Q431 Lord Forsyth of Drumlean: Earlier we have some evidence some weeks ago from the contractors and someone said that they were pretty neutral as to whether they did a project by PFI or by traditional means. When they were asked which resulted in them making most money, they said it was PFI. Why is it that the contractors should make more money out of PFI than traditional methods, do you think?
Mr Waterston: That is a difficult question to answer from the banking side.
Q432 Lord Forsyth of Drumlean: That is why I asked it.
Mr Waterston: We do not see the actual profit level within the building contractor. I suppose it depends case by case between the various contractors. Perhaps that contractor had not had delays on its projects so had not had to pay liquidated damages or perhaps had calculated the costs very carefully so there were no cost overruns. I am sorry I cannot answer that in any more detail.
Q433 Lord Forsyth of Drumlean: Surely as bankers you will be looking at the margins which are going to be obtained in forming a deal. I am surprised you do not have that.
Mr Olsen: We do indeed. The due diligence and the risk process that we go through on that is to look at the price and establish that it is neither too much more nor too little. We need the contractor not to pare the price down to the bone and perhaps get into difficulty over the thing but equally not to overprice because they will not win the competition that ensues around the bidding process. It is a question of finding a balance between "too expensive" and "too cheap". Neither is good from our perspective: one does not win the bid and the other one leaves a contractor potentially in difficulty. There have been some examples over the life of PFI where contractors have actually ceased to exist because of the mis-pricing of their contract.
Q434 Lord Forsyth of Drumlean: So they make more money because you, the banks, insist on a bigger cushion.
Mr Olsen: What I am saying is that there is a happy medium between the two. The price they charge is the price they charge; they do their due diligence, they do their costings. We ask our technical advisers to look at those costings and the detail. We would bring expert help to bear on that. The question we ask of our technical advisers is whether it is a fair price, a sensible price for the work the contractor is going to do. There will be some element in that price for the risks they perceive they are taking on but, most importantly, we will make sure that the price is not too little so that we have a contractor with the potential to bleed very badly in actually undertaking that contract.
Q435 Lord Griffiths of Fforestfach: You have made the case from your experience that for PFI, in terms of construction, it is on time and on budget. You then said that in 60 or so transactions in which you had been involved there were also subsequent running costs. I just wonder whether you have any observations on the role of the private sector as opposed to the public sector in delivering services, on the quality of services delivered when the project is completed and the cost of that as you go forward.
Mr Olsen: Clearly most PFI projects require the private sector both to construct and operate certain elements. Clearly in schools the private sector does not deliver education, they deliver janitorial services, if I may use that term. I come back. In a way it is the same answer as I made to Lord Forsyth of Drumlean's question. We will look at the operator, the company which is providing the operational services through the life of the project and we will ask similar questions of the contract price that they are proposing to put forward to them, that is whether it is an appropriate price for the services that they are going to deliver over the next 20 or 30 years in a lot of cases. Is it the case that the public sector could provide those services? I am sure the answer to that is yes. Could they provide it more cheaply, more efficiently? Again, I am afraid to say, I do not have enough data to be able to compare the two. Evidence to date on the projects that I am aware of which have reached construction completion is that the operational services appear to be going very, very well. A very clear delivery is required and for those contractors who are not delivering there are sanctions, usually in the form of reduced payments, which again is the policing that PFI brings to the process.
Q436 Lord Tugendhat: I realise that we are deviating somewhat from the line of march but nonetheless might I deviate still further, in particular to ask Mr Olsen a question. The Bank of Ireland must of course have a great deal of experience of the Republic of Ireland and also Northern Ireland.
Mr Olsen: Yes.
Q437 Lord Tugendhat: Coming back to the question Lord Levene of Portsoken asked about the efficiency of PFI versus traditional public sector procurement in the United Kingdom, on the basis of the Northern Irish and the Republic of Ireland experience, is there any light you can cast on this. How do they do it in the Republic?
Mr Olsen: If I may cover Northern Ireland first, clearly the processes in Northern Ireland are identical to the processes in Great Britain. You could argue that there are certain local issues, let us call them, which need to be dealt with.
Q438 Lord Tugendhat: I imagine.
Mr Olsen: The general underlying process in Northern Ireland is identical to the procedure in England, Wales and Scotland. In the Republic the process was a little later in starting. We only started to see a programme around about 2000-01, maybe six or seven years after the UK launched. Again, the process is very similar. Obviously the law is very similar and the processes are, in fact I would be hard pressed to name any particular part of the process that deviates from the UK, with the possible exception of the method by which the bid is submitted. In some cases, but not all cases, when a bid is submitted it has to be submitted with full bank financing in place as the bid is submitted into the authority, which is not the case here.
Q439 Lord Tugendhat: Did the Republic follow the United Kingdom in this particular case because the benefits of PFI over the traditional form of public procurement had been sufficiently demonstrated on this side of the water?
Mr Olsen: I clearly cannot speak for the politicians and civil servants of the Republic. I sense and imagine that is the case and indeed in other jurisdictions as well. We are seeing this concept elsewhere, variously named but fundamentally what we know as PFI rolling out in Canada, in mainland Europe, Australia, New Zealand, Far East and Middle East. It is rolling out right across the world as a concept. Whilst every jurisdiction has a slightly different hybrid, the fundamentals are basically the same as the UK.
Q440 Baroness Hamwee: I should quite like to pursue whether the availability of European funds in the Republic of Ireland made a difference, at any rate to the timing, but I will not.
Mr Olsen: I could not possibly comment.