Q171 Lord Griffiths of Fforestfach: Or because you put a price in which you know is the lowest price you could possibly put in and you were dicing it with the fact that you might have to renegotiate.
Mr Sutherland: I think when you are looking for a variation they are always quite tricky because there is a bit of a view sometimes that a PFI is quite difficult. What is difficult is having the capital in the first place to do the variation and that tends to be the difficulty. So when someone decides that they want to put an extra wing on a prison, for example, then whether you are convention or PFI you have to agree with that party how much that is going to cost. PFI gives you an option; either you pay for that as you would traditionally, which you could do through the PFI mechanic, or you have that funded and paid over time against a performance output. So you have a choice in a sense. If you do it traditionally you still have in many ways the same negotiation you are going to have with your private sector partners to how much the wing of the prison is going to cost. I am not quite sure why there might necessarily be a difference. There may well be more legal costs. If you choose to go through the funded routes then it tends to be more parties involved in negotiating that and so there will be cost involved in that, there is no question.
Q172 Baroness Kingsmill: Often with big construction projects you do get the situation when there are overruns and things like that-that there is a lot of hostility and often litigation.
Mr Sutherland: Yes, professionally.
Mr Rylatt: If you compare the two, both conventional procurement and PFI, under conventional procurement you are transferring less delivery risk. With the PFI you are transferring much, much more delivery risk. Therefore, through conventional procurements there is more potential for variations to come through from the client because they may not have quite got what they wanted and therefore they changed their minds and therefore there is a variation and therefore there are often costs associated with that. In PFI because you are delivering against an output specification, which is more about I want this particular service delivered-I am less bothered about the type of building it is, I am less bothered about how you do it, I just want that delivered, then I am going to pay you on the quality of service you provide-there is much, much less opportunity in PFI for variations and we are held much more accountable for what we have to deliver. Going back to the point I made at the beginning, we also have to invest equity in that project as well, so if we cannot deliver the service our equity is at risk in delivering that service. So the whole framework is actually quite different between the two.
Q173 Lord MacGregor of Pulham Market: Are there any examples at the moment where a project has run into difficulties for other reasons, i.e. it was mispriced in the first place and the provider is in real financial difficulties? Are there any examples where a renegotiation has taken place for that reason and, if so, what has been the outcome?
Mr Rylatt: Not that I am experiencing at the moment; at the moment I am experiencing more circumstances where the client is saying, "I know I asked you to deliver the service in this type of way but because of a change in need I would like it delivered like this, and therefore let us look at how we can change the service that you want." Much more of the negotiations we are having are around a win-win for both sides. How can you get the service you want; how can I deliver it in a way which benefits me as well in being more seamless in the way I deliver the service. So usually what we are negotiating are win-wins that we see for both parties.
Mr Sutherland: In the extreme if something goes horribly wrong the one thing that government cannot do is pass on political risks, so you have to keep the school going, you have to keep the hospital going and you will end up in negotiation. But that is true of PFI or any other way it has been procured. What is slightly different with PFIs, because you have passed off the whole build and maintenance, quite often you get into debate post-construction as to whether there is a defect here or was that because it was badly built or was that because it was badly maintained? Those negotiations go on in the background intra the consortium that is delivering the services. Traditionally those negotiations would be going on with the public sector: was it because the builder did not build it properly or was it because it was not properly maintained? The PFI protects the public sector from a lot of what we might call the normal construction services type negotiations, which are going on in the background but the government is not taking what you might call that contractual interface risk because all of those interfaces sit with the private sector. So, on an operational level it is very different.
Q174 Lord Griffiths of Fforestfach: I am still trying to get at the point that you were asked at the beginning. From my personal experience I would say that the real advantage of PFI is first of all the outsourcing of FM because you have brought in much more specialist people than were employed previously. Secondly, the fact that you have responsibility for life cycle maintenance. Would you comment on that?
