PFI: Construction Performance (HC 371) Public Accounts Committee 24 Mar 2003

Mr. Gerry Steinberg (City of Durham): I have to say that when I read this report and looked at the comparison of what happened pre PFI projects and what is happening now regarding construction costs and delivery time for the projects, I thought we should just accept that PFI is a fantastic success, and we should just get on with it.

Chairman: Is that a statement or a question?

Mr. Gerry Steinberg (City of Durham): It is a question.

Mr Gershon: The hypothesis that PFI is delivering dramatic improvements in a relatively short space of time over what has been a systemic weakness in public sector procurement going back over many years is very gratifying.

Mr. Gerry Steinberg (City of Durham): It is a huge success, is it not?

Mr Gershon: It is a huge success but, as I say, we have always maintained there are three preferred methods of contracting, and it is for accounting officers to determine which one to use that delivers them the best value for money to meet their business needs in any particular situation.

Mr. Gerry Steinberg (City of Durham): My wife always says to me that I see the jug always half empty, never half full but you cannot help but see it half full here, can you? If you look at figure 1, before PFI 73 per cent of contracts exceeded the agreed costs; since PFI only 22 per cent do, and if you look further on it says that pre PFI contracts 70 per cent were delivered late and now it is only 24 per cent that are delivered late. This is a huge success story, is it not?

Mr Gershon: Can I go now?

Mr. Gerry Steinberg (City of Durham): Yes! But it is a huge success story, is it not?

Mr Gershon: It is, yes, but that has always been postulated as one of the real benefits.

Mr. Gerry Steinberg (City of Durham): So where are we getting the wool pulled over our eyes, then?

Mr Gershon: On what?

Mr. Gerry Steinberg (City of Durham): On PFI. It cannot be as good as all this, can it?

Mr Gershon: The debate that has taken place previously around PFI has not focused on these aspects of it.

Mr. Gerry Steinberg (City of Durham): Well, it is brilliant! We are told here that price increases are due to changes in specifications requested by the Department, so it is not the contractors to blame when the prices go up. The department is to blame - you are to blame. We are even told that some of the construction companies are losing money on the deals because they are paying for these changes themselves. It is fantastic, is it not?

Chairman: You are supposed to ask difficult questions!

Mr Gershon: I have this horrible feeling --

Mr. Gerry Steinberg (City of Durham): You are absolutely right! Is it not because, let's face it, they are making a killing, are they not?

Mr Gershon: No ---

Mr. Gerry Steinberg (City of Durham): Of course they are making a killing. They are making a huge killing, are they not?

Mr Gershon: No.

Mr. Gerry Steinberg (City of Durham): Of course they are. Their profits are up hugely, and I will come to that in a minute. If you look at paragraph 2.14 it says that the projects are being done at inflated prices. They can afford to give away money because they are making so much out of the schemes, are they not?

Mr Gershon: Well --

Mr. Gerry Steinberg (City of Durham): Are they not, Mr O'Brien?

Mr Gershon: I repeat that 2.5 per cent on turnover for a profit is hardly --

Mr. Gerry Steinberg (City of Durham): It depends what your turnover is, does it not? If it is very small then it is not a very big problem. If your turnover is millions, then it is millions of profits?

Mr Gershon: I do not think either the Kier Group or Carillion would fall into the category of having a small turnover.

Mr. Gerry Steinberg (City of Durham): Is it not because the prices that are built into the schemes are inflated anyway? Mr O'Brien? Mr Gilbertson?

Mr O'Brien: I have no particular evidence of that. If you take the report that Sir John Egan did, Rethinking Construction, one of the things he highlighted was the poor profitability of the industry and one of the consequences of that is lack of investment, so in the PFI process the industry is certainly looking for the win/win so that the users get better value for money and yes, profitability increases a bit in the industry so that the investments can be made better.

Mr. Gerry Steinberg (City of Durham): And what about the fact that the costs are too big anyway? They build in bigger profits?

Mr O'Brien: I am saying that in the PFI process, yes, we seek a win/win - the public sector gets better value and the industry gets a better return, yes.

Mr. Gerry Steinberg (City of Durham): What about the next thirty years as well? Is there a gravy train there?

Mr O'Brien: That would be speculation.

Mr. Gerry Steinberg (City of Durham): I am not sure whether it is speculation. I have just got a new hospital in Durham with PFI, and I am delighted with it - there is no doubt about it. It is brilliant, fantastic, we would never have got it otherwise, but at the end of the day it is going to cost a fortune, another thirty years, compared to what it would have cost in the public sector?

Mr O'Brien: It is going to depend upon whether the people doing it have got their estimates right in terms of the maintenance requirements over that period. They have to do detailed modelling and assessments of any project and the future maintenance, and there is considerable scope for getting it wrong.

