Q51 Lord Eatwell: Hang on a second, you may take a loss but suppose it has failed, the public sector has to take over the project and make it work and therefore the public sector has not lost the risk.
Mr Brooks: What I was going to go on to say was that the fact that we stand to take a loss improves the attention we pay to the specification of the project in the first place.
Q52 Lord Eatwell: Yes, but that goes back to resources and management, that is your number one and number two. The issue is this risk transfer. I can see that you are taking a risk if you are starting it, that is fair enough, but actually what is interesting then is that the social risk is really increased because the public risk has not diminished and risk has been added on your side. This seems to me to be a fantastically inefficient system.
Mr Brooks: I would argue that the public sector risk has been diminished.
Q53 Lord Eatwell: How has it been diminished?
Mr Brooks: Because we and our funding colleagues and the contractors have been incentivised to come up with a project that is less likely to fail and delivers a better level of service.
Q54 Lord Eatwell: That is going back to number one and number two. I accepted the argument there may be resources, I accepted the argument that there would be better management skills and highly incentivised management skills. The issue I am trying to focus on is whether there is any risk transfer. I can see that you are incentivised but is there any risk transfer if the public sector is committed, say, to maintaining a prison and making sure the prison is there to look after the prisoners?
Mr Brooks: I think there is in the short term. When we consider the way the project has been undertaken, there is definitely risk transfer at that point because the lenders face risks that they would not have faced if this project had been procured in the conventional manner. So there is clearly a risk transfer during the life of the project. And I would argue a risk diminution for the public sector, because of your items one and two from the operation, so there is a risk transfer during the life of the project and an overall risk diminution. But I cannot but agree with you that, at the end of the day, if it is a vital public service then somehow the public sector will have to provide that. What I believe should be the case, and what I think is the case, is that well-specified and well-run PPPs can give the public sector better value for money.
Q55 Lord Moonie: I am obviously denser than the rest of my colleagues! Are there three parties here we are talking about: the contractors building it, you, and the person that it is ultimately being built for, the state or government. Who picks the second party, the contractor?
Q56 Lord Moonie: The funders-the state or you?
Mr Brooks: The public sector, the procurer.
Q57 Lord Moonie: The procurer so it is the risk of their incompetence in picking a builder that you are insuring against by charging a higher premium, is it?
Mr Brooks: I would not put it quite like that.
Q58 Lord Moonie: How would you put it? I am trying to get it clear in my own mind.
Mr Brooks: When we approach a project we do a full appraisal of both the value for money and our view of the ability of the contractor to actually deliver. It is not in our interests to tie ourselves up to somebody who is going to fail, so, if we are faced with the situation in which a contractor has been selected, then clearly our evaluation will take into account not only the professional abilities of the contractor but also the myriad of contractual terms-these contracts are very complicated-that share out the risk amongst the three parties.
Q59 Chairman: Can I just play on it in a slightly different way. If it is straight public procurement obviously all of the risk lies with the public sector. If it is a PFI then things may go wrong in the contract which cost and there is a distinct possibility that a contractor has to bear that cost without going bust. If it goes bust obviously the whole lot falls back to the public sector, but there is an area in between where the cost of things going on will be borne by the contractor, and in that area the risk will have been transferred from the public sector to the contractors.
Mr Brooks: If I may say so, Lord Chairman, that is an excellent summary of the position.
Chairman: In which case perhaps we can move on to the next question.
Q60 Lord Best: I think this next question follows this same train of thought. It is about the capital cost and the fact that PFI projects do tend to come in on time and to budget and that that has a value, but of course the research seems to indicate that they cost more and one is putting one against the other. I asked Dr Stone about this and he stressed the advantage of things coming in on time. If you get the product earlier that is a value-for-money ingredient. He did not say very much about it coming in to budget. I think that here we are talking about that gap between when the public sector is placing its contracts and doing all the procurement itself, things never coming in on budget, and this gap opening up between the two and where in a PFI contract, because of the way it is structured, things do come in on budget. I would like a little bit more about that and about the advantages of that which offset the fact that the actual price on day one looks to be higher than the price on day one with traditional methods. Can you talk a bit about that area of saving that is achieved through the PFI contractual methods that represents extra value for money and benefit?
Mr Brooks: Well, of course this issue of whether PFI/ PPP projects come in on time and on budget has been a long running issue of interest in the industry. We talked a little earlier about the need for more statistical analysis and work on this. The evidence we have from our own evaluations, which we have referenced in our document to you, is that indeed the PPP projects that we have been involved in have had a good record of coming in on time and on budget.