Mr Rylatt: We bring a lot of learning to a client because our experience base-and I talked about the number of schools that we are maintain, 150, 180 schools and we have an awful lot of learning that we are able to bring in to how you do it more efficiently, how we procure behind that because we are not just procuring for one school we are procuring for 180 schools, and the fact that we are able to have centres of excellence, particularly in hospitals. For us a key issue in maintaining the performance of a hospital is the power supply, so we have an engineering team servicing all of our acute hospitals simply looking at the reliability of the power supply that we are providing and how we engineer that solution, which could not be provided by somebody just with a single project.
Q175 Lord Moonie: You have provided us with a few examples of innovation under PFI contracts and you say that innovation is common and can you give us real examples of it, and is PFI in fact a real driver of innovation, or is it just pure chance?
Ms Anderson: It has been very helpful in terms of driving innovative approaches and new approaches. I am not saying that none of that can be transferred into more conventional procurement and, again, if we look at the example of Building Schools for the Future some of the new projects are being delivered by more conventional procurement methods and some of them are still PFI. But if you go and visit those hospitals and those prisons, as I have done, and you talk to the teachers and you talk to prison governors and the prison officers in a private prison they will tell you how they have factored in innovations, which maybe they are not rocket science but they have made a difference. I went around Fazakerley Prison, for example, and when we were going around the facility and on the wings they have designed it, so that there are not blind spots so that the prison officers can have things happening behind their backs, they have good lines of sight. That is not rocket science but that is the private sector adding value in terms of new ways of doing things that actually lead to benefits because you need less prison officers on a wing supervising those prisoners. But similarly if you are looking into the service aspects of those prisons the fact that that prison is judged by KPIs that include, for example, drug taking, prison assaults, prison safety that are factored into that PFI deal, means that there are innovative ways of delivering the service element, not just the service design. I think that is a good example of where you have had the private sector involved and you have had better outcomes in terms of what happens to those prisoners in prison-and they have wonderful training facilities there as well-as well as actually having a safer environment. I think PFI has done that and part of the PFI approach has led to those prisons that are run by the public sector becoming more efficient and delivering better outcomes because of the power of competition.
Mr Rylatt: If I could just add to that? We innovate in traditional procurement, we innovate in PFI. The area of difference is in whole life costing because the PFI allows us to innovate in that arena, which in conventional procurement it is difficult to because there will be a constriction on the contract, an FM contract. It is difficult to get the linkages between the two. With PFI it is automatic and that is the fundamental difference. There is no difference in the innovation that sits in the design or in the FM service between conventional and PFI; it is the fact that PFI links the two together.
Q176 Baroness Kingsmill: Can I declare an interest here? I was until 2005 the Chair of the Advisory Board of Laing O'Rourke, who has recently been involved in PFI contracts but I did not advise on any particular one-just in general terms. Before I get on to my assigned question I want to ask you, brutally frankly, which kind of procurement do you prefer and which do you make the most money in?
Mr Rylatt: We are indifferent to which one; there are pluses and minuses to both. Commercial procurement is fantastic; it does not tie up as much resource, it does not tie up as much capital; it means that within the business we can use that capital to do acquisitions and we can run the business. The PFI ties up capital, which is a negative thing for the business. Therefore, within the business the PFI element that I manage has to make its way, but it is only going to make its way by managing the risks it has because if you do not manage the risk I do not make a return. So I have to be able to justify within our own business that I make a return associated with that capital resource constraint that I have which is different to traditional; so I do have to make, I will say, generally more money over here because the company is investing more-not just in capital but in people. So the two have to work as a balance between the two; has that answered your question?
Q177 Baroness Kingsmill: You make more money on the PFI.
Mr Rylatt: Overall the company makes more money on the PFI, I would say, because we are successful in the way that we manage risks. There have been other companies who have made an awful lot less on PFI because they were not capable of doing it. It requires a level of skill over and above traditional procurement, which without that you would not make that additional money.
Mr Sutherland: I would completely agree with that; I have nothing to add.
