Q471 Lord Griffiths of Fforestfach: May I ask for clarification? You said it was the National Physics Laboratory. Is it the National Physical Laboratory?
Mr Ewer: Physical; sorry, my mistake. At Teddington.
Q472 Lord Forsyth of Drumlean: We have had some evidence that the bidding costs on PFI were very high and that that resulted in there being very few people coming to the party to bid. The CBI said to us that two was enough to tango, that two was enough to have a vigorous competition. I wonder what you think about that.
Mr Metter: Actually the bidding process in the UK has been very, very expensive and it has meant that for some of the larger projects only the biggest organisations have been known to compete and many big overseas organisations have come in such as Skanska, Bouygues, Vinci, Siemens, big US and European corporations who are able to bear these very high bid costs. It is also true that many of the big UK contractors, Balfour Beatty, Laing, Carillion and other sorts of large contractors have been able to stand the bid costs.
Q473 Lord Forsyth of Drumlean: Just before you move on, the evidence we have had was that on average there are two or three bidders in any process. Is that correct or not?
Mr Metter: There are now. There used to be five or six bidders and it was very in efficient. If you were one of five bidders, how much were you going to spend on a bid, especially since, under the UK process, there is a tendency for too much to be required at each stage of the process. Well that is our view. Certainly if one looks at the market in Canada and in Sweden they do these projects at much, much less cost.
Q474 Lord Forsyth of Drumlean: Does that make it less competitive?
Mr Metter: I do not think it makes it less competitive, if there are fewer bidding costs.
Q475 Lord Forsyth of Drumlean: If you only have two firms bidding for a large project rather than six, because, in your own words, the process has become so expensive and cumbersome, to a laddie like me that would suggest there would be less competition. Is that wrong?
Mr Metter: The thing is that when you get down to two, remember each bidding group is a consortium of a number of contractors, service providers, banks and lenders so it is not one organisation against another. Each of those organisations is going to spend a lot of money. A big hospital bid would cost up to £10 million to bid and in the UK if you lose that you just lose your £10 million. In Canada they actually pay it to you. If you get down to two, they pay the losing bidders bid costs because they are sensitive to these sorts of issues. It does not affect competition. Why should three be better than two when you are getting down to the final stages of a competition? They will always eliminate on the way.
Mr Davies: Things to avoid. There are two sides to that. I have been in many bids when you are just two and that does not stunt competition at all because you have no idea what the other bidder is doing and you want to win so you are as competitive as you can be. If you are bidding with four or five, you will spend less money until you get to the final knockings and you have been narrowed down because the probability is so much lower. From the public sector angle, if you do too many it is going to detract from the attractiveness of your competition. There is however a risk of only doing it for two bidders and that is particularly if you are doing contracts where there are a number of them around the country because there are not unlimited contractors there and they choose their project. If you are relying at an early stage that some people will stay through the whole of that bidding process, you might be taking an unnecessary risk and end up with one bidder. So on some deals, at an early stage, you will probably have more than two, because you do need two to tango. In the final knockings, if you are down to two, you will get extreme competition. It does not dent it and, for all the reasons David gave, that is fine and you will get strong competition.
Mr Metter: It is important to recognise that in these projects price is not the only major variable. Design is an important variable and so is quality. In the early stages of PFI where there was too much emphasis on price we ended up getting a lot of schools that were built like sheds. They were not good civic amenities and there was a lot of unhappiness about that. In the bidding process, people often tend to think price, price, price, but it is certainly not that. Once you are building big landmark buildings like, for example, our project at Barts, the design is hugely important because these projects are going to be there for 100 years or so. The ability to design these projects well is also very important and also attracts a high level of competition.
Q476 Lord Griffiths of Fforestfach: May I ask what you think are the pros and cons of using a ring-fenced special purpose vehicle to finance, little equity, large debt and so on, as opposed to some other model?
Mr Metter: A special purpose vehicle means that that project and its risks are ring-fenced from other projects. If you put everything in a pool, if one of them goes badly wrong, it is going to taint all the others. The way the finance will come in will mean it will be more corporate in nature than project. That has certain problems with it, especially if you want contractors to take a stake in the project and you want to have different stakeholders in different projects. It is much better to keep these projects separate from each other. That is our view.
Mr Davies: You can transfer ownership, there is a focus on due diligence by the lenders on the project risks; there is a focus directly on that one project, it is not lost in a morass; you can maximise the amount of debt, which is a cheaper form of capital because the markets are used to it, they are used to it in project finance worldwide. You can very focusedly pass risk out to sub-contractors. In the earlier session you were saying that equity means not much risk transfer, but that is not true: it is just passed through under that structure to a number of sub-contractors and it is a model which has been proven outside PFI for 15 years before we even started PFI.
Q477 Baroness Hamwee: May I go back to two points which we have been covering? The first is on competition. We are all used to the concept of a preferred bidder, but can you just continue the explanation of whether competition remains and whether the bidder is actually in a very advantageous position because by the time-I cannot think of the term for the person who wants the project-the procurer is with a preferred bidder it seems to me that there is very little negotiating scope left on the procurer's side. Is the preferred bidder not in a hugely advantageous position?
