Q61 Lord Best: Can you contrast that with the figures that relate to where the procurement has been directed by the public body?
Mr Brooks: I would have to be honest and say that I have to be cautious here because, as I said in some of my earlier responses, and as Mr Barrett indicated, this is still an area of work. We are familiar with a number of spectacular failures in public procurement in the UK. We know of a few significant failures on the PPP side. At this stage I would be very cautious to be too sweeping on this. What I am confident in saying is that the PPPs we have done have on the whole come in on time and on budget, and that being on time has a real payoff. What I am a little less confident in saying is that, comparing like with like, the PPPs have been more successful than what would have happened had they been procured in a different way. My view is that the PPP system has contributed to that but I cannot give an absolute cast-iron yes on that.
Q62 Baroness Hamwee: Do you want to say any more about procurement arrangements and whether they are satisfactory or can be improved or have we covered it?
Mr Brooks: I think on the procurement side there are two areas that could be of interest to the Committee. One is what is practised across Europe and what are the variations in that practice. In a moment, if you agree, I will ask Mr Barrett to answer. The other is whether the current procurement arrangements and the details of the procurement process need any adjustment in the light of the current financial crisis, and whether the Competitive Dialogue system is working as well as it could. On that I would like in a moment to ask Mrs Fisher to give her views. On the European side, Mr Barrett.
Mr Barrett: Perhaps the simplest way to communicate a rather complex picture is to refer back to an exercise carried out by the Member States in collaboration with the Commission about two years ago when they looked at the overall PPP arrangements and in particular whether in fact they were too complex, too mind-bending, and too difficult for reasonable people to engage in. The answer they came up with was two-fold. They say that largely speaking the system works well. The evidence for that is that Member States in general are expanding the programmes for PPP, so the perception from within the public service was that these types of procurement programmes are capable of delivering more than they previously had available and, secondly, that they are learning from each other's successes as well as errors of the past. There was one significant twist which was to say in particular that it would be useful to develop additional procedures, notably the Competitive Dialogue procedures, which limited the way in which the public sector and bidders could speak to one another and indeed the evolution of bids after bids had been submitted. So the broad view of the Member States of the Union was to say that this does work, it is worth expanding further and they strengthened it and tightened it to some degree, so there was that sense of satisfaction. If you wish to see which countries have taken distinct steps to develop PPPs in the interim it is first of all France, secondly Germany. There have been further steps by Italy, by Poland and as a potential candidate member by Turkey, each of whom have set a broad procurement programme that is comparable in size in terms of proportion of GDP to that applicable in the UK.
Q63 Lord Tugendhat: First of all, Chairman, may I say what a pleasure it is to see Mr Barrett whose experience in these matters I have had firsthand experience of over a number of years. It has been suggested, or rather it was hoped when PFI
began, that it would not only be more efficient in terms of delivering on time and on cost but it might also yield innovations in terms of delivery. I wonder if you feel that those aspirations have been fulfilled or whether basically things have remained much the same whether one has had private or public in terms of the delivery? Mr Brooks: I think this is a very good question and I would refer back to an earlier answer I gave right at the beginning about what makes a good PPP-when we talked very much about the need to have a clear idea of what the outputs were, a clear idea of how they were to be delivered and, in general, a good degree of precision so that everybody knew what they were getting into. I think it would probably be fair to say that these desiderata have tended not to drive out innovation but to favour relatively standard approaches. I think there has been innovation on the financing side, where different approaches have been taken to the funding and that innovation has developed according to the situation in the market. I think it would be fair to say that, with a few exceptions, on the whole we have not seen that much innovation on PPPs, but I would just like to ask Mrs Fisher if she thinks I am being too negative about it.
Mrs Fisher: I do not think you are, Simon. Whilst there have been some great examples of wonderful buildings delivered under the PFI initiative, I think it is very difficult to know whether or not those same buildings would have been delivered with conventional procurement or with PFI, so I think it is very difficult to prove the hypothesis in this case. My experience primarily in terms of innovation is around the financing side and there I would echo what Simon said: I think we have seen significant developments in finance which have benefited wider areas of the economy as a result of the PPP initiative. For example, the provision of index linked funding to projects was first done on some early PPP projects and the use of capital markets on some of these PPP projects has provided a way in which pension funds can provide long-term funding for some of these assets as well, so there have been some innovations which have been generally beneficial but it is very difficult to prove that on the design side we have got real innovation.
Q64 Lord Tugendhat: Could I ask one other question unrelated to this. We had a very interesting paper from the Foreign Office which have had only one experience of PFI and that was the Berlin Embassy and they spoke very warmly of how the Berlin Embassy had been done, but they also pointed out that they been hammered by the exchange rate. I wondered whether you would feel that the Foreign Office experience of the Berlin Embassy suggests that it is not wise to do PFI
in a currency other than the currency of the country, a bit like private people taking out mortgages in another currency where one has seen problems in Eastern Europe? Mr Brooks: I think I should point that one at Mr Barrett!
