Q391 Chairman: Thank you very much Mr Stewart, Mr Dwan and Mr Pokora, for joining us for the second half of our meeting. Can I, as we ask all our witnesses, ask you if you would speak loudly and clearly for the shorthand writer and for our webcast? Would any of you like to make any opening statement before we get into the questions? Mr Dwan: I would like to make a short opening statement about the LIFT industry and the differences about LIFT and PPP. It is very interesting hearing the evidence before as well to make some comparisons. LIFT is a true public/private partnership because 40% of the equity in the company that provides the services is actually owned by the public sector and the returns and risks are shared equally and proportionate to our shareholdings. What is also unique about the LIFT industry is that we provide a range of projects and services over a 20 to 25 year period, not a single project. The main difference I would draw your attention to is that a PFI is managing an investment; a LIFT company is about developing a relationship that is spread over a series of transactions and different services, all designed to create an impetus that helps improve health, social care and community care in that area.
Q392 Chairman: We have heard from earlier witnesses that in PFI contracts too the relationship is incredibly important as to whether or not it works, but I take the point you make. Mr Stewart, would you like to do the same for Partnerships UK? Mr Stewart: I do not feel I need to.
Q393 Chairman: Fine, then let us make a start. Can I ask all three of you, how successful are current procurement arrangements for private finance projects and what would you recommend as the most important improvements that could be made in the light of the experience we have all now accumulated? Mr Stewart: I think it is the most reviewed procurement method that has ever been. You only have to look at the NAO reports, of which there have been many, to work out whether or not it has been successful. If you look at the whole spectrum of projects as a whole then I think broadly it has been a very successful procurement method. Unfortunately the market often gets judged on the bottom 10% of deals rather than the 80% in the middle. I deliberately say the 80% in the middle because I also think it should not be judged on the top 10% either. I think you not only should look at the procurement method but what surrounds the procurement method. So I think what has been successful about the PFI/PPP market is that it has been run as a market, as a programme. There has been very strong policy stewardship for it which never existed really before for any other form of procurement. There have been considerably more support mechanisms for it; for example within departments, private finance units, bodies like Partnerships UK, specialist teams within the Treasury, OGC which again never existed for other forms of procurement. Then with that comes things like standardised contracts which have actually been enforced in the market. I do not think you should look just at the procurement method but also everything that comes with it. The last point I would make is that the market is changing and so when you look at PFI you have to consider it both in a historic context but also in today's market. One of the things I would be saying in a conference speech at the moment is that if you look at the pipe line it is now dominated by local authority projects. I think something like 80% by value of future projects are local authority projects. If you compare that to five years ago there were many, many more larger projects, one of which you spent quite a lot of time on in the previous session, which is the London Underground PPP. These days there are relatively few large PPP projects and that means that the procurement methods that we have to use need to be adapted to cope for a different type of market. What you are now seeing is projects being run as part of programmes-whether it is the Waste Programme, the Building Schools for the Future Programme, the LIFT programme-rather than these sorts of monolithic, very large projects which take on a life of their own.
Mr Pokora: From my point of view I think it has been an undoubted success. In the LIFT industry as a whole we have over £2 billion worth of procurement already actually either in construction or operational and a further nearly £1 billion that is currently being worked on. It is quite clear that it has been an undoubted success. I think one of the areas that I would certainly highlight by way of improvement would relate to actually being very, very clear about what the drivers are for the public sector, what is it that really matters in terms of these schemes? We have all experienced changes during the development process of an individual scheme where at one stage it is the total cost that is important and the next stage it is the speed of getting the building operational. That can lead to a longer procurement which is not in anyone's interest, certainly not in the LIFT
companies' interests. Being clear about that right from the outset is something we would certainly find of benefit. Mr Dwan: The other point I would make is that by necessity there is a tendency to create a master contract and a master procurement and with the LIFT market where that £2 billion is actually 260-odd projects (some of those are relatively small projects, maybe £1 million or £2 million) and to apply a contract structure which is in principle the same as some of the bigger PFIs and then make that project bear those costs and the time and delay of assessing it on that basis is perhaps overkill. Linking some form of materiality to the risk transfer taking place for the size of the project would be an improvement; it would reduce the cost of delivering and improve the timescale.
Q394 Chairman: We have heard how Treasury has very firmly steered people towards PFI and other PPP funding procurement methods, but should public authorities have a much freer choice on the method of procurement on a case by case basis?
Mr Stewart: Certainly at the outset there was this compulsion to consider PFI before looking at any alternative but that compulsion went a long time ago and now public authorities are encouraged to consider PFI versus alternative forms of procurement on a VFM basis and I think, for example, if you look at the Building Schools for the Future Programme- which is sometimes called a PFI programme-if you delve into that you will see that that is structured on the basis of Local Education Partnerships which deliver the investment 50% via design and build and 50% via a PFI structure. That mix may well change. That split came about because people considered that refurbishment was better to do under a design and build structure and the new builds were considered better under a PFI model. That was a decision taken at the time on the basis of value for money. Mr Dwan: In the LIFT market place the principle is about delivering an improved estate and that does not just mean new build, that means better utilisation and better management of the existing estate and churning that estate to meet changing demographic needs. You have a living, breathing relationship which responds to the service needs over that 20 to 25 year period and new build is only part of it. Being able to create a structure that allows you in a relatively short space of time to respond to those changing needs, and provide outside expert input has been a key benefit. As a result of that most of the parties involved in a LIFTCo arena see it as a much stronger and greater partnership, not just about procuring an initial funding stream.
