Q351 Chairman: Welcome to the Economic Affairs Committee and to what is the sixth public hearing of our inquiry into Private Finance Projects. Copies of members' entries in the register of interests and interests declared as relevant to this inquiry are available to the public and to witnesses. Welcome Sir John. Would you like to say anything by way of opening remarks or shall I go straight into questions?
Sir John Bourn: Let me say first of all, Chairman, that I am grateful for the opportunity to meet the Committee and to let you have my views on PFI and I am glad to respond to questions that you and other members of the Committee may have.
Q352 Chairman: Let me start off with a fairly straightforward one which is to ask you if you could summarise what you see as the primary pros and cons of private finance projects.
Sir John Bourn: I think all organisations face make or buy decisions; whether you are public or private you have to decide which of the goods and services you need to produce your output or contributions. Which ones do you make yourself and which ones do you buy in from somebody else? Everybody faces this, the automotive world and government departments. I think that government departments now have available to them a wide choice of procurement routes, one of them of course is to use directly employed staff. Another one is of course straightforward outsourcing. A third is PFI and a fourth would be other forms of public/private partnership. I think all of these have got their pros and cons and the choice which falls to the department or agency to make is at least in principle a relatively clear and straightforward one. The cons of the PFI come when the wrong choice is made. I think the PFI works best for, if you like, relatively straightforward activities. If I may just give an example of what I mean by that, I think in the defence sector the use of PFI for helicopter training was a good one because what it meant was that the Ministry of Defence bought so many hours of training, it did not have to invest in the assets of the training helicopters or the employment of training staff. I think that was a good use of the PFI because the efficiency benefits of using that arrangement more than outweighed the extra costs and the financing of the arrangement in the private sector. On the other hand I think if there had been an attempt made to provide operational servicemen by PFI-we used to do that once, they were mercenaries-we would see that it would be an inappropriate use of PFI to use directly employed mercenaries for direct combat operations. That is what I see as the main pros and cons but they are matters of principle; working out the detail is of course by no means simple.
Q353 Lord Levene of Portsoken: You will remember when PFI was first looked at and I think it is true to say that it was regarded as a way of bringing the discipline of the private sector into carrying out services or activities which were not well managed by the public sector and you would have the private sector discipline doing these more effectively both in terms of the way in which they were produced and in terms of cost. Subsequently it would appear that there was far more emphasis on the fact that these activities would be off-balance sheet and that was the prime reason. We had a session a week or so ago talking to people who had been involved in heath authorities who said that being forced to buy a new building, if you like, a new hospital, through PFI was forced on them because it was the only way in which the finance would be available, but in fact the cost was excessive and they would have been much better of if they had done it themselves despite the previous faults of the public procurement system. Which one of these do you think has proved to be more important, getting a better output on better terms or moving things off-balance sheet?
Sir John Bourn: Lord Levene, I think the most important one was to get a better output on good terms. The whole balance sheet issue was a kind of snare and delusion. The idea that accounting treatment should determine what you should do was, I think, a fundamental mistake. One can see historically how it came about; government departments, local authorities, health trusts have to have accounts, accounting standards have got to be followed (the accounting standards that we had then, UK GAAP, said that you made your decisions to on-balance sheets or off-balance sheets in terms of risk) and that did mean that it was often laid down in terms which said, as Lord Levene has said effectively, that you only got it if it was off the balance sheet. This was in direct contradiction of the Treasury requirement to take the procurement route that was value for money. From my past experience in the NAO we did see cases where the project was twisted, where the risk that they were the public sector was downgraded in order to pass the test. I think in the health service there were a number of these independent sector treatment centres where the assumption was that the demand from the public sector was unquestionable. We have now seen, of course, that that was not right; there was a risk to the demand. We have now seen these cases where the public sector side of I.T.C.S have had to pay for treatments which were not administered. I think that overall it would have been much better to have taken a more general attitude. Of course it was necessary to show projects on the balance sheet and of course to know where the balance of risk lay. But I do not think there should have been a rule to say that unless you devise the project in such a way that it can count as off the balance sheet you cannot have it. I think that was a mistake and it led to an enormous amount of misdirected activity in government departments, falling over backwards, wondering what accounting standards actually meant. All these things were very largely wasted effort and diverted attention from looking at the main thing: which projects could be best done by PFI?
