Q224 Chairman: Mr Morse, Mr Humpherson, thank you for being here and thank you for being patient as our session beforehand went on for rather longer than we had expected. We are very grateful for the NAO's contribution to our inquiry, and indeed in particular for your very impressive and authoritative written evidence. We have to ask you as ever if you could speak reasonably slowly and clearly for the benefit of the shorthand writer and the webcast. Would you like to make any opening statement or shall we move straight into questions?
Mr Morse: I will be extremely brief, Chairman, thank you. Unfortunately we are in the position that the particular stenographer concerned has to suffer my contributions at the Public Accounts Committee quite regularly so I am hoping she will manage to get through! Thank you very much for the opportunity to give evidence. Our evidence is basedon 12 years' work by the NAO looking at PFI projects and I am indebted to Ed Humpherson and the team for all of what you see in the document there. You will be aware that I am a relatively new joiner to the NAO. I think it is important to notice that there is no universal answer, as the report makes clear. Sometimes PFI is good value for money and sometimes it is not. There is still, in our view, and I listened to some of the later evidence you were given just now, a bit of a bias towards PFI in public sector funding arrangements, more of a push towards it than away from it, and we will say more about that perhaps. The current economic climate clearly makes PFI arrangements likely to be more expensive and that is a factor to be considered. It may indeed create a certain amount of pressure towards PFI deals but faute de mieux if people want to carry out large projects. PFIs represent £7.3 billion fixed costs for the Government and it is worthwhile thinking about that when you are considering the context of cost reduction, whatever the polite term for that is, that we are likely to be seeing over the next few years. I would add too that it is worthwhile thinking about the effect of having significant numbers of PFI contracts on the rest of a particular budget and a particular department because it does reduce the discretionary spend available. Overall in our report it is worth emphasising we have shown that project delivery under PFI contract conditions is generally reasonably reliable. We have not been able to make a quantified comparison between that and other forms of delivery. We simply do not have the data to do that, so we are saying that it appears on the data we have on PFI that it produces reasonably reliable results and that is one of the factors in it rather than saying to you it is universally superior, if I can put it that way, to other forms of contracting available to the public sector. Thank you.
Q225 Chairman: Thank you. Picking up on a point you have just made I would like to go to paragraph 14 of the summary of your report which is quite unequivocal. It says:" We have yet to come across truly robust and systemic evaluation of the use of private finance built into PPPs at either a project or programme level. The systems are not in place to collect comparable data from similar projects using different procurement routes. Unless such systems are established, together with robust evaluation of the overall whole-life costs of alternative forms of procurement, Government cannot satisfy itself that private finance represents the best value for money option." That is quite unequivocal. How would you like to see this problem resolved and indeed could the National Audit Office itself do more in this area?
Mr Morse: I think it is symptomatic. Certainly since I have been in this role it has struck me how little of a universal culture of evidence and measurement there seems to be in a number of complex government activities. There has been a lot of talk about evidence-led and objective decision-making but not an awful lot of it being counted on the ground, I would not say. Certainly in this space if you want to have a basis for making decisions of that kind you need to establish systemic collection of data and whole-life project costs and systematic and consistent evaluation of projects, embedding benefit realisation and using real data and not simply modelled data to test projects, so in other words as tough and realistic a set of tests as you can possibly can. If you want to be able to make valid comparisons that sort of rigorous and evidence- and information-based approach is needed. Of course the basis for doing that can only be built up over a consistent and determined effort over a period of time. We certainly will champion that. Forgive me just stepping aside from PFI for a second, one of the features of the next few years is likely to be the need to be able to make prioritised investment decisions and to say, "This is more beneficial than that," not on the grounds of assertion but on the grounds of actual demonstrable value generated and that requires a rigorous evidence-based approach. This is one example of the areas where such an approach would really be very helpful, and I agree it is a good example, so we very much want to try to set out what we mean by that and work with others who are interested to set forth our thinking on this.
Mr Humpherson: Can I just add one further observation which is that we have done an awful lot in this space. We have a huge body of private finance work which is brought together in this report. We also have an even more huge body of work on conventional procurement, things like our annual report on major defence procurements and reports on IT-enabled change and on out-sourcing. There is a wealth of data from the National Audit Office. We have also brought those two bodies of work together. Only recently for example we published an update on some work we did to compare or consider the performance of construction under private finance and under conventional procurement and we have other comparisons as well. I would say we have been a little bit cautious on how far we have taken those comparisons-and perhaps that goes to the heart of your question, Chairman-for technical reasons because there are different sample frames, for good value-for-money reasons because we are not really convinced we are comparing like with like and because of an extra margin of caution about the theology here. There is lot of theology. There are people who say that private finance is good and there are people who say it is always and everywhere bad and we are very cautious about pitching our comparisons into that debate for our work to be misused. We hedge our assertions around with caution. There is a final reason, which is the most significant of all, which is that it is not us who signs the contracts, it is not us who proposes the contract model. Those are things done by government departments, local authorities and government agencies and we believe the responsibility for gathering the data and gaining assurance on value for money lies properly there. It is our job to cajole and to support and to lead the way but it is their job to provide assurance on value for money.