Mr Stewart: I think what is hovering behind both of these questions is the issue of new procurement models. If you would like me to just cover that I could. As I said, the market is changing and I think two interesting things are happening at the moment. The first is that on the large projects-Steve Allen was referring to Crossrail earlier-what you are seeing is PPP methodology being brought into a public sector world. If you look at Crossrail they have set up a client entity which is the Department of Transport and Transport for London and that client entity sets the requirement in output terms, decides what it wants to buy, decides how much money it has to buy its requirement and then sets a challenge for a delivery body to respond to that output specification according to the given budget. The delivery body sits wholly within the public sector, it is staffed primarily by professionals from the private sector, and then that public sector delivery body then lets the contracts to the private sector. What you are seeing between the client entity and the delivery body is a lot of PPP type methodology but sitting wholly within a public sector context. The other interesting thing about new models at the smaller end of the scale will be the recognition that the whole life cost approach of PPPs is seen as very attractive. If you are interested in sustainable solutions you have to take a whole life cost approach to delivering your requirement. What will be interesting in the future will be to see how we come up with some new approaches to incentivise whole life cost and my guess is that we will see some design and build-which is where I think you struggle on whole life cost approach. I think we will continue to see some PPPs but I think we will see some models appearing in the middle which might be 10 to 15 year contracts with or without finance but with some long term maintenance, again the key being that the providers of the service are incentivised to take a whole life cost approach.
Q395 Lord Griffiths of Fforestfach: A number of witnesses have said that in making a decision between a traditional approach to procurement and a PFI approach you obviously have to take into account costs, but in addition they have said that there are a whole lot of subjective factors like will it delivered on time or the management of risk and so on, which are highly subjective but they may actually be a sort of deciding factor as to whether you choose one or the other. Would you agree with that or disagree with it? Mr Pokora: Certainly from my point of view I do agree. I think that in selecting the partner-whether you are selecting a partner for an individual single project or for a 20 to 25 year relationship-then you need to understand how that relationship is going to work and whether you can actually have any sort of rapport with the individuals and organisations concerned. That is missing if you are simply paying with a cheque for something and then the two parties walk apart from each other. With the whole fundamental premise of PFI and LIFT we do not walk away, we are there for the long term. On the question of flexibility-or the lack of flexibility, and there are different views on that-my view is that in selecting a partner you should be selecting one who will respond to change into the future because all public sector bodies-healthcare is the one I know best of all-do change but they change whether you are building something with exchequer monies or whether you are building it with private finance. The change is totally irrelevant to how the facility is funded, so you are looking to the company you want to work with to see how they will support you and help you make those changes that will inevitably occur over the 20 or so years of an agreement. Mr Stewart: There is a technical answer which is, as you would expect, a fairly lengthy document which was issued by the Treasury in 2006 which provides a fairly precise framework for making what is called the stage one decision as to whether you should pursue PFI or a conventional approach. I would hope everyone would agree you should not make that decision on cost grounds alone, ie just on a quantitative assessment which means that you have to make a qualitative assessment as well and that qualitative assessment is designed to take other factors into account which will improve your decision making process. Inevitably when you get into qualitative assessment some of that is subjective. I think one of the advantages that was focussed on when this document was produced was the fact that there was a track record of doing PFI deals. When people were required to look at qualitative assessment criteria like the time taken to deliver procurement, they were very, very strongly advised to look at the track record in their particular sector and use the data available in that particular sector to help them decide whether PFI was a good route. In a sense what they have been told to say is that if it has been shown that PFI is a successful procurement method for schools in the past then you should be able to take confidence that it would work in the future as well. If you are doing a one-off project which no-one has ever done before then it is going to be a more subjective exercise.
Q396 Lord Eatwell: I am intrigued by how we are going to measure the benefits of a PPP project. Mr Pokora has said just now that it is clearly successful because there is a large amount of projects. That does not seem to me that that defines success at all; it might just be a waste of money. There is an approach which measures the benefits of PPPs on user satisfaction. Do you think that is a satisfactory objective measure? Mr Pokora: I will answer that first as you came back at me with my initial response. In and of itself no, but all tests of whatever kind, if they are fairly applied across all procurement methods and all financing methods, then you do have a means of evaluating those and putting them into the qualitative and quantitative assessments that need to be made The difference and the problem of course is that whereas we have an approach in our LIFT contracts whereby we will test the views of users of our facilities, that is not the norm as far as publicly procured buildings are concerned, so you do not have a means of being able to evaluate whether ours are more successful than a publicly procured building, but it is one of the tests that you could use if you had the evidence.