Q178 Baroness Kingsmill: Would you say that having one body of PPP expertise to coordinate all private investment sits well with the concept of a partnership to meet the specific requirements of the user?
Ms Anderson: I do not think that those are mutually exclusive concepts. We do think that having expertise at the centre providing information, advice and guidance, sharing good practice and to an extent coordinating activity is good in itself. And we think that particularly a hub of expertise for these complex projects does help to ensure that the skills and experience that are needed are available at the right level. But of course we also recognise, particularly at the sectoral level, again there has been some really good practice that has developed and I would there cite Defra with its infrastructure development programme, and I would also say Partnership for Schools, which has had its difficulties, but again has provided that hub of expertise that really has helped drive forward delivery of better outcomes.
Mr Sutherland: It is not just in the delivery of it, actually having something more centralised is quite useful as we make our investment decisions. So if we have a body that we can go to and we can see and forecast five, six years' worth of capital procurement the way that we behave is that we will invest in people and teams and intellect to actually compete for those projects. So they add that to it as well. If I look at my own business and look at where we invest most of our money, it is probably in the school sector because it has coordinated the requirement for government and we can see that and have an element of confidence in that. So we invest quite heavily into our teams for those opportunities. So I think in those areas there is a real benefit for the end user because it is going to get a lot of competition-it is going to get better resources because we will do that.
Mr Rylatt: I think where it works really well is having that kind of body that shares information and learning between different bodies. What cannot be efficient is for us to continually reinvent the wheel, and if you have somebody saying, "We learn that on that project, this is the right way to do it" it definitely improves the whole process and I think it adds to the partnering because there is less to talk about. There is much more in terms of the standard form contracts or the problems have been solved before, and it allows you to move on to the real issue, which is delivering the project-not talking about it but delivering it.
Q179 Baroness Kingsmill: It does seem in some senses that the PPI does address some of the failings of the conventional procurement process. Do you think that there is an alternative to that? Do you think that you could improve the traditional procurement process without using a PFI? In a sense, have you learned from the PFI process to improve traditional procurement?
Mr Rylatt: I think we have, yes; I think our traditional procurement is better because of PFI and, to be honest, we are selling some of the skills. What we have now learned about-going back to my example of the door, we now know much more about doors. I took that as a very, very simple example because I could apply it to almost everything. Now when we bid a traditional procurement we are bidding that kind of knowledge to our clients. So definitely there is knowledge transferred between the one or the other. Could conventional procurement ever replace PFI? I think you would fundamentally struggle because of that linkage requiring us to look at everything from a whole life costing perspective and managing an asset from cradle to grave, which is very, very difficult to duplicate conventionally, and it would cost you a lot of money to do it. I think even then a lot would fall between the cracks because the interface risk of making it all stitch together would rest with the public sector, which may not be best placed to manage it.
Mr Sutherland: In an odd sense our personal view of it that if you have good people you can do most things, but the problem of course is having a really high quality procurer on all the projects and you do not really get that across government-the best people go into policy, they do not go into procuring things. In a strange way what PFI does is almost outsourcing the procurement-you find what you want and then you let the private sector go and do the procurement, the construction, the cleaning, the catering and all of that. So there are clearly teams that can do that within the public sector but they are few and far between. You just need really good people to be able to do that.
Q180 Lord Griffiths of Fforestfach: What happens if some of the private partners go bust? What happens to the delivery? Secondly, the costs of bidding are really quite high. I would like to ask you in your own businesses what percentage of success do you have relative to the total amount of bids you put in.
Mr Sutherland: On the first one, if you go out and buy a traditional construction project and half way through your construction your provider becomes insolvent you have a problem, and that would be directly with the public sector. You will have found up to that point that there will have been stage payments to that provider and you will have lost them. If the same thing happened on a PFI you would have paid nothing and the consortium has to work out how it is going to replace the construction provider within its own money, up to a point, until it all goes bust, and there is quite a cushion. So you have paid nothing and there are other people there who have to sort out the mess before it comes back to government.