Q11 Lord Forsyth of Drumlean: I thought the whole argument for paying a premium for the funds was that the risk was transferred to the private sector. If you are saying that risk transfer is not about risk transfer, it is about sharing, why are we paying such a high premium for the finance?
Dr Stone: I need to clarify that. What I mean is it is not about taking all the risks of delivering and just saying, "There you are, it's yours, sort it", it is actually saying, "What are all the risks involved. There is a big chunk of them that somebody else can manage better than the public sector can, transfer those", but across the whole spectrum you share them. Some of them you keep and some of them you transfer. It is about transferring those that make the most rational sense to somebody who can manage them. In the early days of the process there was very much a sense of government having a large bulldozer and simply moving the risk and it was a case of, "The more you can transfer the better, that must be a good thing", but I am afraid it was not. There were some risks transferred, the patronage in the Royal Armouries, but you cannot deal with that in the long-term and the dialogue was changed. When I say risk sharing, I do not mean that we all keep a bit of each risk but that some risks go across and some stay. That balance is extremely important.
Q12 Lord Forsyth of Drumlean: Are you saying that in the cases where there have been PFI projects of the kind you have given where it was impossible to transfer risk that the taxpayer did not get a decent deal because they were paying a premium for transferring the risk?
Dr Stone: Let me give you the most spectacular case I can think of, and it is the National Physical Laboratory. In that case two private sector companies took on a request from government to build the laboratory. The specification of that laboratory was undeliverable. The original estimate was it was going to cost about £45 million to build and the organisations spent about another £40 million to try and make it work and eventually it ended up with the bankruptcy and disappearance of John Laing, the construction company, who tried their best to fix it. That risk was actually transferred. It should not have been in the first place because the specification was simply undeliverable and the homework that had been done by both sides before it started was incomplete. That did teach lessons. It has been very interesting watching even in the case of the collapse of Jarvis, for example, that the risks that were transferred in the contract stayed transferred even when the deals were sorted out and the company disappeared and successive companies came into play. Have we transferred risks where the public sector has paid over the odds and those risks have not been transferred? I struggle to think of one where I can see that we have not had something out of it. In that case the government got a very good laboratory for a fraction of the price they should have paid. The risk was successfully transferred.
Q13 Lord Best: I apologise, along with some of my colleagues I thought the meeting was at 3.30. You may have already touched on or answered something in the question I am going to ask you and I apologise if so. In your experience, do private finance projects typically provide not only significant but objective value for money? We know that at least reputedly they come in on time more often and they come in on budget more often but also that they cost more when they do come in. If that is so one is really weighing up different factors and it becomes a subjective judgment as to whether there really was value for money. In your experience can we show objectivity here?
Dr Stone: I would follow the line that the NAO takes on this which is that if you compare and contrast the best estimates you have of what the whole life would have cost had it been done in the public sector versus what the whole life will cost under the PFI contract on the whole life basis you are getting a better cost, a lower cost, including the risks. The danger of investigating that too far is that the data around the conventional is pretty thin, as I said earlier. There was a period of time when there was a search for an algebraic Holy Grail which I think Jeremy Colman, the Assistant Auditor-General, referred to as "pseudo-scientific mumbo-jumbo". It is pretty hard to prove with a micrometer that this thing is absolutely spot-on. Do I think that there are objective value for money benefits? Yes. The on time and on budget point is quite important because one of my complaints with the way we measure value for money is we do not measure the value of the benefits. The assumption is that however you deliver the service the service and benefits to society will be identical, but if you deliver a new hospital or a new school earlier than would otherwise be the case I would contend that there are social benefits from that that matter and those are not measured. We assume that the results are unvaried and I think that is plain wrong, but I cannot measure it, I do not have anything to do that. The operational certainty side is quite important too. Because of this feedback loop where literally on a month-by-month basis the performance of the service delivery against standard is monitored and there are financial consequences of that performance that means there is a return to the mean that you intended. That is much, much more likely than you would ever get in a conventional case. By delivering services to quality for longer, yes you are getting better benefits. We do not measure the consequences. I think David Miliband, when he became Schools Minister, said 8% of the schools were built before the telephone was invented. Those as institutions in which to deliver education are substandard. We do not measure the cost of that to society. The benefits that we have from these deals is that the service level is maintained much more consistently for much longer, that has to be measured, so I do think there are objective measures but objective in the sense that they are still relatively qualitative from my point of view. I am quite clear that they are there.