Q226 Chairman: Does leading the way include providing a template?
Mr Humpherson: Indeed we have done two successive templates. We produced a report in 19991 which considered how authorities could gain value for money from PFI essentially during the procurement phase. We updated that report in 20062 to extend theanalysis into the delivery phase because of course these contracts have a 30-year life and managing their operational performance is just as important as striking a good deal at the outset. We have provided value-for-money assessment templates into the public sector. Indeed a lot of our specific reports also give hints to departments or recommendations to departments about the data they could be collecting to get a much stronger evidence base for future decisions.
Q227 Chairman: Have departments taken up what you have put in your template reports?
Mr Humpherson: I would say in general the picture is rather mixed and of course it is disappointing that it is mixed. There are cases where departments have enthusiastically and with conviction implemented our recommendations. I can think of a recent example in the Building Schools for the Future programme, this enormous programme to renew every secondary school in the country. We made some very clear suggestions to the body responsible for implementing that set of arrangements about how they could collect data to ensure that over time they are continuing to secure value for money and they are getting the benefits that they hoped for. And they have put in place the arrangements to do that. There are examples of departments implementing our recommendations with conviction. There are a larger number of cases, I am afraid, where we have to continue to drive away at the same themes because we are not seeing the improvement that we hoped for.
Q228 Lord MacGregor of Pulham Market: A number of our witnesses, particularly the major contracting firms who are engaged in PFI, have stressed to us not just the value-for-money comparisons but what they see as the real meta-practical results resulting from whole-life contracting for example in relation to better, cost-effective maintenance or indeed maintenance taking place in difficult years when it would not under traditional procurement. Can those benefits of whole-life contracting be achieved without recourse to private finance?
Mr Morse: I think the answer is that they definitely can be but you have got to consider what it is about PFI that can provide unique qualities. One of the things is that you have actually got ring-fenced maintenance funding in a PFI contract and it is not very easy for somebody to help themselves to it to contribute to a departmental cut requirement. Replicating those wonderful conditions in another contractual context is not easy. There are things you can do. You can create trusts, you can do various things, but they do not have the inviolable quality, I would say, for the most part. It may be possible but difficult to do that in the same way as you can do within a PFI contract, so there is that to it. I certainly think you can make choices based on whole-life costs without PFI being involved and indeed I know that increasingly departments that do a lot of contracting are doing that. At a point in time if you have a choice between two decisions and they have differential whole-life costs you should have a consistent method of estimating those costs and take them into account in making the decision. Easily said; not all that easily implemented but it is beginning to be seen now. I spent three years in the MoD and I am aware that you have had quite a lot of MoD experience this afternoon already, but it was clear to me that that method of looking at the maintenance costs had taken hold in the MoD. Looking at and contracting for are not necessarily the same things and it is important to have flexibility and a genuine ability to hold the contractor to account and to deselect a maintenance contractor if necessary, and that can be hard. Combining a good supplier with a good maintenance contractor is not always the same skill-set, so I think the answer is it can be done in other ways but in PFI you do get this protection of the budget funds.
Q229 Lord Best: You have answered this a little bit and it is about whether bundling together the build and the managing that follows always brings advantages. Did you have evidence that showed that privately managed facilities compared better or worse with those where there was the build and the management together in those facilities?
Mr Humpherson: Yes, we have looked at that, particularly comparing the private finance context with other outsourcing contexts which is probably the cleanest comparison you can get here. And when we look at those, actually the private finance initiative bundle includes the construction, the maintenance of the asset and the provision of services over the contract life. Comparing that service element with the service element under an outsourcing contract, there is not generally a great deal of difference between them as a general rule. There are cases where particularly good contracts have been struck in the private finance context and of course there are particularly good outsourcing arrangements, but we have not seen a general pattern that PFI bundling delivers better VFM on cleaning and other services through the contract life.
Q230 Lord Best: So those making the case have been rather over-egging this one perhaps? Mr Morse: We think that there are advantages both ways, but if I may add just one thing, Lord Best, a lot of it comes down to the ability of the in-house team to be a smart customer for the services being contracted for. Sometimes in the past I used to be involved in business process outsourcing deals and the lovely people who were selling the contract would sign the contract and then they would walk out the door and another crowd of much rougher looking people with clipboards would walk in and their job was to run the contract. They had the contract in one hand and a calculator in the other, generally speaking, and their job was to drive the profitability of the contract by knowing everything which was a variation, by making sure they picked it up and by making sure they got the maximum out of you as a customer. You will sign a contract where the optimism is not in the numbers, the optimism is in the estimation of your capacity to manage your side of the deal and not be taken advantage of by a much more deeply commercially experienced counterparty, and you do see that an awful lot, particularly with the movement in jobs. You have somebody in the private sector who is sitting opposite who has probably done, roughly speaking, the same job in a number of companies for all their working life and then sitting opposite them there may be someone who is actually moving from job to job and this is part of their broadening experience and you do not get very many prizes for guessing who is likely to come out on top in that negotiation.
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1 Examining the value for money of deals under the Private Finance Initiative (HC 739, 1998–99).
2 A framework for evaluating the implementation of Private Finance Initiative Projects (Report by the National Audit Office, 15 May 2006).