Q311 Lord Forsyth of Drumlean: We have had quite a lot of evidence which suggests that PFI means that the initial process of scoping a project and working out costs and so on is subject to much more careful scrutiny and discipline, and this is one of the arguments that offsets the additional cost of capital. I am trying to find a polite way of putting this but University College London Hospital, looking at how the costs escalated, seems to contradict that view. Were there particular reasons why PFI was not suited to that project?
Sir Peter Dixon: PFI was the only thing that was available at the time. The contract was signed just before I took up post and just before my chief executive took up post. We are both still there, but we were not party to the negotiations for the signing of the PFI. What we could do was to make sure that it did not get any more expensive. I can tell you what goes on now in that we have just signed a contract for a large new cancer centre, using our own resources and some borrowed money. We have not gone down the PFI route. We can do that because we are a foundation trust. I believe that we have managed the risks for that adequately. I believe we have procured it professionally. I hope the discipline that we have imposed on ourselves will mean that if it does not work it is going to be the problem of a major contractor rather than mine, which is just what a PFI partner would do in procuring it.
Q312 Lord Forsyth of Drumlean: Yes, but what I want to know is what happened to the PFI project which, according to my information, started off at £120 million and ended at £430 million, so three and a half times the cost? All the evidence we have had is this sort of thing will not happen because you have your specification, you do due diligence and there is private capital involved, so what I want to know is what went wrong?
Sir Peter Dixon: I cannot give you direct evidence of that because I was not involved at the time and I would not speculate. What I do know is that they spent nearly 20 years trying to get the scheme off the ground. When I arrived, the contract was for £422 million, and that is the contract that had been signed three months before I was appointed. It was not a contract at £120 million.
Q313 Lord Forsyth of Drumlean: So when you decided to do your new cancer facility, you were not in the least bit curious as to how this had all gone wrong and the cost had overrun by so much?
Sir Peter Dixon: We sounded out potential PFI partners and they were not able to contract with us on the timescale that we required or to the sort of specification that we required, so we used a more traditional procurement route and we did that ourselves.
Q314 Lord Best: You might guess that I am going to ask a housing-related question using your Housing Corporation experience. The housing associations have advanced various reasons why they have been engaged with PFI projects, one of them being that this means that the capital is off their own balance sheets. They can only borrow so much themselves on the back of the assets that they have so this is additional borrowing where somebody else is picking up the tab. I think under your watch three or four of these slipped through somewhere. Was that sufficient reason, helping housing associations to do more than they would have done, for what they complained about on the other side of the balance sheet, the cost of consultancies and the setting up costs, which are very big and unless the project is enormous they are prohibitively big, and the fact that they do not give any of the equity appreciation that they normally would have done if they have invested in the property themselves and picked up the gains later, do you feel that it was worth it in the cases where it did happen? Are there other reasons other than not falling on the balance sheet of the provider, the housing association, that would have meant that people got a tick in the box from the Housing Corporation?
Sir Peter Dixon: There were probably instances where it was not possible for individual associations to borrow more money, but as you would know as well as I recall there was actually surplus borrowing capacity within the sector and therefore in most cases housing associations were able to borrow on very fine terms from their banks. The cases which I knew of which did take place, I had the clear impression that they were undertaken reluctantly. They were undertaken usually in conjunction with local authorities who found themselves unable to borrow because the rules said they could not, and there was a certain amount of tying up in knots in terms of the service specifications going forward-it was not just around the capital cost, it was usually around the management issues for the next 20 or 30 years which ties you into an inflexibility, whether it is a housing scheme or whether it is a healthcare scheme. You are tied into something for a long time and it is both difficult and expensive to change it. While I think there may be occasions when the PFI route for a construction contract can be a useful discipline, I have much greater difficulty in agreeing that signing up a service contract for 30 years is something that is worthwhile.
Q315 Lord Best: Because the building may well be required for a different purpose subsequently.
Sir Peter Dixon: The building or the service or whatever will change.
Q316 Lord Best: Just to round this up, the ones that are still in the pipeline, the two or three big ones just coming through now, in the world of housing, these are for new build rather than refurbishment. We have seen one or two major refurbishment projects- Reading was probably the largest on behalf of existing public sector housing. Does it surprise you that it is on the new build side and not the refurbishment that people are now thinking that if they are going to do PFI that is where they should do it?
Sir Peter Dixon: To the extent that it is more predictable you should be able to get better pricing. The more unpredictable a refurbishment scheme over, let us say, several thousand old homes with unpredictable problems is going to be the more difficult it is to have a fixed price and to manage that risk appropriately.
Q317 Lord Moonie: You have touched briefly on future inflexibility, would you like to say any more about that as a potential problem?
Sir Peter Dixon: It is a problem. When our hospital was designed it was designed with no day case facilities. That was an error in the original procurement-I say again, I was not there. We had to put in day case facilities and it was very expensive; it was more expensive doing that.
Q318 Lord Moonie: That was on top of the £420 million.
Sir Peter Dixon: Yes. We had to do that because there was no original provision in there.
Q319 Lord Moonie: This was for day surgery.
Sir Peter Dixon: The theory was that the day surgery was all going to be done at a hospital three miles away; it was a planning error on a major scale which I was horrified about when I discovered it and it cost us a lot of money to put that right, not surprisingly. We had no ability to challenge the capital costs of our provider and of course they did it to suit them and we just had to cough up. It is the same with any other change that we need to make, and we will have to make changes over time, there is no doubt about it. We do not have the opportunity to go out and get three quotes, to manage it in the way we want, we only have one provider. We can challenge them with engineering assessments; there is a pile of documents higher than me which says how we do all that but it does not actually give you the opportunity to really make things bite, so the inflexibility is an issue and there is no doubt that in 30 years time when this project comes to an end there will have been several reincarnations of the buildings.
Q320 Lord Moonie: The secondary question at this point is that we have heard from some witnesses that inflexibility is often beneficial because it ensures things like maintenance are undertaken and prevents escalation of requirements as the project develops. I could not help noticing in one of the papers you seem to have had some problems in the hospital. Is that false?
Sir Peter Dixon: That is false.