Q241 Lord MacGregor of Pulham Market: And could bring additional funds too?
Mr Humpherson: Exactly.
Lord MacGregor of Pulham Market: You have answered the second question I was going to ask.
Q242 Lord Eatwell: Could I just follow up on that. The experience in financial services is that this is disastrous because the initiator of the contract, knowing that they can exit, is less responsible about the commitments they make in the contract. That is exactly what happened in the sub-prime mortgage case. Given these possibilities of exit that you have described, and a reasonably competitive environment, are you not then going to get rather less responsible tendering?
Mr Humpherson: I think in the financial sector what people were worried about was the slicing and dicing of risk into ever smaller packages such that the originating risk is so far away from the person who holds it through a very long chain of bonds, into CDOs, in CDO- squared that you lose sight of it. Actually the opposite of slicing and dicing is what we are talking about here-I do not know what the culinary metaphor would be-you are congealing because you are bringing together a whole series of separate contracts under one house.
Q243 Lord Eatwell: But the initial person has an exit possibility so therefore they are no longer responsible for the terms of the contract which they have negotiated. They have shifted the responsibility and sold it on.
Mr Humpherson: Yes, but I do not think it was the shifting of responsibility that has been the concern in the financial sector; it is the slicing and dicing of the responsibility.
Q244 Lord Eatwell: It certainly has. Leaving the comparison with the financial sector aside, you used the term "exit". You have somebody who is tendering for a contract who can then exit from the responsibility of fulfilling that contract and therefore it seems to me less obvious that they would be fully committed to a responsible tender.
Mr Morse: Forgive me, it is not necessarily so in the way these deals are put together that all the people who are shareholders are actually involved directly in delivering it. They are parties to the contract as shareholders but they are not necessarily the body that is delivering an element in it, so supposing you were talking about the construction of a piece of defence equipment, there would be a particular party that was constructing that defence equipment. A change in the shareholding will generally not release them from their obligation to construct that piece of equipment so it is a more complex contractual structure.
Q245 Lord Eatwell: The party taking the ultimate risk has changed.
Mr Morse: I am not sure that is necessarily true.
Q246 Chairman: Can I explore what Lord Eatwell is saying. We have had witnesses who have claimed that one of the benefits of PFIs has been the detailed scrutiny of the initial creditors, made not just at the initial tender but of the contract over time. That has been an additional discipline that has been of use to the PFIs. That discipline presumably could be at least watered down if not disappear if you securitise the PFI things themselves; is that not right?
Mr Morse: Securitisation is a bit different from somebody succeeding to a shareholding. Just to say though if that means that some body is prepared to pay for it, presumably there will be some conditions as to who then should be a credible or acceptable shareholder, and in most PFI contracts I have seen (I have not seen a vast many but I have seen a fair number) there is some approval process on the part of the customer, which is let us say the government, as to whether it can be just anyone or it has to be someone who brings something into the contract. If that is so, then to take on a contractual liability, unless there is in front of you a delivery contract or a construction contractor something like that where that liability sits with a particular party, this is the discussion we were having before, in other words, let us say we are talking about constructing a ship, something I know a bit about, you would have a contractor who was constructing the ship and then you would have various parties who would be involved as shareholders, not necessarily all constructing the ship. The ship construction contract will be placed separately and these shareholders would be above that, so I do not think the fact that you might have a change in shareholder would change the risk of constructing that asset successfully.
Q247 Lord Eatwell: In this case we are talking about something different. We are talking about PPP portfolio investor funds. The whole point about such a portfolio is that you bundle together a series of projects believing that diversification in projects reduces the risk in investing in the project as a whole. The experience of those sorts of securitisations is that the due diligence, if you like, of the buyer portfolio is not the same as somebody who makes the initial investment and is totally committed, so in fact diligence disappears or fades, let us say, or evaporates on two levels: firstly at the initial contract and secondly on the due diligence of the investor.
Mr Humpherson: I feel we could go round this for several hours. Just to be very clear on our view, we are not free of concern about these consolidations of ownership, but our greater concern is that it creates a sort of asymmetry of commercial power between the atomised public sector on the end of a whole load of individual contracts and a concentrated private sector. We have thought a little bit about the risk that you raise and if there was evidence that there is deterioration in the due diligence that would indeed be a concern but on the basis of the evidence we have seen it is not the thing that worries us most.
Q248 Chairman: This is an area of obvious interest to the Committee. Would it be reasonable to ask if you could give us a little note on that? We would find that very helpful.
Mr Humpherson: Absolutely, we are happy to do that.
Q249 Lord Tugendhat: Could I ask a completely different question. We have had a lot of talk in all the sessions about capital projects and that is really what it has been about, but the CBI has raised a question as to whether you could not use private finance to deliver services. They have thought about teachers and nurses and that obviously is a very different ballgame, but what would be your views on that?
Mr Morse: I think the answer is it is certainly feasible to do it and if you look at some of the contracts that exist now, let us say the prison contracts, they are contracts with a large service element, so if you say do they have to involve the construction of prisons, well, actually that is not absolutely essential to organising and running a prison and providing what they probably would provide, which is systems to support a way of working which were somehow different to those which were traditionally imposed under prisons, so what you see if you actually go and look at any PFI prison is that it is organised somewhat differently to traditional prisons. There is some investment and then there is a new way of working and possibly rather more differentiated pay scales, and so I think using people and using systems differently to deliver is perfectly possible. Because of the fewer front-end costs element in that I would say it does not necessarily require the formality of a PFI contract in order to make that work.
Q250 Lord MacGregor of Pulham Market: Is that not quite close to outsourcing of the service?
Mr Morse: Yes, it is quite close.