Examination of Witnesses (Questions 100-119)|
GERSHON CBE, MR
WEDNESDAY 12 DECEMBER 2001
100. They do not provide the clinical services?
(Mr Gershon) No, no, no.
101. The point I am trying to make, if you will
listen, is if the hospital has a certain budget and they have
to take from that budget to pay for the contract, at the end of
the day that contract is more than was anticipated because they
then have to find extra money to pay the extra payments, where
will that money come from?
(Mr Gershon) The extra payments are not triggered
by the contractor making losses. I am sorry, although it is true
in the hospitals clinical services are not within the scope of
PFI, the contractor will probably have an obligation about the
maintenance of the ambient temperature inside the building.
(Mr Gershon) He will provide soft FM services like
catering, laundering, portering, i.e. the non clinical services.
(Mr Gershon) Right. He contracts. There are key performance
indicators in the contract which define the contracted level of
service. If the contractor does not achieve that he gets debits
off his payments for failing to meet the contracted level of service.
If he has already made losses, because he got it wrong on the
building, that is tough luck, you do not get extra money, that
is one of the great benefits of PFI.
104. I hope that is right. My understanding
and information that has perhaps been given to me, it might be
biassed information, is that at the end of the day if the hospital,
out of its budget, has to increase its payments to the contractors
(Mr Gershon) Because the contractor has
made a loss?
105. Yes. Then they have to find that money
from somewhere else and that means cutting services.
(Mr Gershon) Mr Steinberg, if you pass me that information,
I am very happy to follow that up and personally come back to
you on that.
106. Okay. We will move on. I am almost out
of time. That cannot be right. Is it not a fact, the way I look
at it, that the track that Jon was going down is absolutely right?
Basically you are bound to say, if asked, it is value for money
because at the end of the day you have no other option but to
say that because there is no other avenue you can go down, therefore
you have to justify it. At the end of the day there is only one
way that a major capital project can now be built and that is
(Mr Gershon) Sorry. It is not the case that is the
only way of building capital projects.
107. Can you tell me a hospital that is now
being built under a public sector contract?
(Mr Gershon) There are one or two traditionally procured
(Mr Ryan) Can I just clarify. I cannot give you the
names off the top of my head but I know that very recently on
four hospitals in the NHS which had been due to be built under
PFI it was concluded that after careful examination it was better
to do it through conventional procurement. That is what is being
done. That illustrates the fact that the public sector comparator
is used properly.
(Mr Gershon) Mr Busby has just mentioned in my ear
that he thinks that the one on the Isle of Sheppey is being done
through traditional procurement, not PFI.
(Mr Busby) It fits the definition.
Mr Steinberg: I had six pages of questions I
wanted to ask you, I have asked one and a half.
Chairman: You can come back at the end if you
want to. Mr Rendel, unusually, has now found his reference to
the question he was asking Mr Busby so he wants a very brief question
to him before he leaves.
109. If I may, Chairman, because I am afraid,
I have to apologise, I have to leave in a moment. Mr Busby, when
I was asking you earlier about these ones that had deductions,
you gave me an answer which I was surprised about. You may remember
at the time I said I would look up the reference and come back
to it. I have now been helped to find the reference which is paragraph
1.22 on page 11 where the report says that "... 58 per cent
of authorities who had an agreed performance and performance deduction
review process told us they had made performance deductions in
accordance with those processes. 25 authorities told us that they
had made deductions totalling £10.3 million". As I understand
it, that is when the contractor's performanceas it says
in the very first sentence therefalls below certain contractually
defined standards. In other words, it is something that is in
the contract. When a ward goes into maintenance for a period you
do not get the payment during that period, that is in the contract.
What we are talking about here are deductions for when the performance
falls below certain standards. Now it seems to me if that is true
and if this amount of money is being removed from your contractors,
given thatas I mentioned earlier, I would hope the contractors
were basing their tenders on the lowest possible price to get
anything like a reasonable rate of returnthen presumably
in the end all these 25 contractors had failed to get a reasonable
rate of return and I would have expected that to be pretty worrying
from your point of view.
(Mr Busby) I can only repeat what I said earlier.
As far as I am concerned, the ones I am aware of, the deductions
were made in accordance with the processes which are contained
within the contract. There are two fundamental ways on which a
contractor is paid: availability of the service is clearly one
of them. In the event that there is a problem with that availability,
and that can come in all sorts of forms, then a deduction will
110. Are you sayinglet me get this quite
straightthat in your view the contractors would have taken
into account the likelihood of this level of deductions before
they fixed the tender price to give them a reasonable rate of
(Mr Busby) I think they probably would, yes, because
it is totally unreasonable to expect every ward to be available
for 30 years 100 per cent of the time.
111. Can I just ask the C&AG, is that how
you understand the PFI is supposed to work or perhaps Mr Gershon
would like to answer this? Is that what you understand, they are
expected to set up their contract prices with an allowance for
the fact that they probably will fail to do what they said they
will do in the contract?
(Mr Gershon) Can I put it this way. When I was on
the other side and we were bidding for a PFI contract, you would
make probably an allowance that certainly in the period immediately
following what you describe as the start up phase of the contract,
you would probably make some contingency against meeting the contractually
Chairman: I am going to stop you there.
Mr Rendel: That is fine. I am appalled, but
that is fine.
112. Mr Busby, it is a strange set up, is it
not? We go through all this system and I bet you must wish for
the bad old days or the good old days again. When we were building
hospitals in the good old days, we would start off with a price
of £200 million to build a hospital in two years.
(Mr Busby) Yes.
113. Then by some miracle we would find things
go wrong or things not up to standard, we suddenly found the floor
was not good enough, we would call the architect and say: "That
ward there would look much better if the floor was wood or the
doors would look much better in glass and if they had gold handles
on it would be much better, you know". The architect was
trying to keep costs down because he was paid a percentage of
the final price. He would say "Oh, no, all right" and
we would get this extension and it would take three years to build
and cost £300 million and you use the three years and the
£300 million and then suddenly you got cut back to produce
this building in two years for £200 million. Do you not rue
the day anybody thought of this scheme? Yes, is the answer.
(Mr Busby) It was a considerable shock to the industry
when the scheme was initially suggested by Government. The industry
struggled significantly with the additional risks that they were
asked to take on board as a result of PFI but there is no doubt
that the good old daysas you describe themdid a
number of things. It certainly in the main, if you use hospitals
as the example, did not provide value for money to the public
sector, of that I am absolutely convinced.
114. It was awful.
(Mr Busby) It was awful, yes.
115. They were all part of the same gang.
(Mr Busby) The returns that the contractors get, I
am fascinated by some of the comments that have been made around
the construction industry shafting the public sector. The reality
is that my industry probably makes a return on average of about
two per cent of turnover, that is the return that we as an industry
on average will get. My company has been very proud to announce
for the first time it has managed to get one per cent profit margin
on its turnover. There are industries which I know contract to
the public sector, Mr Gershon, where margins of, let us say, ten
per cent are thought to be more appropriate. That does not happen
in this industry.
116. IT Companies are 15 and 20 per cent.
(Mr Busby) Fine, yes.
117. Construction is quite well known and recognised.
Schedules and rates, for example, you can work these things up
reasonably simply and easily. Here is the old building, you have
a chance to maintain it, taken over a 30 year lifespan where you
have a responsibility
(Mr Busby) Absolutely.
118. You have to make sure it is built right
to start with.
(Mr Busby) Absolutely so.
119. I am surprised you find it amazing you
have to take wards out. You have to take wards out to paint them.
(Mr Busby) Yes.