Q181 Lord Griffiths of Fforestfach: Do we have any examples of when the whole thing has gone bust?
Mr Sutherland: I am aware of one that is happening and it is not one of mine, I have to say; but there is one at the moment in the market which is going through negotiation. What I expect, however, is that somebody else will come in because the banks in this particular case will probably lose a significant proportion of their money while the public sector has not paid very much, and there has to be a solution to that because this particular sector has to be delivered. But again traditionally the whole capital amount would have been paid over and you are in a much more difficult position of how do you recover that money through an insolvent company. It is certainly a pro-PFI position in the horrible event that someone does become insolvent.
Mr Rylatt: We have had experience of stepping into a PFI where the construction company went insolvent and there was also an equity investor. The remaining equity investors needed to replace the construction company and we stepped in to replace that construction company and the project was ultimately built out to the requirements that the client wanted. The construction company went insolvent and lost its equity in that. In fact the remaining equity investors in the project also suffered quite a lot of cost associated with doing that but none of that cost, I believe-and I cannot speak for the public sector- ultimately got transferred to the public sector; they got the assets they needed-they may have been slightly later than the original programme-and I think that is quite a good testament for the robustness of the financing that sits behind it.
Ms Anderson: If I could commend the NAO report on construction on that, there were some good examples there where exactly that happened. I think there is good evidence that the pieces had been picked up pretty quickly. There was some loss of momentum but the PFI projects coped.
Q182 Lord Best: Is it not much more difficult to insure against a PFI contract going belly-up than it is for an ordinary contract where you can take out an indemnity bond against the builder's bankruptcy? It is much more difficult to take out insurance against things going wrong for a PFI contract than for a traditional one.
Mr Rylatt: I would agree with that and therefore you tend to find the more financially robust construction companies are able to compete in a PFI market where perhaps the less financially robust companies struggle, because they cannot raise the bonding and they cannot raise the guarantees that the funder is looking for. So you tend to find, at least from day one, that the companies involved are in a very much stronger financial position.
Q183 Lord Griffiths of Fforestfach: My second question was what percentage of your bids are successful?
Mr Sutherland: Because of the bid costs you probably have to win one in two, one in three of your bids, otherwise you are going to struggle-it is a very competitive market. So when you have spent that much you have to win a fair amount to be successful.
Mr Rylatt: Our business is generally about the same. If you look across the industry you need to be winning about one in three to have a sustainable business going forward. If you are not doing that you are struggling to recoup the bid cost.
Q184 Lord Forsyth of Drumlean: Just before I ask my question, on that point my brain is hurting! If you have to win one in three how can it be a very competitive market?
Mr Rylatt: Because of the pricing levels that we have to bid at within the market are very, very low. Going back to your original question, the amount of income that I am potentially looking at when I review a bid compared to the amount of risk that I am taking. Ten years ago I was probably making that much money against that much risk and now I would say that the balance has very definitely moved. (Indicating) I increasingly have to take much more risk in an environment where if I manage it well I am probably going to earn less.
Lord Forsyth of Drumlean: I am probably being stupid here, but if everybody has to win one in three in order to stay in business surely there are not going to be that many competing?
Chairman: I think the word Lord Forsyth is looking for is oligarchy.
Q185 Lord Griffiths of Fforestfach: It is a barrier to entry; there is no question about that.
Mr Rylatt: The BSF programme showed that originally when the programme was set up we would often find 12 or so people bidding for a project. Now probably the market has matured we are still competing against three or four bidders on each project, which we think three or four bidders is ample to get a competitive dynamic. To be honest, in a lot of bids two bidders is enough to get a competitive dynamic. In the current construction environment there is not a lot of conventional work around, for obvious economic reasons-the market is very, very much a buyer's market at the moment and is not a seller's market.
Q186 Lord Forsyth of Drumlean: So the question-probably for Ms Anderson-is in the CBI's representations you say that you would like to see greater payment by results in the PFI contracts. Could you elaborate on what that means?
