Examination of Witnesses (Questions 220-239)|
GERSHON CBE, MR
WEDNESDAY 12 DECEMBER 2001
220. That is a very helpful answer, thank you.
I would like to ask you about the position of PFI in the firmament
generally. To what extent do you think PFI is understood by public
servants, by politicians, by the public, by journalists?
(Mr Gershon) I think there is still some way to go,
particularly in the wider public, to communicate the real benefits
of PFI and to try to clarify some of the conceptions that people
have around PFI. I think amongst public sector procurers there
is recognition that PFI is a powerful acquisition tool to use
in some, but not all, circumstances and can be a powerful way
of getting value for money, but not the only way; it has to be
considered on its merits. I think the perception of the tool is
rather different from the reality of the tool and we have to do
further work to change perceptions.
221. Your answer is incomplete. You mentioned
the public and you mentioned public sector procurers but perhaps
wisely you did not mention politicians. The impression I have
is that it is not particularly well understood by large numbers
of people in all sorts of facets of life. Would you say that is
(Mr Gershon) Not well understood. You said do I think
that is totally unfair, no, I do not think that is totally unfair.
222. Right. I will not press you further on
(Mr Gershon) I think we have to demystify some of
it. Some of the language we use to describe it does not help improve
understanding of it. When we talk about it in terms of complex
financial engineering I do not think it is reasonable to expect
normal human beings to understand what things like net present
value and internal rates of return and all that stuff mean.
223. Do not go into it now.
(Mr Gershon) I have no intention of doing so, Chairman.
I do not think we help ourselves in communicating what the benefits
of this are about.
Mr Bacon: Chairman, I asked the clerk for a
seminar on net present values and rates of return.
Chairman: You can go to it.
224. That being the case, there is plainly a
big communication job to do and you are the adviser and guider
for Government departments on how they should assess the value
of these projects and whether to go ahead with them, but as with
many things the communication is very much part of the answer.
What steps are being looked at by your office or others in terms
of improving the level of communication and understanding about
(Mr Gershon) With which community?
225. With the wider public. They were the first
people you mentioned in your earlier answer.
(Mr Gershon) In that area I think we have to look
for direction from ministers as to what they would like to see
done and I do not regard that as something I can do off my own
226. But you accept there is a need to do something?
(Mr Gershon) We clearly input. I just said I think
on the clarity of understanding of the benefits and some of the
currently held conceptions there is always room to do better.
That is my personal opinion, which I may get shot for when I leave.
Mr Bacon: I think that is absolutely right.
Thank you very much.
227. A general question about risk transfer,
in particular for longer contracts. Can you just comment on this
suggestion that basically if you go into one of these long contracts
and the public sector has a duty under all circumstances to deliver
a public service, to what extent is there a real opportunity to
actually exit and either provide another provider or provide something
directly? Do you want to make a general comment?
(Mr Gershon) Under the standardisation of PFI contracts
there are termination provisions included in the contracts that
define the circumstances in which a client can terminate, which
include termination where there is contractor default.
228. For argument's sake I will not carry on.
If I have a contract with you and you are the supplier, as it
were, and you provide a standard service over time and in the
future unit costs go down but the balance to the consumer goes
up and the whole specification begins to change and I try to negotiate
with you because I want to change, how easy is it for people in
the future to exitthis is public sectorwithout facing
massive penalty clauses? I am just wondering what your view is
down the line, whether Government agencies will find themselves
in a situation where with new consumer demand alongside lower
unit costs and very clever lawyers they will find themselves in
a position where they provide sub-standard above cost.
(Mr Gershon) That is why standardisation places great
emphasis about what authorities now need to do in PFI contracts
to configure the contracts to cope with change and satisfy themselves
that change will be delivered on a value for money basis through
the life of the contract.
229. You are satisfied we can deliver that?
(Mr Gershon) We have the standardisation route and
those sorts of issues are things which are tested during the Gateway
Review process. We have a number of mechanisms in place now which
are helping authorities get a very clear focus on this important
aspect of PFI.
230. See you in a couple of years.
(Mr Gershon) Does that mean there may be scope to
take further action in the future? There may be. We need to keep
the matter under review.
Geraint Davies: I will leave it there.
231. It struck me that really we are talking
about risk and transfer of risk but at the end of the day if anything
goes wrong you are going to bail it out, are you not?
(Mr Gershon) No, I am not.
232. You are not?
(Mr Gershon) No.
233. That is what it says here.
(Mr Gershon) Which one is that?
234. The renegotiation of the PFI for the Royal
Armouries Museum in Leeds. The Department for Culture paid £10
million to bail it out. You are not going to let a hospital close,
(Mr Gershon) You made a general statement to which
235. You answered no.
(Mr Gershon) I answered no to your general statement.
Things do go wrong, costs overrun, things like that, which are
costs which are picked up by the private sector.
236. The answer was not right, it was not accurate,
because there is one which has been bailed out and if my hospital
closed you would bail it out. You could not let a hospital close,
(Mr Gershon) I made it very clear that there are some
risks which the public sector can never transfer to the private
sector. One is the risk that in the ultimate you have to keep
providing public service. Let us suppose your hospital closed
because the contractor went bust. In that contract, if it followed
standardisation, the client will have step-in rights to take over
the running of the hospital.
237. That is my point.
(Mr Gershon) You are looking at catastrophic failure.
238. Was that a catastrophic failure?
(Mr Gershon) That was catastrophic but many failures
are not catastrophic and the tab is picked up by the private sector.
The risk of catastrophic failure can never be transferred to the
private sector if there is the provision of public service involved.
Whether it is passports, hospitals, whatever, we all have the
responsibility to continue to deliver a public service. That is
a catastrophic failure which has low probability but very high
impact. There are other risks which may have a high probability
of occurrence and a lower impact which will be picked up by the
239. If you had been sitting there three or
four years ago and somebody had said that the Royal Armouries
would need £10 million to bail it out, you would have said
that was a catastrophic failure and it would never happen, would
(Mr Gershon) Where there is demand risk involved,
which there was in the Royal Armouries, the number of people who
would actually come through it, there is no doubt that both the
public and the private sector have learned from those sorts of
experiences about how much demand risk the private sector can
sensibly take in a PFI.