Q354 Lord Eatwell: The one theme that has really emerged from all our witnesses is that there is insufficient evidence concerning traditional procurement and PFI projects in general to assess which is superior. In other words, one would like to be able to say that in one field it is superior this way and in that field it is superior in another, but the counterfactual is never terribly clear and the evidence is deemed to be murky. I wonder if you agree with that and whether you feel the NAO could have done more to resolve the evidential issue.
Sir John Bourn: I do not think you can reach a view that PFI or conventional procurement is a better approach. My view would be, as I tried to say a few moments ago, that for some projects PFI will be the best way of doing it; there will be others for which conventional procurement is the best way of doing it. I do not think it is a black and white alternative. On the question of whether the NAO could have done more, as somebody who was there for a long time, one must always say that of course they could have done more. But I think we did bring out many of the important features which enabled judgments to be made about the choice between PFI and conventional procurement or outsourcing. We were the first people, I think, to bring out the possibility that refinancing of projects provided scope for increased profit which could be usefully shared between the two sides. We brought out that very often PFI was lumbered with extraordinarily heavy costs of advisers; you could have had competition among the advisers and got good advice more cheaply. We did bring out in some of the cases how, because the PFI project was not drawn up properly, quite extraordinarily large profits were made. There was the Skye Bridge, for example, where the private sector firm made over 18% per annum profit. We also brought out very well that you could not make your decision between PFI and conventional procurement simply on a money figure. The decision of course involved money but it was not possible or realistic to decide on a 25 year or 30 year project simply on some money figure. You needed to take account of the possibility of the project changing its nature and many other considerations. Whilst I think the NAO could certainly do more, I would like to claim that it did a lot. The NAO had produced 72reports in the 12 years since PFI was operational, covering individual cases and themes. I feel that the NAO, which I can now look at perhaps more objectively than I could a year or so ago, did do quite a lot in this direction.
Q355 Lord Tugendhat: Sir John, it has been suggested to us-a number of the early witnesses made this point-that PFIs brought about a more rigorous risk assessment and general due diligence than existed before with traditional procurement. Do you think that that judgment is correct, that as a result of PFI more rigorous risk assessment and due diligence came in? Secondly, do you feel that now, in practice, that that benefit-if it was a benefit-has been secured and that the risk assessment and due diligence would be at much the same level regardless of which route was chosen?
Sir John Bourn: I certainly do think that PFI brought with it a greater attention to due diligence factors because the private sector partner had to borrow the money and would often have to negotiate with the banks and other lenders and show them that this project was well conceived. So there was a greater attention to these factors and it was, I think, one of the advantages of using a PFI because it was a discipline which the existence of the Treasury control of projects that departments operated, which is not to be dismissed, did not bring with it the same attention to due diligence factors. Whether this has now been, as it were, caught up by the public sector side, one would like to say it had and I think there is some evidence that it has. But I still think there is a fair way to go in increasing the skills on the public sector side. This was brought out in the recent NAO report which came out earlier this month-not one of mine-on commercial skills for complex government projects which showed that it was still the case that central government did not have sufficient numbers of well trained project managers and those able to carry out this work. I think PFI did give a shot in the arm to due diligence. I think the public sector has got much better than it was a decade or so ago but I think it could be better still.
Q356 Baroness Hamwee: A number of people have also said to us that whole life contracting is a benefit, a major argument for PFI projects. We are going back to one of your first answers I suspect, but perhaps you could tell us whether this could be achieved without using PFI.
Sir John Bourn: I think in principle it could. Costing the whole life approach is obviously a sensible way of looking at projects and certainly the idea of PFI which makes you think about what it is going to cost you year by year over 10, 15 or 20 years, certainly shows the significance of the whole life approach whereas the traditional governmental way of looking at projects did not really have that same incentive; you either had the money to do it or you did not have the money to do it. I think that it is the case that if now in the public sector-particularly the central government sector-you actually follow the Treasury guidance on this (I think the Treasury guidance on this is very good, it is very extensive, it is some 300 or 400 pages) it would provide the ability to carry out whole life costing on the part of government departments and agencies. It is now possible to do it and it does not rest simply on PFI. But there is no doubt that PFI was the incentive to get this going.
Q357 Baroness Kingsmill: I wonder, Sir John, if you could tell us just how competitive you think this market really is. It seems sometimes that because the bidding costs are so high then possibly a pool of bidders is relatively small and it would be interesting to know what your views about this are.
