Q205 Chairman: Welcome to the Economic Affairs Committee. This is the fourth public hearing of our inquiry into private finance projects. Copies of members' entries in the Register of Interests and interests declared that are relevant to this inquiry are available to the public and witnesses on that table. Ms Lomax, Lord Crisp, Sir Kevin, Sir John, thank you very much for coming to give us evidence this afternoon. It is not often that we see four former permanent secretaries together. We were musing on what the collective noun might be but we will not go any further into that.
Lord Crisp: A mandarate!
Q206 Chairman: We would be grateful, as always, if you could speak as clearly as possible for the web cast and the shorthand writer. Do any of you wish to make an opening statement or shall we go straight into the questions? As there are four of you and we have quite a lot of questions to ask in a fairly short time, I will be happy to take silence as assent if others agree with the first answer, but feel fee to put your own slant should you wish to do so. Perhaps I can make a start. Before we go into specific questions, and this is the exception, I would like all four of you to say something. Could each of you give as brief an overview of the use of privately financed projects in your former departments as possible? Perhaps you could outline the benefits to us, if any, of the freedom that goes with having PFIs.
Sir John Gieve: At the Home Office I think the two main bits of PFI I was associated with were firstly knocking down the old Marsham Street building and building a new headquarters, so that was a big construction project, and secondly the building and operation of a number of private prisons. On the first, I think, so far-touch wood-it has worked quite well, we got it built to time and budget, and it has proved to be a good building and not at excessive cost. In terms of the prisons the PFI was much more important because it was not just financing the construction of prisons, it was creating an estate of privately run prisons so, if you like, the finance was a secondary issue, it was about creating competition really for the core public services in the prisons and, therefore, giving an alternative to turning to the public service in prisons for bits of the prison estate which were not working properly. That was very important and goes beyond the PFI because it has been important over the last 10 years in driving better performance throughout the prison estate.
Ms Lomax: I was actually permanent secretary to three departments which used PFI, first of all in the Welsh Office where the big PFI project we did was what is now called Lloyd George Avenue and Callaghan Square in Cardiff, which was an innovative PFI for building a stretch of road and getting developers to develop the bit between the station and Cardiff Bay. It was a crucial part of putting in place the infrastructure for the Assembly down on the Bay. That was an interesting one. Then at DSS, which subsequently became DWP, I inherited some PFI projects and had a few that came to fruition. They were really in two sorts. One was some large IT projects, some of which went spectacularly wrong, like NIRS2 and the benefit payment card, both of which collapsed before I arrived and we spent quite a lot of time tidying them up. Then a major outsourcing to EDS which really was designed to modernise the DSS's IT estate, starting with the CSA and then going on to things like pensioner credit and eventually the payment modernisation project which was about paying benefits by card. That was hugely ambitious. It had lots of problems but I think it also brought lots of benefits as well in terms of sharpening the Department's ability to handle a major modernisation programme. We did it by PFI because, frankly, that was the only way we would have got permission from the Treasury, but I think it has some other benefits as well which we can talk about later. The big hit during the time when I was at DWP was the PRIME project which was when we sold off the Department's estate, transferring some 700 offices to a consortium which became known as Trillium and eventually was bought by Land Securities. In return they gave us fully serviced and very flexible office accommodation. That has been a big success. It was an innovative deal. It was the first time that had been done. I think the BBC have done something similar, Norwich Union and others. The Department has gone on and extended it. That was a success. Then I spent an interesting year only at the Department for Transport, which is a story all of its own. You know about Metronet and the London Underground PPP, but I think the roads story is actually much better.
