Examination of Witnesses (Questions 160-179)|
GERSHON CBE, MR
WEDNESDAY 12 DECEMBER 2001
160. You are a fairly small player because we
are looking at something like
(Mr Busby) We have about half a dozen contracts under
161. In the generality of this report, on the
400 projects the Government do they have already committed £100
billion and you are a very, very small fraction of that, you are
talking about millions of pounds, or are you into billions?
(Mr Busby) In total it would be 150 million-ish on
construction work over the half a dozen that my group has.
162. It is small beer in the totality of things.
Basically in ballpark terms, and I know from what you say this
is being distorted by this one contract, you are looking at, say,
2.5 per cent return versus one per cent on normal activity, so
two and a half times the level. You think that is a reflection
of inherent risk, yes?
(Mr Busby) Yes, I do.
163. If there is inherent risk, risk goes both
ways so you would expect in the wash that it comes out at the
same level, one per cent, because you win some and you lose some.
(Mr Busby) No, I do not. I am not being asked to invest
£4 million up front in any other part of my business.
164. Do you think 2.5 per cent return is normal
or below average?
(Mr Busby) I am sorry?
165. Do you think 2.5 per cent return is normal
or below average, because it seems a bit low from the figures
I have heard before?
(Mr Busby) We are in a competitive marketplace. Every
contract that we have been awarded under PFI has certainly been
in competition and I would be surprised if our returns
166. Have you lost a lot of bids?
(Mr Busby) Yes, of course.
167. Okay. You think it is rational from the
point of view of your shareholders to put forward £4 million
bidding for a contract, paying solicitors or whatever you did,
for a £70 million contract?
(Mr Busby) There are times when we questioned it,
168. If you had not won the bid then that £4
million would have been lost money. Would that have been factored
into other PFIs?
(Mr Busby) That is why I believe the returns that
we are getting are fully justified. We have lost contracts.
169. In this example, what was it for incidentally?
(Mr Busby) A hospital.
170. Presumably there were competitors who also
spent £4 million and did not get the deal, is that correct?
(Mr Busby) No, I think that is wrong. There could
well be competitors who spent up to, say, £1 million.
171. £1 million?
(Mr Busby) We have certainly incurred £1 million
of costs on a project that we have not got.
172. If you are running, as you are, a successful
private sector enterprise then you need to stay in business. In
the global analysis of PFIs, if each PFI is four companies bidding,
for argument's sake, and they all put forward in this sort of
contract between £1 million and £4 million up front
for the bid then we are talking about a net loss in this sort
of industrial system of three or four million through that competitive
activity that you have to recover from prices if all these companies
are to keep going. That is true, is it not?
(Mr Busby) Your numbers are not correct.
173. They were your numbers, with respect.
(Mr Busby) Taken out of context.
174. Let me give you it again then. You said
in this example you put £4 million and other competitor companies
were putting £1 million up front. Is that an abnormal situation,
is that what you are saying? That was the situation because that
was the evidence you have just given.
(Mr Busby) Yes, that was the situation, but you said
that, in fact, there were typically four bidders, all four bidders
would not be spending at least £1 million. There is a process
175. How many bidders would there be?
(Mr Busby) Typically four, but in the early days of
getting down tothe final two the costs are much lower.
176. Is there a sense in which some prospective
competitors are actually excluded from the competitive process
by the very high entry costs in terms of lawyers and all the rest
(Mr Busby) Yes.
177. If I was running a company and knew that
you were bidding and you were going to spend £4 million even
though I could do a better contract, I would think, I would not
be prepared to bet £4 million, I would go elsewhere.
(Mr Busby) Yes.
178. Could I ask Mr Gershon just on this narrow
line really. You are in the midst of reviewing the rates of return
for PFI deals, are you not, or rather your organisation? That
is correct, is it not?
(Mr Gershon) We have commissioned a review, yes.
179. Tell me the spread of rates of return you
are picking up?
(Mr Gershon) The review is under way, it has not concluded.