Q14 Baroness Kingsmill: PFI projects tend to get a bad press, do they not? I am wondering quite why there are rather more critics than there are advocates of that process. Anticipating some of the things you might say, as a second part of the question what do you think one could do better other than PR?
Dr Stone: The starting point, if we go right back to the mid-1990s, without realising what was happening it turned not into a discussion about delivering better public services, it turned into a discussion about the survival of one or two particular unions. In the early days when we transferred staff from the public sector to the private sector without realising what was happening we were threatening the very lifeblood of some really quite large organised unions and that turned immediately into a, "Don't confuse me with the facts, my mind's made up" debate about, "This process is simply about abusing workers" when it absolutely is not. The big mistake we made was we did not deal with the fact that if you are delivering public services you cannot do it without a well-trained, motivated and, in the broadest sense, rewarded workforce, you cannot abuse the staff and deliver high quality services, you have got to look after them. It has been very interesting for me looking at deals that have gone into operation after I had been involved in the initial creation of them, talking to the people who were originally part of the old system and are now part of the new system where delivery of service really matters. I have had a number of people say to me, "For the first time I feel valued. I now feel I have a career. I am not waiting for dead men's shoes because if I'm good at this I can do it somewhere else in one of the other hospitals or one of the other schools". The first thing was that we made a complete mess of the public presentation of this. The second thing is this is not trivial, it is really quite complicated. To explain the system as a whole is not the sort of thing that the front page of a tabloid will cover, let alone the twenty-second sound bite on TV. It is quite complex. The number of times I have heard conversations from very well educated people about, "There must be a better solution because the cost of the finance is far too high, the government can borrow cheaper", absolutely but irrelevant because the cost of the finance comes with other benefits, it is part of an overall system. If you take any one element of that system out it is not a system any more. To try and explain that to the public is always going to be very difficult and in the absence of really good data about these deals and the counterfactual you cannot produce nice simple stats that you can give to Stephanie Flanders and the Newsnight team and put stuff out that the public can understand, it is very difficult. As I said, we have two universities looking at this, that is all. We have very few PhD students looking at this-very few-therefore it is not surprising the public cannot get it. Can we fix it? In my view, the only way we will fix it is by showing that it works or that these sorts of techniques work. Again, I do not want to sound like a zealot because I am not, I genuinely do not care how we do it, but until we make the case with data that there are good things happening and we make that case better in a way that the public can understand it will continue to be difficult.
Q15 Baroness Kingsmill: There have been successful projects.
Dr Stone: Lots.
Q16 Baroness Kingsmill: It is not beyond the bounds of possibility to use case studies and to be able to put across positives.
Dr Stone: You are right, but the problem is most of the evidence that we produce ends up being opinions. For example, I was asked to go on Channel 4News on the day that Jarvis went into administration. I went on not as an apologist for Jarvis at all but as a commentator. As it happened, a couple of days earlier I had spoken to headmasters working in schools that had been designed, built and run by Jarvis and without any prompting they said these were the best schools they had worked in in their entire careers. That is useful and interesting but I cannot produce hard numbers in most cases that allow me to say, "On my quality tested numbers, that is the answer". At the moment it always comes down to very subjective, very qualitative, very opinion-based research. At the back of it a lot of people believe that there is something very robust here but I cannot prove it and because I cannot prove it, it means it is a very easy target for people who do not like it for whatever reason. Indeed, I have made presentations at the end of which people have walked up to me and said, "You should be ashamed of yourself involving the private sector in delivering public services, it is an immoral thing to do". How do I deal with that? I have no data.
Q17 Baroness Kingsmill: It does sound a bit like magic, does it not, when you say, "It's all very wonderful but I cannot prove it. Believe me, it is there".