Lord Crisp: Can I have three positives and three negatives in the story that I am about to tell? The background is the 1990s and not a lot happening in capital investment in the NHS and a massive backlog of maintenance being built up. At that period we started to get involved in PFI and that very early period was what I would describe as a thousand flowers blooming. Every hospital was trying to get private finance in through some means or other. What then happened was the Department of Health established some priorities and started to manage this market so that we set priorities about how many hospitals at a time would come to market, recognising our understanding of how much potential market there was for these projects. From then on there was what one could call a journey, I guess, over the next 10 years of a smarter way of learning how to use PFI to do the two things we wanted, which was to get the best deal for patients and best value for money for the taxpayer. The three positives are, firstly, the Government set out in 2000 for 100 major hospital projects to be built as part of the NHS plan and that was achieved in 2008. At today's date I am assured there are 116 major hospital projects. What is interesting is that three-quarters, which is 87, are PFI and 29 are public sector capital, so 3:1. In value terms PFI deals are higher so that seven billion are private sector and one billion is public sector. There are some more to come. That has had an effect on the whole estate of the NHS, including the backlog maintenance. Ten years ago more than 50% of the estate was pre-1948 and now only 20% of the estate is pre-1948. There has been a big, big change and I think it would be difficult not to argue that would not have been achieved-forgive all the double negatives-but for PFI. It was a pretty fast development of capital. Some of that was about improvements in the process, but I have to say the biggest bit was that this was about availability of money and this was what made that possible. That is the first positive. The second positive is that the PFI creates greater local accountability. Under the old system you allocated capital from the centre and then it was subject to patronage and the distortions that you could potentially get by a centre allocating the capital. Every project had to stand up to private sector scrutiny, to business plan scrutiny and every chief executive of every hospital and board had to sign it off and had to take that responsibility. We still had the role overall that I described, but prioritising and only letting a certain number of schemes go to market at any given time and, of course, funding the public sector, so some local accountability. The third one is a change in politics, a change in the political scene. PFI, and I am sure you are looking at this, is only part of a wider set of changes between public and private sector which emerged at the beginning of this century in health when the principle became that as long as we kept a clear focus on the public goals and that these were controlled by public bodies that it was reasonable to use the private sector in whatever way. There is a spectrum of activity: from PFI we then moved into LIFT, which you may or may not look at, which is a shared joint venture as opposed to a straight PFI contract arrangement. Subsequently you will observe at the other end of that spectrum is that in my time certainly we actually bought a number of companies to operate ourselves as the NHS. So to secure a supply of blood products we bought an American blood company which I notice this year is turning in profits of $30 million to $40 million. My point in saying that is to make the point that this is a two-way street and PFI helped the debate. The negatives, and you may want to go into these, I will headline because I am talking too much. The first one is complexity. If you are going to specify things early then you are involved in more complexity than you would have done in the traditional scheme. That changed to some extent during the course of the last 10 years and then from 2003no PFI schemes were done for less than £20 million. The reason for that was the overhead of the transaction costs and everything else for a lower value scheme made it not worth doing, but LIFT went on at a lower value. Complexity is an issue. The second one is the health sector is about relationships-doctor-nurse, doctor-patient, manager-doctor, GP-specialist-and this added another relationship into the equation and that makes for complex management. I could say something on that and if you check out what is happening you will hear people talking about problems this has brought in some places. I can give you the odd instance if you want. The third one is that because this was in a sense the only show in town there were some rigidities built in in terms of how we spent a lot of time on capital planning and major acute hospital builds whereas arguably maybe were money available by different routes we might have paid more attention to community service development in different ways. There are some positives and negatives. You will gather my view is the positives outweigh the negatives but there are negatives.
Sir Kevin Tebbit: A broadly similar experience in a different context from the MoD, I think. We have used PFI very extensively across a wide variety of areas. It started before I became PUS in 1998 and has carried on to date. £9 billion of capital investment has come into the Department through PFI during that period and we have applied it across accommodation, training facilities, equipment areas, and also other support things, including, for example, the Skynet satellite which was done by PFI. A very broad and diverse range of activities. The biggest one is more or less happening now. There is Project Allenby/Connaught which has accommodation for 18,000 military and civilian personnel and involves several hundred buildings, new ones as well as demolishing old ones. Some are quite high profile. The main building of the Ministry of Defence is a PFI project, for example. We have equipment quite close to the frontline under PFI. There is a contract for heavy equipment transporter facilities actually manned by sponsored reservists which operates in Iraq and Afghanistan all under a PFI. The future tanker service for the air fleet has just been concluded under a PFI arrangement. It is a very broad and diverse programme and would not have been possible if we had relied on conventional money, we would not have had it, and that was very evident. The benefits: for the MoD projects to time and cost are not perhaps as familiar particularly to the public as they should be. All of these projects have run to cost and time. Eighty-eight per cent of them were within two months of the end target date, which is much better than conventional comparators. I had a study done before I left in 2005 and those figures come from that study. That has more or less been borne out by subsequent examination from the NAO and the Treasury, so I think they are fairly accurate figures. The other benefit is that the quality has been high, particularly in an area I have not mentioned, which is in flight simulator training where the quality of tuition has gone up enormously since we have been using PFI contracts for simulators for helicopters and fast jets. A final plus would be the level to which this has raised the Department in understanding partnering with the private sector, not just within PFI but in a broader context, the need to look through life at whole life costs of projects for 35 years and not just the upfront cost. That has brought better discipline into the Department. The negatives are rather similar to Lord Crisp's. The length of time it has taken to negotiate some of these has been extraordinary, particularly the rather novel ones. With accommodation, once you have got a template going you can more or less measure it. Some of them have been extraordinarily long in the making and I am surprised that everybody has hung around to make it work, frankly. The other negative is more a question. The public comparators are often very difficult to establish. Although we believe we got value for money in every case because we hit the right markers and criteria, getting those criteria in place was very difficult.
Chairman: That is a very helpful starter for 10 and gives us a view of what the scope is both in what PFIs are about and the reasons for doing them.
Q207 Lord MacGregor of Pulham Market: To what extent is one of the benefits, if that is the right word, getting round traditional constraints? Will that lead to later year difficulties?