Ms Anderson: Clearly it is about ensuring that the projects are delivered on time and to budget. What we were particularly alluding to there though is focus on the outcome in terms of service delivery; so what makes a successful long term PFI project is whether you have better outcomes. So if we are looking, for example, at education what we should be measuring it on is the quality of the education that is delivered in that school, not just whether you have a wonderfully designed building, which may well contribute to better outcomes. So if you do not have dark corridors where children can be subject to bullying, if you have a nicer building to turn over it is less; but in terms of are we ensuring that it is actually part of educational transformation? So some of the results that are being looked at at the softer side of the contracts, but the really important side of the contracts, are around are we seeing improvements in educational attainment? Are we seeing staying on rates post-16 going up? Are we seeing improvements in the number children that are requiring, for example, five good GCSEs? Those are the sorts of things that we talking about.
Q187 Lord Forsyth of Drumlean: This is getting quite exciting but how many contracts are like that?
Ms Anderson: An increasing number.
Mr Rylatt: The current Building Schools for the Future programme has a number of KPIs that we, as part of our process, need to assist the local authorities in increasing educational attainment. We do not do it unilaterally because we will provide a building, we maintain a building and there are teachers, curriculum and all sorts of other things; but we are being increasingly challenged to say but as part of BSF you are providing the IT learning environment.
Q188 Lord Forsyth of Drumlean: This is slipping away. If I could just give an example. I understand that if you build a bridge or a motorway and the contractor takes on the risk of the number of vehicles that will cross the bridge or the motorway and takes a view on the volume of traffic and there is some regulation of the tolls I can see how you have a real transfer of risk and the quality of service becomes the responsibility. Similarly, when I was Prisons Minister in the early days one of the arguments for using the private sector was that we could actually say to them, "Look, provide a prison and achieve these recidivism rates," and you would look at the outputs and you would reward people according to how many people that prison enabled to do a job and did not actually come back after a few months because they had reoffended. The evidence that we have heard from you so far, particularly Mr Sutherland, has placed so much emphasis on the maintenance of the buildings and the quality of the buildings rather than the outputs from the service, and that seems to me that if there is a justification for PFI it has to be that you actually transfer the risk to providing the service. So it is not about whether you have a pretty building and it is well maintained, but it is whether it turns out children who are able to read and write and to get to university.
Ms Anderson: That cannot just be down to what the private sector is doing in terms of providing some of those soft support services around, for example, helping with the curriculum; but it is part of it.
Q189 Lord Forsyth of Drumlean: You say soft support services, but surely schools and hospitals are about education and healthcare?
Ms Anderson: But it is also about the quality of the teaching or the nursing.
Mr Sutherland: It is a political decision, is it not? We build a lot of these prisons in partnership with a company that provides the services and I have to say that the results from that were quite startling in the early days in terms of the innovation that was brought in because the ability to aim at the real output meant that people could design really for that. Politically we have not moved to say include the education of the teachers, the nurses and the doctors, and in a sense as an industry we have responded to that. The further you go into the actual delivery of those services then I think the private sector can respond and will respond very innovatively to dealing with it; but someone has to make a political judgment that that is what they are prepared to do and the private sector could respond to that. I agree with you-I think you will end up with even better results as a consequence of it if it was politically acceptable.
Q190 Lord Forsyth of Drumlean: I was not saying that you would end up with better results; I was saying that you would then have a real transfer of risk to the private operator, whereas what you have been describing so far seems to me to be just a very expensive way of procuring buildings. There is not actually a transfer of risk to the private sector in terms of providing the service that the building is meant to fulfil.
Ms Anderson: Prisons are a good example: so that, for example, if we are looking at recidivist rates then it has to be around the support that you are giving to those offenders while they are in prison in order to have better success outside in getting into the world of work. Went I went around looking at Fazakerley Prison, absolutely it is not about saying, "We are just going to give people so many hours of training a week or teaching, we are going to say there is the training and the education we are going to give them that is going to make them hopefully less likely to reoffend when they go outside." On that particular site they have a Network Rail, they have a fully lined up track, so the prisoners there can actually gain the competencies so when they come out they can help Network Rail lay tracks.
Lord Forsyth of Drumlean: Can you provide us with examples of PFI contracts where this kind of transfer of responsibility for the service-not now.
Chairman: It would be very helpful if you could give us a note on that; it would be very useful indeed.