Mr Davies: Two points there. First, under what is now known as the competitive dialogue, a lot of the competition and the definition of what is required and the pricing, is done with more than one bidder. It is not just the preferred bidder. The new directive means that it is taken far longer down the line which has on the one side the adverse effect on bid costs but on the other side is removing the risk you have described. In theory, when you select that preferred bidder, so much has been bottomed out. In practice there can still be quite a lengthy time with that preferred bidder then delivering the project. The key negotiation strategy you have is that they have given you your bid, they have given you your price and you are trying to deliver within that price. To the extent that there is any change from that price thereafter, it is normally only for reasons which are outwith their control. For instance, if the debt market price has increased, which I have had on some projects, their price goes up and it is a straight pass through. It is something you can observe; you know that it has been imposed on them. So your negotiating power is holding them true to the bid that you agreed when you made them preferred bidder and that tends to be tied down pretty tightly.
Q478 Chairman: In your experience, have you ever seen the price come down when these external factors vary?
Mr Davies: Interest rates falling, absolutely. Indexation of bids; sometimes the actual price we agree with a preferred bidder has an indexation to RPI or consumer index or whatever which can go in either direction. Yes, it can come down. Recently, because of what has happened in the price of funding, it has gone in the opposite direction because that has been pushing it from a funding point.
Mr Ewer: There have been examples in the past as well where the price has come down because a preferred bidder has been appointed, even though their price is unaffordable and then there has been what you call a value engineering exercise to descope the project post preferred bidder and if you take scope out the price does come down.
Q479 Baroness Hamwee: We have heard from a number of witnesses that innovation is a benefit of private finance projects. We have heard this afternoon that they are best suited to the sort of projects where there is experience and one knows what the project is about really. I do not know whether there is a conflict between those two and whether you can provide examples of significant innovation.
Mr Metter: I think that significant innovation, certainly at the practical level, is not apparent very much any more. This has to do with risk transfer issues because when projects and delivery become very innovative the price attached to that is often beyond the Government's affordability. When PFI started there was this innovation dimension to it, but it very quickly walked away. I am sure there is innovation down at very, very technical levels. There are hospitals where there are innovations on ward design but it is at a very, very detailed technical level. If you took people round and they were not experts in hospitals, they would not really notice that. Certainly the main innovation is the PFI process itself and its development and the financing and contractual nature that has been built up over the last 10 or 15 years.
Q480 Lord Tugendhat: PFI is obviously firmly established in relation to physical assets, though given the constraints which are clearly going to apply to public expenditure over the next few years, do you think there is any potential for extending this form of operation to the provision of different sorts of service, clinical or teaching to take two examples, or any others that might come to your mind?
Mr Metter: I think PFI is best suited to projects which require capital because there you get the benefit of the debt providers and the equity providers to create discipline on the contract, to make sure the contract works efficiently and that is what drives the efficiency. If one takes the capital away, for example in schools projects where it is just a refurbishment project and no new schools are built, or the moves for the NHS to put all the community workers in some kind of service company which the private sector then manages, I think those projects are more difficult. It depends whether you take the point that it is the finance which is providing the discipline on the contract, that is driving up the efficiency or whether without the finance you would still have the same ability from the various parties to drive the efficiencies. You could take the finance out and go back to traditional procurement and deal with the problems there where you have a public sector which is not really incentivised to drive efficiency. They might want to but actually when you get down to it, they are not personally incentivised to drive efficiency, particularly in the areas of procurement in the various departments. It has not previously attracted the best human resource. So you have this problem of how to drive the efficiency and PFI has enabled that driver to be taken out of the public sector into the private sector. If one does not take that point, then one can have service projects and the public sector can be the principal in the process.
Lord Forsyth of Drumlean: I resisted the temptation to respond to your opening remarks about how PFI had been identified with the Labour Government. I think it was actually started by us and one of the reasons that I was very enthusiastic about it, even though on my birthday I had to open the Skye bridge with 1,000 demonstrators led by Robbie the Pict, was that you could actually go beyond simply transferring financial risk and in the example you gave of prisons, although you could not ask the private sector to take the risk for how many people there were in prison, you might be able to take the risk on how many people were released from prison and did not come back and the whole business of rehabilitation in prison and the running of the Prison Service. Prisons are not just buildings with facilities, they are places where people go and hopefully they are rehabilitated and do not come back. Therefore you could transfer that risk in that way. Similarly with the Skye bridge, the contractor was taking the risk as to the volume of traffic which would go across that bridge. As it happened, the traffic volume went up enormously because it turned out that quite a lot of people were not actually paying for the ferry which had been the previous method of crossing the waterway. Are you not being a little unambitious? This was originally sold as an idea which would enable a real transfer of risk in the provision of services and facilities. It is not just about financing. If you make it just about financing, it is much more difficult to justify.