Mr. Gerry Steinberg (City of Durham): Do you think that prices will come down as more PFI projects are done?

Mr O'Brien: I would hope so.

Mr Gershon: The prices for construction?

Mr. Gerry Steinberg (City of Durham): Yes.

Mr Gershon: Yes, they should come down and, if you take one of the points referred to here to test that hypothesis, there is going to be the use of batching by the Department of Health so that instead of going out for a single hospital we are going to run two pilots involving a batch of three and a batch of two to see whether the benefits of economies of scale and the learning curve will be reflected in lower prices over the whole batch.

Mr. Gerry Steinberg (City of Durham): Moving on, if these 40 projects that we are talking about had been built to conventional public sector conditions or contracts, do you believe that they could have been produced at any less cost, or do you think that in fact the deal that is being got is the best deal that could have been got?

Mr Gershon: Under PFI, remember, the client is contracting over 30 years for the provision of service. The cost of the asset is one element that goes to make up the unitary --

Mr. Gerry Steinberg (City of Durham): Put it this way, and I am not being funny now: would you have been delighted if the 40 projects that we have delivered now had been delivered under the public sector, and had been delivered as they have been now?

Mr Gershon: Ecstatic. Unfortunately there is no history, either recent or past, that indicates the public sector has ever been able to deliver traditionally procured projects to cost or time with any degree of predictability.

Mr. Gerry Steinberg (City of Durham): Can I ask the National Audit Office a hypothetical question? If these 40 projects had been delivered under the public sector, what would you have been saying to us?

Sir John Bourn: As you say, it is a hypothetical question but on all past history you would have been saying that they cost more and took longer and had defects in them because that had been the experience of the past overwhelmingly, and was one of the motives for seeking to secure construction in another way. But that is not to say that, if you had been able to use PFI or either of the two other methods and if those had been available at the time, no doubt there would have been the possibility of doing these 40 projects and getting them done successfully. I think it is very difficult question because there is a hypothesis in a hypothesis.

Mr. Gerry Steinberg (City of Durham): It is. Putting it another way, if these projects had been delivered under the public sector and you had been doing a report on these 40 projects, would you have been coming to this Committee and saying, "Well, we believe these are very successful projects"?

Sir John Bourn: If you look at the reports of my predecessors who were looking at 40 projects in the past they never seem to come to the Committee saying that the construction had been done well but, as I say, if those projects had been done by the PFI or the other two methods, there would have been a chance they would have been done better. That is not to say there were not examples in the past where sometimes central government did a project on time, on cost, and did it well - of course there were some where it was very successful - but the general result had been disappointing which was one of the motives for trying to find another way of securing these services.

Mr. Gerry Steinberg (City of Durham): We have proved in the past, I think, when we have had individual projects in front of us, and to use the word "fiddle" might not be right but certainly where a public sector comparator has been made the PFI has beaten that with a certain amount of jiggery - there has been no doubt about that whatsoever - because things have been added to the public sector comparator to ensure that the PFI bit always looks better. But even after saying that and accepting - which you might not but I think this Committee is pretty certain, or some members are - that that does happen, is PFI a better deal? Also, can I ask Mr O'Brien and Mr Gilbertson - who still has not said anything - this question: as businessmen in the construction industry you are obviously very delighted because you are making a lot of money out of the way the construction industry is, but as taxpayers are you delighted with it?

Mr Gershon: I am very aware of the comments that the Committee has made at some of its hearings and in its reports about the construction and use of public sector comparators in certain projects but even allowing for that, as the guy who has always made clear, the public sector comparator is not to be used as a simple pass/fail test but as an aid to accounting officers to help them determine which route they should go down on best value for money grounds, and in doing that there are both qualitative and quantitative factors that have to be taken into account. For PFI you need greater certainty over when the asset will be available and the certainty that the asset is going to be kept in good order for the whole of its life, which cannot exist under conventionally funded procurement, so there are a range of other factors that have to be taken into account other than whether the public sector comparator indicates that PFI is significantly better, marginally better, or possibly even slightly worse than the traditionally funded option. This is not just about what the numbers coming out of a model tell you.

Mr. Gerry Steinberg (City of Durham): Mr Gilbertson? Mr O'Brien? As taxpayers?

Mr Gilbertson: I think the various ways of procuring always have to be weighed up, and it would be very unwise to say, "One must always do this or that". PFI is now established as a viable option which, from the work have been discussing today --

Mr. Gerry Steinberg (City of Durham): But as a taxpayer are you happy?

Mr Gilbertson: That it has been delivering? Personally I would say yes.

Mr O'Brien: I would say certainly in terms of value for money we are looking for over the life of the asset.