.
If we can do that and we can get good value for the taxpayer then
that is precisely what we should do.
1071. This may be a question for Mr Macpherson,
if it were possible for the public sector to deal with the 30
year payment profile that we have for PFI would this make value
for money better? I realise that would breach Treasury rules,
and all sorts of things?
(Mr Macpherson) The reason why PFI is usually better
value for money is all to do with where the risk resides. In theory
lots of public sector projects look very nice at the start, but
the history is, be it in relation to Parliamentary buildings or
the Jubilee line, that you get these long overruns in terms of
time. Okay, some PFI projects may take time to get going but a
lot of public ones get started and go on forever. Also in terms
of cost, in theory you are right and in practice in some cases
you are right. It happens that hospital projects seem pretty good
candidates for PFI but the fact is that 85 per cent of the investment
into the public sector is still exchequer funded, classical public
sector investment. Certainly from a Treasury perspective, and
I am certain from the Department of Health perspective, what we
are trying to do is find out what works. There are some things,
prisons for example, which are very good PFI material, other things
(Mr Milburn) The other answer to your question is
that we tried that. I do not know if you remember, we were looking
at alternatives to PFI, whether there were different forms of
procurement we could model and test out there. If you remember
there were two, one in Hull and Gloucester was the other one,
where we looked at different models which could potentially be
applied, one of which was to try and apply the discipline of PFI
to traditional public procurement by trying to stage the payments
to the building contractor in the way that we do through PFI.
As you know, in a traditional procurement by the time the hospital
has gone up the contractor who has built it has had 99 per cent
of the payment more or less up front, that does not provide a
lot of incentive once the tape has been cut and the bulldozers
have been removed for the private sector to have any on-going
commitment as far as that new hospital is concerned. That shows
precisely the maintenance and repair problems that have been dealt
with by the National Health Service for very many years. We tried
a different form of procurement at Hull which involved looking
to see whether we could stage payments in the way that we did
through PFI over a number of years and it proved to be catastrophic
value for money. Not surprising because all, I guess, that the
private sector would do in that situation is if they are not being
paid the money that they would otherwise get all they do is bid
up the price. As far as I know, with one exception, there are
only two major forms of procurement, one is the PFI route, where
essentially the risk is lodged with the private sector and we
pay a unitary fee over a period of years, 30 or 60 years, in compensation
for the private sector building a new building up front at its
risk, or we have the traditional public sector procurement, whereby
you end up not transferring any risk at all, in fact assuming
risk. I think from the public sectors' point of view, from the
NHS's point of view and from the staff and patient point of view
that does not make sense, it has not given good value for money
for the taxpayers in the past. If you look at the ups and downs
of the economic cycle as far as building is concerned, when it
has purely been through public procurement there has been this
horrendous stop goal. Guy's Hospital was the worst, Guy's phase
three, which the NAO and the PSC quite rightly took a very hard
look at because of the substantial delays where public sector
capital was not being made available for a whole variety of reasons
not out there at the time. That does not happen with the PFI.
The only other alternative that we know about, that we looked
at is what the Ministry of Defence are doing through prime contracting,
where they are trying a slightly different form of procurement
which involves not paying up front but staging some payments over
a period of time. Their period of time, as we understand it, is
a maximum of three years. Since we are going to have these NHS
hospitals in Swindon and elsewhere hopefully for 30, 40, 50, 60
or 100 years I do not think that really answers the problem.
1072. What you said, and what Mr Macpherson
said, does emphasise the importance of Richard's point, that being
able to enforce penalties is important to the benefits the private
sector is supposed to bring to the whole process?
(Mr Milburn) Absolutely. I agree with that. The beauty
about PFI is what it does is impose legal and, more importantly,
on-going commitment on the private sector. I think I said at the
last committee or at a previous committee, when I was Chief Secretary
to the Treasury, when I opened the first PFI school in the country
and I spoke to the head teacher there and asked him about the
benefits of PFI what he said to me was that he did not need to
worry any more about the fact that he would come in on a Monday
morning and there were vandalised windows and doors that needed
repairing, that was somebody else's legal and contractual responsibility.