Dr Stone: I am trying to be quite academically accurate about the proof here. If you go and look at the schools, the hospitals, the road deals that have been done, the best analogy I can give you is it is a bit like vice, you cannot define it but you know it when you see it. There are enough people who I respect who have looked at these deals and some people who have been converted in terms of their scepticism that the private sector is just going to make profit when actually they are making a lot less profit than the builders used to do when they built the thing and disappeared the day after with no responsibility for the consequences of what they had done. There is bucket loads of anecdotal evidence. There is a lot of opinion-based research which gives me anyway pretty strong comfort that there is something there.
Q18 Baroness Kingsmill: Will greater transparency help?
Dr Stone: The issue of transparency is on both sides: we need transparency about what happens conventionally and we need real visibility about the way that public services are delivered irrespective of how it is done. With that then we can have a really good debate. I can promise you the grief that you go through trying to dig out the data for the conventional is quite spectacular. On one of the big defence deals I was involved in for many years-it took nine years from start to finish with this perishing thing-we were trying to find all the current budgets that paid for the existing service. I think the system gave up when they found 270 separate budget lines and they gave up not because the numbers were coming to a plateau, they were still going up like that but it was just getting too much like hard work to go and find any more. To find the data about what it currently cost would have taxed Sherlock Holmes, it is buried away in lots of different places.
Q19 Lord MacGregor of Pulham Market: Following up on the common criticisms of PFIs can I ask you about one. You referred earlier to the fact that there was an appalling lack of accountability. It is the accountability on the long-term financing side that I would like to raise. One of the criticisms is that if the scale of PFI really grows and it is off-balance sheet financing it is a little bit like the equivalent of a company financing a whole lot of things off-balance sheet way beyond what it should be doing. I understand your point entirely that projects are delivered earlier, but should there be a better way of dealing with that off-balance sheet element so that one understands the scale of the risks at any one time that one is building up for the future? Dr Stone: First of all can I say that I have absolutely no sympathy whatever for the concept of a balance sheet treatment in this context, it is irrational. I cannot think of any other walk of life in which something will flip from black to white with an apparently minute change, it is quantum mechanics. One of the things that worries me about it is that it is a measurement and things that get measured get managed. That does not help one little bit. I would be delighted to see a consistent treatment where something like a balance sheet treatment did not come into it. Let us put that aside because I think that is a completely spurious process. Many years ago now Treasury made it quite clear that their only interest in PFI was in terms of pure value for money: does it deliver value for money yes or no, end of story. They were not interested in balance sheet treatment. We fixed some of the temptation to misbehave on that. In terms of the long-term consequences I would argue they are there in the first place. When you build a school or a road or a hospital you have just committed three, four or five generations to paying for looking after the thing and that has not changed. When Joseph Bazalgette built the sewers in 1860, we are still dealing with those things. Your obligations are there. Through public accounts we have this presentation that says eventually, "I am paying for the thing all on day one and I'll forget about it after that" and the result of that is behaviourally you do forget about it. I can see I am causing some unease here. The dangers around all this is that what we are looking at is immense visibility on the one hand and not on the other. Personally, I think there are some strong benefits from having that long-term visibility and long-term interest. One of the side-effects of all this is that while that debt is outstanding, which it tends to be for a long time in the way that these deals are structured, you have somebody month on month who is watching the performance because if the performance starts to drop then payment drops and if payment drops the ability to service the debt drops. The miserable credit person at the bank who is very concerned about the performance of this deal is actually part of the mechanism to keep the performance back to standard and that is quite an important part of the feedback process.
Q20 Lord Forsyth of Drumlean: If I could just follow up on that point. You will have noticed that I was twitching when you were talking about the financing. Surely, given that it is so much more expensive to finance the project because of the cost of the money and if the government were borrowing the money themselves it would be very much cheaper, is it not a bit like deciding to buy your house on your credit card rather than on a mortgage? To say that it is still being financed in the long-term and covered by future generations, the fact is these PFI projects are going to be financed by more generations for longer because they have been chosen to be funded in that way, is that not correct?
Dr Stone: First of all, so is the public debt. The public debt you borrow in the first place to pay for the alternative you are also going to be paying for in the very long-term.