Q397 Lord Eatwell: I just feel somehow that if those involved in the procurement decided to fix on PPP or some form of PFI
structure they are then going to be somewhat biased towards saying that they are rather satisfied with it because otherwise it would reflect on their prior decision. Mr Stewart: Except that it will not have been their prior decision because the rate at which people move jobs in the public sector ensures that somebody else probably did it before them. I think when they talk about users here it is not only the official sitting in a public authority who is dealing with the contract, some of this is also end users, consumers as well. I think the frustration is that we live in an environment where we have very poor data.
Q398 Lord Eatwell: Yes, that has been commented on by several others.
Mr Stewart: The interesting thing is that PFIs and PPPs is a more data rich environment than conventional. One of the problems is that there is almost no data available on the performance of conventional contracts because there is no such thing as an operational phase of a conventional contract, it is just absorbed within the public authority's general budget. So comparing PPPs with other types of projects is very difficult. If you are interested, one of the things you should look at is the Building Schools for the Future Programme because a major effort was made at the start of that to collect much more data and there is this comparison between design and build and PFI in-built within the programme. I think it gets even more interesting when you not only look at the outputs but you look at the outcomes and so you start looking at educational outcomes within schools that have been delivered through PPI as opposed to an alternative form of procurement. I know that is not your question but personally I think we should be looking at outcomes, so we should be looking at recidivism in prisons and we should be looking at educational outcomes in schools rather than just saying: is the private sector contractor delivering to a certain level of performance?
Q399 Baroness Hamwee: You have already talked about some of the benefits of the LIFT model compared with conventional PFIs
, but I would like to ask if there is anything you would like to add to that and also to ask your views on the impact of the absence of a public sector comparator. Mr Dwan: I outlined in the introductory statement the principal benefit and actually sitting around a table with people who are taking risk and reward alongside you has a lot to be said for it. Certainly when the decision making is being made and when you are saying to them, "Are you sure this is what you want because if it is not what you want you need to say now because there will be an impact on you both financially and practically", that is really important In developing the partnership-these really are proper partnerships-we know we are going to be around for 20 to 25 years; there is nowhere to hide in that partnership so if you get something wrong you will still be there, somebody will say, "Why did you put this building up 10 years ago? Why is it like this and why is it like that?" As a result of this type of relationship the LIFT companies themselves build in a lot of flexibility. We build, quite often, extra space that LIFTCo takes at its risk because it can assess in the future there might be an additional demographic surge or a different episode of care pattern to host. We are also very well placed to be the community developer; because we represent principally the NHS but also local authorities and social care we can create a community asset that can host a range of different services and can create a flexible structure to put an asset in place and then say that you can hire it on an hourly basis if you want, if that is appropriate. We can provide much greater flexibility that a rigid PFI which is a single project with a single purpose. If you allow the relationship to develop to its full extent, at the moment we are having very active debates about looking after the existing estate, trying to increase the utilisation of that estate, moving towards a carbon neutral position which we have on a number of our LIFT buildings and driving a much more joined up community focus approach, you could not do that within a rigid PFI type structure. I also do not think you could do it unless there was a share in the equity return and risk because you would not have the same relationship.
Q400 Lord Moonie: Is the LIFT
approach part of a broadening out of private finance models? If so, where do you see things going? Mr Dwan: That ties into what I was just saying, that increasingly what we are talking about is providing the range of services which are focussed on the better utilisation, better management, better availability of assets rather than raising funding to build new things. There is a natural maturity that takes place if you think about any estate; there are only so many new buildings which are appropriate and at a certain point in time you need to match services to existing assets and integrate on a better basis. What increasingly is happening is that as projects have succeeded and they have generated income, employment and improved healthcare in communities that has led to greater and wider discussions about using LIFTCo as a focal point for community assets. We think that about 80 to 85% of the money invested in LIFT
projects is retained in that community so it has a fundamental regenerative effect on that community as well. I think a model which allows a flexing of response that is not focussed on a single purpose, that allows the deliver of services alone-whether they are professional services or life cycle services-is the next level, a more sophisticated version of a true public/private partnership. Mr Stewart: I think the difference with the LIFT model to the traditional PFI model is that the asset is owned in the long term by the private sector company whereas in a PFI contract at the end of the contract term the asset returns to the public sector. That encourages very different behaviour in the private sector and encourages them to invest not only in that asset and make sure it does have alternative uses, but it also means they will take on a development role and actually build other assets around it and are encouraged to do so. There have been LIFT schemes where there have been leisure centres, retail developments and housing developments sitting alongside the health sector assets. I think the fact that the private sector own the asset for the long term encourages that kind of behaviour. I would want to support what Mike was saying about the community focus aspect of LIFT. I think the challenge going forward is going to be to ensure that we have community investment across sectors. At the moment we have a very silo driven approach where investment in communities follows the budget which come down particular channels whether it is a schools channel, a health channel or a social care channel and what we need to do is develop new models at a community level which encourage a cross-sectoral approach. I think the Total Place pilots which are going on at the moment are a good example of that kind of activity. I think the co-location fund which has been set up within DCSF (which is a £200 million fund specifically aimed at cross-sectoral projects) is another good example, but we have to crack cross-sectoral regeneration community based investment going forward and we have not so far.