Sir John Bourn: That is certainly the whole essence of PFI, but it is not just PFI, it is all the procurement routes. If they are going to be effective then competition is needed for them all. In the early days when the approach was starting off it there were projects that departments and agencies wanted to go forward but found that competition was limited, you could not actually find anyone to compete in the short term for all the work that was available. I think as time went on that was resolved to a degree but of course the credit crunch-through its limitation of access to funds, making them more expensive, lending money for a shorter period-has tended to reduce competition. Another factor which has got in the way of it was that some firms were deterred from competing sometimes because the project was so complicated in its design and the bid costs were so enormous that it put you off having a go to do this. The lesson from that is often, of course, that the worst projects were the ones that were so complicated to do. So, in a way, if you were not getting any bidders you really needed to ask yourselves whether it is a sensible thing to try to do it this way, is this one of the projects that would be better to do conventionally? I also think that some firms were put off in some areas because of the time it took to reach a conclusion. Sometimes a department would announce that it was going to have a competition, firms would express an interest, but it turned out they waited years for a result and sometimes there was no result at all at the end of it. So although sometimes firms would then ask for compensation and occasionally get it, I think it did deter competition to a degree. But I do think, having recognised that there are difficulties sometimes in developing a fully competitive market, that the amount of money the government spends, and the number of projects that there are, will mean that there is very good business there and I think that with attention on the part of the public sector in looking at the nature of the projects it is putting out and simplifying aspects like complexities of bidding-standardised contracts are relevant here- competition will be forthcoming. It is quite interesting that in spite of all the difficulties at the present time the Birmingham University Centre for Public Service Partnerships, in the evidence they have given to the Committee, say that there have been 30 new PFI and PPP deals done since July 2008, so it does suggest that while you cannot take competition for granted it is there and can be encouraged successfully.
Q358 Baroness Kingsmill: It may mean that the projects are more expensive than they might otherwise have been if there was not sufficient competition in order to drive down prices.
Sir John Bourn: That is right, that is why there is an advantage in doing everything you can to encourage the operation of a competitive market to make it as straightforward as you can for firms to make their bids.
Q359 Baroness Kingsmill: That does not seem to have been the case in many of these larger projects, does it, from what your evidence is?
Sir John Bourn: It certainly has not. It took the Ministry of Defence 10 years to work out the PFI for the Tanker Aircraft, so it is absolutely true. You cannot help but feel that it could and should have been done much more quickly.
Q360 Lord Forsyth of Drumlean: Do you think, Sir John, there is anything inherently unsuitable about IT projects that makes them difficult to do with PFI? As you know, that is the conclusion that has been reached by government. Although there have been some spectacular examples of PFI IT projects not working out very well, there have also been some spectacular examples of in-house projects not working out very well and the private sector seems to be able to outsource their IT. I wonder what your view is on this.
Sir John Bourn: I think with IT projects the most spectacular difficulties have arisen with projects which were so ambitious and so technically advanced and therefore, in a sense, so exciting to everybody who had a hand in them that they had a desire to get on with them even though the software had not even been devised. What you got in a sort of curious way, because it was such an enormous and such an evident and exciting project, was that the very top people in the department would be very interested in it and the very top people in the supplying companies would be interested in it. If I can put it this way-I hope it is not being too outrageous-you had one set of people who did not really know what they were buying and another set of people who did not really know what they were selling. Down the line you had the wretched people in the public sector who would have to make this thing work which often was an IT system which did not correspond to the practices of paying benefits or whatever it was, so it was a mismatch between the work they had to do as they had to do it and the new system that was coming in. On the private sector side there were people who had to produce this system because their directors had told them they had to. But they had no real idea how to do it because it was too far on the edge of technology. As I say, two sets of people trying to buy something they did not understand and trying to sell something they did not understand. I think that you did find that this was not a unique situation to the public sector; there were private sector cases which never attained the same degree of publicity as the public sector cases, but there were private sector cases where rather similar difficulties arose. I think that a number of lessons come out which are relevant to both sectors. It does emphasise the importance of the technology being at a sufficiently developed state actually to know what it is you are doing and I think some of these large projects could have benefited by being divided into more manageable portions. I think as well, of course, in the public sector a greater attention to training and also associating the planning with people who would have to use the system on the ground would have been very well worthwhile. In principle there does not seem to be a reason why you could not do a large IT project successfully in the public sector by yourself. In the NAO we did a report on successful IT projects. Although this was seen to be a rather amazing document it did not secure anything like the publicity that the reports on failed projects brought.