The same is true in the NHS. PFI hospitals mean that we need not
worry about repair and maintenance. We get a good asset on day
one and it has to be maintained as new for 20, 30 or 40, or 60
years at the private sectors' expense and at the private sectors'
risk. Anybody who knows NHS buildings and what has happened to
them in the past, beautiful on day one and a disaster by year
five. That seems to me to be a huge step forward.
1073. That is a point that came over in our
evidence round the country. Something else that has been a factor
that we have kept hearing about is this pressure on bed numbers
and the pressure to reduce bed numbers, and various witnesses
have asserted that has happened. Can I ask you, (a) if you think
there is any truth in that allegations, particularly in the early
years? That may not apply now but did apply early on. (b) How
can you be absolutely certain pressure to reduce costs does not
result in reducing bed numbers?
(Mr Milburn) I do not think the reduction in bed numbers
in the National Health Service, which occurred over very, very,
many decades had anything do with the Private Finance Initiative.
Indeed the reduction in bed numbers over a period of 30 or 40
years predates the introduction of the PFI by very, very many
years indeed. Indeed in the 29 new schemes that I did announce
in February last year they will contain in total 2,900 extra beds
on top of the current provision. The idea that PFI equals bed
cuts is simply wrong and it is not borne out by the evidence.
If this Committee has visited Durham and Carlisle you will have
seen pressure on beds there, there is no doubt about that. It
is worth remembering that those PFI hospitals were built before
we did the National Beds Inquiry and before we assumed the big
increase, both in resources and elective activity, that is now
going into the National Health Service. The situation is turning
round. Last year was the first year in 30 years where there were
more general and acute beds in hospitals rather than fewer. The
tide is turning and PFI is going to make a contribution to increase
the number of beds in the NHS rather than reducing them.
1074. As you have said, Secretary of State,
it was the National Beds Inquiry that alerted you to the fact
that those PFIs that were planned before were desperately short
of beds. What puzzles me is where you have PFIs that were started
before this and you are putting on extra beds, because you are
funding those extra beds from the public sector rather than from
the PFI, does that not askew the advantages of the PFI?
(Mr Milburn) No, because it is important to remember
that the decisions about both bed numbers and staff numbers predates
any decision about the former procurement. Basically the National
Health Service in an area sits down and decides before it is decided
how the new hospital is going to be built how many staff it needs
and how many beds it needs. It then goes through a process of
deciding which is the best way of procuring the beds, the assets
and the number of staff. The relationship between the bed numbers
and PFI is completely unrelated. As far as the extra beds that
are coming on-linecertainly at Norfolk and Norwich, where
we have put an extra 144 beds into an existing PFI hospital that
is being built as part of a PFI scheme.
(Mr Coates) It is being funded by the private sector.
(Mr Milburn) The accusation that Professor Pollock,
amongst others, erroneously makes, that PFI both cuts bed numbers
and does not have enough flexibility in order to be able to cope
with changes in demand is patently wrong. There you have a contract
that is signed, a hospital that is actually built and now is being
added to to the tune of 144 beds, through a revised PFI contract.
1075. In Worcestershire it is being funded under
the public sector.
(Mr Milburn) That may be so.
1076. One great disappointment to us was when
we went to Carlisle we learned from the staff there that they
were going to have a public sector alternative at the cost of
£35 million and they were actually at the stage of signing
the contract when on virtually the day that PFI came in and they
were prevented from doing that and the PFI alternative they are
getting costs a great deal more than the £35 million that
it was going to cost. It is obviously a complete new build but
there are less beds than there would have been under the £35
(Mr Milburn) You are not comparing like with like.
1077. I know I am not.
(Mr Milburn) It is an apples and pears question. I
know a little bit about Carlisle because it is my part of the
world, near enough, that was not for a new hospital, was it?
1078. It was for refurbishment. It was at a
stage when the staff there would have been happy with it and would
have got more beds.
(Mr Milburn) Talk to the medical director.
1079. It was medical staff who told us this.
(Mr Milburn) Talk to the medical director about the
quality of the care there, for example, that mothers are receiving
in the new maternity unit at the new hospital as distinct from
the conditions they had to put up with in the old, not just hospital,
but hospitals, because it was a split site and I think there is
no argument. Although there are problems, of course there are,
capacity issues, and so on and so forth, nonetheless the new PFI
in Carlisle is a good thing and not a bad thing.