Q161 Baroness Kingsmill: Can I just build on that a moment? I am still slightly slipping from the difference. Why is large and complex more suited to this than something else?
Mr Rylatt: It is because a lot of the set-up costs are fixed or tend to be generally fixed. If you are negotiating a contract the legal fees of negotiating a contract, whether it is for a £50 million hospital or a £200 million hospital, tend to be the same. Therefore, simply the cost, spreading that cost over something like £200 million, the impact of that on the overall value for money when the potential for that £200 million scheme to go wrong, for costs to overrun is so much greater, makes the whole economics work much better. We can deliver a better whole life cost service to a building where we can establish a team on site with the prerequisite skills. If we looked at a £10 million building in isolation it is very difficult to provide the level of dedicated service that PFI really requires to an isolated building. So it is as much an economies of scale question.
Q162 Lord Forsyth of Drumlean: I am struggling with this too. Mr Sutherland, perhaps I am putting this too simply but what you seem to be saying to us is that PFI is a good idea because you get this fantastic school and you do not get a lot of bureaucrats cutting the maintenance costs and the thing falling down because they are trying to save the ship for a hapor'th of tar. It does seem rather extraordinary that you have to pay a lot more upfront with all these costs in order to avoid people making false economies along the route. Surely you do not have to have a PFI apparatus to achieve that. What you are really describing is that the public procurement process is deficient. It is not actually an argument for PFI, is it?
Mr Sutherland: You could say that. In truth, if you look across the estate that is what happens.
Q163 Lord Forsyth of Drumlean: I can think of cheaper ways of fixing that than this.
Mr Sutherland: I think we should consider all options. What I struggle with, I suppose-and I do that with a number of hats when I go around these schools-the problem is that people do do it cheaper, and that is exactly the attitude people have, and they cut back on the maintenance-they do not invest in the schools. If you can find a mechanic where you can change the behaviour of departments so that they do commit to a long term investment and invest in what they are going to do, that is the challenge in a sense. What is coming out of the evidence is that that behaviour works within PFI. Can we make that behaviour work through different procurement methods? My experience tells me that so far we have failed to do that. It might be very frustrating for everybody-and indeed when we build our financial models in the public sector to say does the private sector do it better or cheaper than the public sector, all the financial models assume that a government is going to behave in a way which will invest and I do find that again curious because my experience tells me that it just does not work like that.
Q164 Lord Forsyth of Drumlean: I do not want to go on unnecessarily but it is quite an important point. If you look at the independent sector who are driven by schools I can think of independent schools which have not had any proper maintenance since the 19th century but they do actually turn out kids who are well educated, and are we not missing the point here?
Mr Sutherland: I think that is a very different question, is it not, whether you spend your money on teachers or on buildings? I am not qualified to answer that.
Q165 Lord Forsyth of Drumlean: In order to get around the procurement process you have less to spend.
Mr Sutherland: I suppose what I am saying is that if you enter into a building and you then decide not to invest into it because you want to spend the money elsewhere, that is a flexibility you have less of in PFI, I agree with that. The consequences of making those decisions will have a negative impact on the future and the cost of that building, and it will be more than if you continued to invest. Would you get more benefit by not doing that and spending it on something else within the teachers' budget? I am sure that that is a decision which someone can take, but I am saying that if you do that it is going to cost you more in the long run in the building.
Ms Anderson: Can I show you an analogy where the public school really works? I am a governor of a school that was built in the 1920s that has Portakabins outside; that is in quite a leafy, green borough but attracts children from quite a wide catchment area. No money has been invested in that school over the years; it was a poorly designed building in the first place. Kids are in Portakabins. The per capita spending on each child is much less than the private school that is three-quarters of a mile away. I have to say that at a particular school at which I am a governor there has been nothing invested in its infrastructure. It has not been refurbished probably since the 1960s and it is a bog standard building but we aspire to have great educational outcomes, so I am not sure that I buy the parallel with the public sector.
