Q251 Lord Tugendhat: But I think it is different from outsourcing because coming back to the hospital experience I mentioned earlier it seems to me it is one thing for a hospital to make use of agency nurses and nurses from different places because they then have to fit in with the rules and the spirit of the place where they are working, but like a private military company, as it were, if you went to Nurses Incorporated who provided you with a whole batch of nurses on a contract for a given period or for a given function, they would have a corporate culture and a set of corporate loyalties and promotion ladders and so forth which would be different from the place where they were working which is not the case with outsourcing.
Mr Morse: That is fair but again just to come back to the prison example, which is quite a concrete example, what is very clear is the criteria under which it is run. That is something that is being run by the private sector but under very strong standards and criteria not set by the private sector. What you find then is that the public sector is in a detailed regulatory and standard-setting role, not in the role of directly providing the management. If you want to go down that road the public sector does not disappear from the picture. It has to be very specific about what it wants if it is going to be able to contract that way and get consistent service.
Q252 Lord Tugendhat: Correct me if I am wrong but my impression is that you have a private sector prison and it has all the warders and all the staff and so forth. There is not within that prison a mix of the private sector employees and regular prison officers.
Mr Morse: I just do not think I can speak with certainty about that, to be honest with you.
Mr Humpherson: I think it is a fascinating question, the supply of labour as opposed to the supply of an asset supported by labour, and you have mentioned nurses or teachers. One also perhaps thinks about the social care sector. It is a fascinating question. To answer it, I think it is probably a good idea to go back to first principles and say could those contracts be provided under a PFI-type of arrangement? I suppose our first principle in PFI is that there is a reasonably predictable fixed and definable public sector requirement, for the reasons that Amyas has suggested, and if you think there is going to be any change in the requirement over the term of the contract it is probably not a good idea to enter into what is essentially a fixed price arrangement with commitments for the long term. On top of that PFI can, but does not always, bring the benefit of innovative management approaches, a degree of risk transfer and due diligence at the outset so that the contracting parties look at the risks and very carefully allocate them between themselves and those taking the risks on the private sector side and also some kind of whole-life consideration embedded into the contract at the outset, a credible commitment as we were talking about earlier. If you think about those principles of PFI and how many of them might apply to the PFI supply of labour as opposed to labour embedded with an asset, I am not entirely sure. Obviously you would have to be sure that the requirement was fixed for the term of the contract and I guess that is something the procuring authority would know. Perhaps you can get innovative management but the benefit of risk transfer and due diligence and the whole-life maintenance seem to be concepts that do not quite fit with the scenario. I suppose my answer is by all means consider some form of medium-term contracting for the provision of labour services but do not take lock, stock and barrel the PFI model which has the specific characteristics which are designed really for the problem it was created to resolve.
Q253 Lord Eatwell: Coming back to a bit of an old chestnut here which is that several people have commented on the way in which the development of PFI contracts has had an impact on traditional procurement and traditional procurement techniques have improved side-by-side. If that is so, is the optimism bias added to public procurement now outdated?
Mr Morse: I think we have always been professionally sceptical about it, and I heard some of the remarks that were made earlier and saying let us assume there is a bias and just put it in. No, we would look at every project on its merits and look at the quality of evidence and, as I said at the beginning, insist on rigorous evidence and evaluation rather than saying let us assume that there is optimism there. So (i) we do not think that it was appropriate in the first place and (ii) yes, I think things have been learned, but you are still left with the point that you do not have the degree of protection from summary decision-making. I have seen PFI contracts being put in place alongside non-PFI contracts for the same amount and value and, generally speaking, there is a much more deliberate approach to evaluating risk in PFI than in non-PFI. It cannot possibly be because people do not realise what is happening with PFI contracts because they have quite often been working on them so it is more that you just do not have a shortcut option when you are doing PFI because you have to convince the outside financing counterparties that all the risks have been understood and nailed down tightly. It is very difficult to reproduce that degree of discipline and not be bounced by impatience in the public sector without contractual protection. I think that while it has improved the degree of deliberate due diligence and discipline that is associated with it, it is always going to be a bit more difficult to sustain.
Q254 Lord Moonie: Just a slight variant on that as a cynic. Surely optimism bias is something that has been introduced to the figures to ensure the public sector do not win the business?
Mr Morse: I could not possibly comment!
Q255 Chairman: Can I put the question slightly differently. Have you had a chance to look at how many PFI projects would have failed to come forward had the optimism bias not been there?
Mr Humpherson: Could you take me through the question again please.
Q256 Chairman: I will repeat it in slightly different words. If you took the optimism bias out of the calculations how many projects which essentially became PFIs would not have got over the hurdle?
Mr Humpherson: Optimism bias has been a crucial contributor to the PFI net present value being lower than the public sector comparator net present value in a very large number of cases we have looked at. Indeed, what we have tended to see as a general rule is two numbers clustering quite close together so if you took the optimism bias out of one of them it would make the public sector comparator lower.
Q257 Lord Eatwell: Higher not lower.
Mr Humpherson: The PFI NPV would be higher, you are quite right, thank you for that correction. Does that mean we believe that those deals would therefore have failed the value-for-money test? No, because we have always felt quite consistently probably from the first reportweeverwroteonthisbackinthe1990s,that you should never regard the public sector comparator as a pure pass/fail test and the only arbiter of value for money because there are so many more aspects to value for money than simply comparing a deal in front of you to sign with your hypothetical estimate of what it might cost. You need to be sure that the costs being proposed by your private sector contracting party are reasonable costs on their own terms. You also need to be sure that you have a long-term need for the asset. All of those sorts of things are absolutely crucial. The direct answer to your question is that the optimism bias does shift the numbers.
Q258 Chairman: I want to be absolutely sure. Had there been no optimism bias then there would probably have been far fewer PFI projects? Is that right? Is that what you are saying?
Mr Humpherson: That is a counter factual that I cannot answer. What I can say is if you took the optimism bias out of the number the PFI net present value would be higher than the public sector comparator so it would look as though PFI was more expensive, if I can put it bluntly. However, I am not going to say that would have meant fewer PFI deals would have been signed because I think the reasons for signing PFI deals, whether they are value for money or not, is more than just a contract versus a model.
Q259 Chairman: So other reasons would have been brought to bear to make sure these were PFIs rather than ordinary public procurement?
Mr Humpherson: I think the procuring authority would look at a wide range of sources of assurance. At least that is what we would expect them to do. One thing is this public sector comparator: how much would it cost us to do it conventionally. Another would be are we sure that we need this service for the amount of time and we are not tying ourselves into something which we are going to then regret as we need to unwind it? That is valuing flexibility. Another is looking at the costs proposed in the model put forward by the contractor. The contractor is saying we will provide you the hospital or the prison or the school or whatever for a fixed price, and you have to be absolutely sure that those fixed prices are fair and reasonable and, just as you do in any contract, you would say is this what it should cost.
Q260 Chairman: It sounds fairly subjective.
Mr Humpherson: I think that is right.