Mr Barrett: I think, Lord Tugendhat, commonsense has brought you to the obvious answer: It is not something one would normally expect to do, but I presume those who had those decisions had particular reasons or rulings or procedures which brought them to that point. If I may perhaps refer to the earlier part of the question, as the Chairman said in starting this discussion, there is such a mix of terminology that occasionally one loses sight of the wood for the trees. There has been in the Community over recent years a very distinct attempt to harness public and private resources together and it tends to fall into a rough terminology of risk sharing or partnership or terminology like that. There have been in one or two key areas significant moves, both in the research development and innovation side as programmes across the Community but also in strategic energy technologies, to bring public and private together, so because we are speaking here very much in the context of the programmes that are well-established in the UK this would seem to fall outside the terms of reference of this discussion, but in fact there is a rather significant programme that is addressing these other issues, whether they are for example things under the FP7 Programme for research and development, et cetera, so there are indeed other innovations, but the point being made by my colleagues is that it is still very central. If you wish to roll it out systematically as a standard programme for all finance houses in the market for all promoters, an essential criterion is that it must become simple, it must become repeatable and it must become low cost to administer. What we are seeing at Community level at the moment is very much an exploration of what is possible in these areas.
Q65 Lord Eatwell: On simplicity I wonder if we could address the wonderfully named optimism bias uplift which is used in UK discussions. Do you think it is really reasonable to include a measure of cost overrun in the public sector comparator for a PFI
evaluation? Mr Brooks: I think that there are some grounds for thinking that some allowance would be appropriate. One of the things that PPPs deliver is cost certainty. That is, in a sense, one of the things that PPPs are aimed at. The evidence is that PPPs have been delivered on time and on budget. There may well be a tendency, and I would guess that historical record tends to bear this out, for some optimism on the part of the internal promoters of projects. I think that if- in the UK for example-the historical record were to bear that out, then it would be appropriate to make an allowance for it in the public comparator. Having said that, I have to say that the details of the public sector comparator are not a matter that is of concern to the European Investment Bank because clearly we are not involved in that case. But my general view is that a priori it is quite likely that some sort of allowance would be appropriate.
Q66 Chairman: Do you think that having such an allowance might have an effect on the best estimates in the first place? If one was giving a best estimate and you knew that you were going to have an uplift would that not possibly affect the best estimate?
Mr Brooks: I think certainly it could, Lord Chairman. I think here one is trusting the integrity of the civil servants who are doing the estimates in the first place.
Chairman: But of course. Lord Moonie?
Q67 Lord Moonie: Given the Bank's AAA status is it the case that the EIB tends to fund the most viable and promising PPP schemes anyway?
Mr Brooks: As I said earlier, we always look at PPPs in terms of their economic, technical and financial viability, so we always want to fund projects that are worth doing, that are going to work, and that are going to pay back the loans. After that, we are able to select from projects that meet the policy aims which our governors, the EU finance ministers, have set us. So in that sense I would say that we do finance the most promising and interesting schemes. If, on the other hand, you mean 'do we just stick to the easy ones', then I have to say we do not. My colleague Mrs Fisher has spent many nights on some very difficult projects, trying to bring them to close. I have mentioned the M25 and Manchester Waste already, both of these very big UK projects, very difficult to close, and very complex, so not straightforward in that sense. But I would say promising, good projects.
Q68 Baroness Hamwee: Mrs Fisher was going to say something about the Competitive Dialogue and I wondered whether we might have a word on that or perhaps ask our witnesses if they could give us something in writing.
Mrs Fisher: Just very briefly on the finance side, I highlighted earlier some of the concerns that some of the contractors have around the competitive dialogue on cost but I think it is certainly the case at the moment that because there are fewer funders available to fund projects the public sector is not able to require contractors to have committed financing prior to the bids being submitted. A key issue then for the public sector in the current market is making sure that it obtains best value financing that is available in the market and I think it is something that will be useful for the Treasury guidance to develop further, in particular how the public sector should bring financing into the funding of these projects, and at what stage to ensure that it gets the best offers available given the smaller number of funders that are available to finance these projects, so it is more about adapting some of the procedures that we have been using in the past to take account of the current situation that we are in.
Q69 Chairman: This is not a direct EIB question but I will ask it anyway: do you have a view as to whether risk transfer should determine whether private finance liabilities appear in national debt?
Mr Brooks: Lord Chairman, you are right, it is not directly a matter for us. But I would offer one thought on this: the intention and the aim of PPPs is to get the right method of procuring particular projects and it is important that that method is selected on the basis of the characteristics of the project. I think that how the project is ultimately scored in the various accounts is not a consideration that should really relate to project design, if I can put it like that.
Q70 Chairman: So, in your view, of these various projects that pass through the EIB you would not have any feeling that governments might like the idea of PFIs
because they were off balance sheet? Mr Brooks: We are aware of the fact that sometimes they may be tempted. But it is not our view that they should really give in to this temptation, if I can put it like that. The appropriate procurement method depends on the project.