Chairman: I want to bring us back. Lord MacGregor.
Q166 Lord MacGregor of Pulham Market: I can see the arguments that you are putting in terms of whole of life maintenance and all the benefits you have been describing but is there a budgetary control problem the other way? If in very good times of low interest rates, and so on, benign public expenditure increasing all the time, you start a huge number of PFI projects and then we move into a much more recessionary period is there not a risk that the number of projects in future years will be much curtailed as a result of that?
Mr Rylatt: I think, again because we deliver both conventional and PFI, we are relatively indifferent as to which route the client chooses to go. We are happy to bid both-it is what we do as a business. I think probably the contra to your argument, or the case that you make, would be that because we are locked into that spend programme we are effectively reserving the money for the future in terms of maintenance costs.
Q167 Lord MacGregor of Pulham Market: For the projects that are there.
Mr Rylatt: For the projects that are there, so that in times when perhaps money is short-and it goes back to Dougie's point-actually we will come out of a 30-year life with a building which is still in pretty much the same condition it was when it went in, which I think has to be a better outcome. We are locking in the financing from the front so there is no cost escalation risk in what the public sector are looking at; they have largely passed that risk to us and we have to look after labour inflation, indexation on raw materials, indexation on the different components that we are putting into building. That is all passed to us and we are only going to be successful if we manage that risk successfully. So there are obviously contras either way but I would not want you to think it was one side; I think there are definite benefits.
Chairman: Baroness Hamwee, thank you for your patience.
Q168 Baroness Hamwee: I might try yours, Chairman, by asking if I could ask a very brief question which is in this area arising from our witnesses' written evidence. There is reference in it to the momentum that has been achieved by the Brent, Harrow and Hillingdon LIFT company and the health sector, I take it. Can I understand a little better why you think that has succeeded? Is it simply that the same group of people are getting experience under their belts, undertaking a number of projects or what?
Ms Anderson: It is partly that. I think the LIFT experience is an interesting one but I would also say that the whole Building Schools for the Future initiative has been one where because you have a group of people who have learned from experience, who are benchmarking themselves and helping transfer good practice-and I would commend Partnerships for Schools in this instance as an organisation that has been open to constructive criticism and in fact the CBI has been pretty critical over the years but we have had a dialogue with them in order to improve what was at one stage a pretty cumbersome process. So we are not saying either LIFT or indeed Building Schools for the Future are perfect, but I think what they have demonstrated, because they have had experience that they have been able to improve policies and processes, is they have been able to cut down, for example, on procurement times and they have been able to share good experience. What I would say in terms of some of the LIFT schemes that I have seen-and I, for example, went up to Brierley Hill to see a health centre project that was being delivered by Carillion-was that they had factored in very much this flexibility to respond to changing needs.
Q169 Baroness Hamwee: I do not mean to be rude, but we have heard that sort of benefit. What I am trying to get at is why there is a difference here between PFI and the traditional public sector because reading these paragraphs in your written evidence it seemed to me that this was experience being gained among people who were working in the traditional public sector. I cannot see where the distinction is.
Ms Anderson: It was a PFI initiative so clearly the skills of the public sector employees are about how do we deliver difficult projects in areas of high social deprivation where health needs are changing, so it is a complex procurement where you do have effective collaboration between the private and the public sectors as part of a PFI initiative.
Q170 Baroness Hamwee: Perhaps I have too much local authority experience and loyalty. I want to go on to the question about renegotiation of contracts. You have said in your evidence that PFI can support variations to project specifications, and this rather takes up the point I think that Lord Forsyth was making. How is it that it is more amenable to that without the sort of cushion to which he referred?
Mr Sutherland: Do you mean in renegotiations because there is trouble or renegotiations because you want to add something to a variation to a project?
Baroness Hamwee: Your evidence is about variations but one would be interested in both.