Ms Lomax: Originally I always felt that was what it was all about. Having started life as a Treasury official who, as you will probably remember, was used to policing these rules, I started being very cynical about PFI, just seeing it as a wheeze to get round Treasury rules. That was how it started, but over time it turned into something else; and where it has really worked is where it has enabled a much more grownup approach not just to working with the private sector but also to managing capital expenditure. As we got into the new millennium where the public expenditure constraints did not bite in quite the same way and we got new accounting rules, then I think it really did turn into something else.
Q208 Lord Moonie: We have heard from several sources that the presence of private finance has brought accountability to public infrastructure and services that was sorely lacking in traditional procurement. Has this been your experience?
Lord Crisp: Shall I start off on that having started slightly on that area? It depends what we mean exactly by accountability, but certainly at the local level I think it has because decision-making has been pushed rather more and business plans have been much more scrutinised. If that is what one means by accountability, that it is not just-I exaggerate wildly-decisions made in smoke-filled rooms but a fairer degree of transparency, within the confines of commercial confidence of course, there has been some improvement of objectivity at least in that sense. It has made people accept the ownership whether they liked it or not and learn new skills and so on. There is a fair amount of it in that sense. It has also changed a bit the relationship between the centre and the locality in that, again, if you give more accountability locally you lose a degree of accountability centrally and it is people over there who are making decisions, so you have ended up with that tension. Certainly I would say objectivity and clarity, so in that sense accountability.
Q209 Chairman: Is that a common view?
Ms Lomax: I do not recognise this to the same extent because I was always in the area where services were very much a direct central government responsibility-if you are talking about central government services. They were much closer to the department. I agree with everything that has been said about PFI forcing us to learn better project management and better capital expenditure practices, and accountability in that sense is a good part of that.
Sir Kevin Tebbit: As a centrally managed department it nevertheless did help people understand better how to manage risk and where risk was best placed because most of the on or off-balance sheet treatment depended on who was bearing risk in what area of the programme and that was a particular advantage in terms of accountability of risk. I speak from a department which needed a lot of these disciplines imposed on it and this did help to impose them.
Q210 Baroness Hamwee: Can I turn to the performance of privately financed services, the services perhaps more than the capital spending to create the project, and prisons has been mentioned. Is your experience that performance is more variable than public alternatives and, if so, why do you think this is? I am picking up a point that has been made and, if that is so, is that related to the complexity of projects?
Sir John Gieve: Looking at the prisons, I am not convinced there is a greater variance in performance. Some of the private prisons have run into difficulties, particularly in the early stages, and there have been some disasters but very evidently there were some disasters in public prisons as well. The average scores are a bit more volatile in the private estate but that is because there are only 11 of them and, therefore, one going wrong affects the average much more than in the public estate. On the prisons, the ones that have not worked so well are usually the ones where the private sector under-bid and were over-optimistic about what they could deliver, and that is quite a difficulty. In my experience this was also true in the IT projects which went wrong. Very often the root of that were contractors thinking they could do something they could not do at a price they could not meet. In a sense, one of the bits of learning of this whole process has been do not just take the lowest bid, really be convinced that these guys can actually do it because there are people out there who promise to do it and then there will be a very painful experience for them but also for you in trying to get the thing back on the rails.
Lord Crisp: My experience is not that there is more variability for the same sorts of reasons Sir John has said. I think the NAO actually looked at this and could not find more variability, if I remember rightly. Can I touch on the complexity? The complexity is about trying to predetermine things in advance. I have to say that over a 10 year period, which is what we are talking about, or slightly longer, people got better at doing that and we started to issue standard contract terms and we took the schemes out under 20 million, as I said. In some of the earlier schemes some of the things that were not quite so effective were things like design and we spent too much time on the financial aspects perhaps and not enough on some of those aspects. There were things that needed to be learnt as one went through. In terms of performance I do not think there was a difference.
Sir Kevin Tebbit: Our study in 2005 had a very high satisfaction level. Ninety-seven per cent or above of users said they were satisfied and that is very high indeed. Did I believe it was accurate? What would have been the case with a normal procurement? I think the reason it was high was because the discipline does require a continuous engagement between the customer and provider, particularly on accommodation, training programmes and that sort of thing, and that probably focused both sides more clearly than they otherwise would have been under a conventional procurement. It probably is and has been rather better than the conventional routes within the MoD.
Ms Lomax: It did involve a lot of painful learning for some departments. It was a completely different way of dealing with outside suppliers. We did have a few bumps along the road, but in the PRIME contract, which I mentioned, and which probably scores as a fairly major success, I do remember, in the first year or so, enormous complaints from the field about quality, and then we learnt how to manage that contract in a way which gave us what we wanted. On IT, I agree with a lot of what Sir John says. Some of it was about us also basically sending people on "mission impossible" and we had to learn to grow up in our thinking about what it was sensible to ask people to do. Our IT people had to behave quite differently from the way they had- in fact, we probably needed different IT people. Departments had to change in order to manage these relationships quite differently. It is about partnership, not about controlling a supplier relationship, and that is a very different mindset which some people were not comfortable with.