Q271 Lord Paul: You have explained a lot of the problems with PFI but how much reservation do you have about the mechanism itself or is it all because the government funding levels and procedures have not adapted enough?
Professor Pollock: I know that the private sector would love to see you come up with an answer that PFI needs to be streamlined and deregulated and made much easier. One of the big issues is that of course the procedures and guidance in departments have been completely restructured and rewritten to enable PFI. It may be that many of the problems associated with PFI are insuperable because of the financial complexity and long-term nature of PFIs associated with tendering, bidding and writing contracts. There has been an extraordinary level of standardisation in the PFI process in the market that has not resolved the issues. Some of these problems are insuperable. The huge transaction costs are well-known for legal, financial and technical services, which Dudkin and Välilä found in a sample of 25 hospitals transaction costs accounted for 8% of the total investment cost, split between the private sector and winning bidder. The public sector procurer ultimately bears both sets of transaction costs-its own, and the private sector through higher contract prices.
Chairman: Bearing in mind the time factor, we still have witnesses to come, so if there are additional points that you want to make perhaps you could very kindly put them in writing to us. Lord Levene?
Q272 Lord Levene of Portsoken: You told us how in effective and what a bad effect PFI has had. As someone who was involved in this at the outset, one of the original problems was the very poor performance both by central and local government in all forms of contracts, particularly when they involved the construction industry, which clearly is a large part of this, so if the local and central government procurement system is ineffective and if, as you have told us, PFI does not work, it is too expensive-and this is addressed really to both witnesses-what do you suggest should be put in its place?
Dr Edwards: I think you are wrong. The Mott MacDonald Report in 2002 claimed that the public sector was only about 13% over budget for fairly routine projects. Since then, the overrun has been reduced, so I am not sure what the evidence is for central government and local government being ineffective in terms of their procurement.
Professor Pollock: I would like to challenge that, too. In our very first BMJ paper in 1999 we looked at cost and time overruns in NHS estates and there is really no evidence at all to support your assertion of poor performance. That is the first thing. The second is, if anything, performance had been improving, so cost and time overruns in the public sector were really only in the order of six to 12%. Cost overruns were very small and indeed could have been handled through a contract with penalty clauses. I think the second point to note is that this is the only area which the PFI industry has attempted to claim evidence of improvements over cost and time overruns. In our two research papers which we have published we have shown that the evidence for cost and time claims is not supported by the NAO Treasury reports and commissioned research from AGILE Construction Initiative which was not actually a report at all about cost and time overruns, and is actually flawed. I think there is a real problem. What we find are assertions of cost and time overruns for which there is(a) absolutely no evidence of poor performance, certainly in health, and (b) no evidence that it could not be overcome anyway by good contracts and (c) such evidence as is being provided by the private sector as quoted evidence, has been well and truly demolished by researchers. The critiques of the evidence are suppressed and ignored and instead false claims repeated.
Q273 Lord Levene of Portsoken: I would certainly like to see those results.
Professor Pollock: You can. They have been published in peer-reviewed journals and I will send you them both.
Q274 Lord Levene of Portsoken: I hold no brief with the PFI industry. What I am saying though is that certainly from what I have seen in the past the direct route has not been effective. If you are now saying that they are doing a good job and sticking to their budgets, I would certainly like to see where that has been evidenced.
Professor Pollock: We could not know now because the majority of construction is happening under PFI, certainly in health, but we do know from the period between the 1960s to the 1990s that the evidence of performance in aggregate was improving.
Lord Levene of Portsoken: I am very interested you say that because I was the author of one such report and I will send you that and you can look at that and that does have some evidence in it.
Q275 Lord Forsyth of Drumlean: Did you say that there was no evidence of cost overruns and problems with public procurement in the past? I am just thinking in your own part of the world, in Scotland, I remember being dogged by Crosshouse in Ayrshire which went on for years where there were arguments about planning and building. I think for Ninewells in Dundee there was a three-year delay in completion there. Are you not in danger of ruining your case by perhaps being a bit unbalanced?
Professor Pollock: I am not being unbalanced. I can provide the data which looks at all the projects over time. I think that is why it is very important to look at individual cases where there appear to have been cost and time overruns. Guy's is one very good example and indeed there was a select committee inquiry into Guy's. There are a number of factors that underpin perceived cost problems including and not least are the problems of the phasing of capital or the lack of capital availability or changes in rules over VAT. Indeed Guy's was hailed as one of the first public/private partnerships; but it was the withdrawal of funding by a carpet magnate Philip Harris from the Guy's deal that scuppered it and left it exposed.
Q276 Lord Forsyth of Drumlean: Sorry to interrupt you. There may be reasons for it but you are not saying that public procurement did not result in cost overruns and delays?
Professor Pollock: No, of course we are not, but we are saying when you take them in aggregate and look across the board, it was not a particularly strong feature, certainly in the health sector. Now you may be able to pull out of the hat one or two examples but then we would have to look in detail to understand what the causes were behind it. That is what I am saying. You cannot attribute that to poor management. I would like to make one other point. At the moment, the industry is saying the problem is the public sector not negotiating and managing contracts and doing it well, but you have to also understand that there has been a huge hollowing out of the capacity in the Health Service to do that. Enoch Powell in the 1960s for the Hospital Plan put in NHS estates, architects, surveyors, planning departments, you name it. These were all hollowed out the in 1980s reorganisations and after, so the public sector has almost no capacity and is increasingly reliant on the very same management consultants that are advising the industry. That is another big issue and it is not enough to say that the public sector is not very good at doing it. One has to look at the enormous changes that have taken place and the substitution of public skills and capacity by the private sector.
Q277 Baroness Kingsmill: Could I declare an interest, one, as the former chair of an NHS trust who tried and failed to get a PFI project off the ground and, two, as the former chair of the advisory board of Laing O'Rourke, the big constructors who are involved in big PFI projects, neither of which are current appointments. I am trying to get to the root of this. Are you opposed to PFI generally or PFI in the health sector or private sector involvement in the Health Service or what? Is it a broad brush thing or is it particularly related to the Health Service, because it does seem, and I would not dream of saying that I was an expert or had done anything like the work that you must have done, in some sectors like telecoms and so on to have worked quite well.
Professor Pollock: This is a question for me?
Q278 Baroness Kingsmill: Either of you.
Professor Pollock: It is political question. My research is based on the evidence.
Q279 Baroness Kingsmill: I am asking is it health or is it all projects?
Professor Pollock: We have looked at PFI in health, we have looked at education, we have even looked at London Underground, we have looked at one or two small projects like the Cheshire Police Station as well, so in the sectors that we have looked at we have found that these are generic problems and issues. A big problem for the health sector is that it did not, of course, have the PFI credit stream, but just because you do not find problems in other sectors it does not mean there are none. It may be that they have not been subject to the same sort of scrutiny that health has, that is how I would answer it. I think the other issue about PFI we have to understand is that if you have a universal service and a universal service obligation then you have to design the funding and financing principles to support that through risk pooling. What PFI does is it fragments the risk pool and tends to devolve the costs and risks to local communities who are not able to bear those costs and risks. That is certainly the case in the health sector. It is a bit different in local government for schools where you have streams of PFI credits coming in if they can keep their schools off balance sheet.
Dr Edwards: Very simply, the private sector and private finance initiatives are likely to be more expensive in almost all sectors simply because the cost of capital is double that in the public sector. It is as simple as that.
Q280 Lord Griffiths of Fforestfach: Would the logic of that argument be that every project throughout the economy in every sector is going to be more expensive and therefore the state should undertake it?
Dr Edwards: No, I am not saying that at all. I am saying that there is a choice.