Q500 Chairman: Mr Houten, Mr Coates, Mr Thompson, Ms Mingay, welcome. Thank you for coming along. We are very grateful to you for giving us your time. Would any of you like to say anything by way of introduction, or shall we move straight into questions?
Mr Coates: Straight into questions, please.
Q501 Chairman: It has been suggested to us that until about 2002 PFI was often seen as something of a wheeze to get round Treasury rules which restrained spending on infrastructure. Do you agree that that was so? Has the perception changed?
Mr Coates: From a Department of Health perspective it would be difficult not to say there was some element of truth in that, because the Minister of State at the time was on record several times as saying it is the "only game in town" as far as NHS PFI was concerned. From my personal view, I do not think that is particularly unhelpful, because along with a new initiative was a lack of clarity about how to deliver it, and by focusing it on accounting, balance sheets and such like it gave some kind of framework to discussions about what a contract would look like, because the objective was to transfer, you might say, risk across to the private sector. That has changed. It changed over time, and quite quickly in the NHS, from a helpful wheeze to a helpful delivery system and the number of schemes we pushed forward I thought demonstrated that the NHS had got more comfortable with delivering PFI than it did through public capital.
Q502 Chairman: You are all nodding at that.
Ms Mingay: I would like to say something different. From Transport's perspective it has never been the reason for going ahead. If you slice the data between before 2002 and 2009, it does not tell you that story particularly. We had around 50% of projects in financial close before March 2002 which were on balance sheet compared to about 20 in the later period. That is by number of projects. If you do it by value of projects, it is more like 50:50. The reason for the shift in our numbers is due to the type of projects that we were doing. In the early days, we were doing more Highways Agency DBFO (design, build, finance and operate) type PFIs, whereas now we are doing a much wider range, including a number of street lighting and highways maintenance deals. The shift for us has changed the number of on/offs but it has always been driven by value for money.
Q503 Chairman: Do you all think that PFIs have improved outcomes as well as getting things done?
Mr Houten: From an education perspective it certainly has. Although clearly with a school there are a lot of things that go into delivering the outcomes, from the leadership to the teaching and learning within the school, if you look at any of the studies that we have done about what children think about their school after it has been rebuilt under PFI and the impact that has on things like a reduction in the bullying that happens in schools, because we design out the spaces where bullying can happen and put in good lighting, we certainly think the investment that we have been able to make through PFI-and when we talk to heads about it they are certainly clear about it-has helped them or improved the outcomes of the schools.
Mr Thompson: The question of outcomes for Defence is quite a difficult question, but it has certainly improved outputs. The National Audit Office Report in 2008 demonstrated that it has certainly improved performance, so there is plenty of evidence to that effect, yes.
Q504 Lord MacGregor of Pulham Market: Mr Houten, on the point you made, is that because it was a new school, a new building, and therefore was much more attractive to teach in and to avoid bullying and so on? Or are there particular things linked to PFI that brought it about?
Mr Houten: It is broadly about the fact that it is a new school, but the fact that we have been able to make so many investments through PFI has spread that benefit across a wide number of schools. We are approaching now 1,000 schools that will have benefited from PFI funding over the past dozen years, so we have been able to spread those benefits much more widely.
Q505 Lord MacGregor of Pulham Market: It has been the fact that it is a new school, rather than something intrinsic in PFI which produces other benefits.
Mr Houten: Interestingly, although I am slightly dubious about the study myself, there is a piece of work that KPMG or one of the consultant firms1 did that looked at the difference between PFI schools and other new build schools that showed some effect from PFI but I struggle to understand precisely what the dynamic is there. In theory, as long as the school is rebuilt well and you do all the right kinds of things, like engaging the head and the teachers in the process, and the pupils in the process, then whether it is through PFI or another route should not really change the nature of the outcomes.
Q506 Lord Eatwell: Still on the overall effect of PFI projects, do you think the introduction of PFI has increased aggregate investment? Or has the old aggregate level stayed about the same and simply the composition has changed?
Mr Thompson: It is quite difficult to answer your question because we do not have a counterfactual position for if there was not a PFI. Our annual spend on the acquisition of assets is around £7.5 billion a year. Over the last 10 years we have gained control of £9 billion worth of assets through PFI, so the question is: Would we have gained control of those assets if there was not PFI? It is quite difficult to answer that. We would say, however, that we think the 54 deals that we have done have brought some additional value and we would argue it is over and above what we would otherwise have spent through more traditional means.
Ms Mingay: From my perspective I would have to deflect that question to Treasury, who I think you are seeing next month. The reason is because for our local authority PFI projects we have a separate budget called PFI Credits, so whether you are spending through conventional procurement or PFI these are things that are ultimately allocated through the spending process.
Mr Coates: From the health perspective, my personal opinion is that it has brought additional investment that would not have been achieved in the same timeframe. In 2000 the Government announced the intention to build 100 new major hospitals by 2010. Unless we had a mechanism to empower the NHS to decide on its own programme and its own affordability, we would have got mired into the central bureaucracy of public capital and discussing those with Treasury. By empowering the local NHS, we have ended up with 110 major PFI schemes in build or operation, and my personal view is that we would never have achieved with public capital alone.
Q507 Lord Lipsey: Traditional procurement got a pretty bad press, which is why PFI came about in the first place-or one of the reasons. Do you think those doing traditional procurement-and there is plenty of it still going on-have learned the lessons from PFI or is it still very much as it was before PFI came along?
Mr Coates: We do consider the transfer of certain aspects of PFI into public procurement. In the Department of Health we have a programme called Procure 21 which is around trying to bring partnership working and better design into hospitals. We do have a healthy public capital programme. We have 29 operational large public capital schemes in the NHS, so it is not all one-way traffic. There are things we can transfer from PFI and do.
Ms Mingay: From my perspective, I think we have learned things from capital procurement, particularly on the larger projects such as Crossrail, where the assessment of project risks has become much more developed. We have thought a lot more about the risk, where we can transfer the risk to the private sector but, also, on the retained risks, of which there are many, how we manage and mitigate those in the public sector, and, in addition, a lot of quantified risk assessment before final decisions were taken on a willingness to proceed. In that sense we have learned a lot, but we still think that by tying the success of a project to the contractor's financial risks, the thorough assessment of risks you get is very strong and powerful and you also get that whole life approach which means the risk analysis is continued over the long term. It is not to say that we have not learned things through conventional procurement and transferred them across, but the power of the PFI and the due diligence you get through that is very strong.
Mr Houten: In education our model now is that we tend to have a mixed economy, in that each local authority will procure some through PFI and some through design and build, so both processes are working together alongside each other. You can very much look across from one to the other and make sure that where they need common things there are common things in the processes. The trouble is, as Kate says, you can transfer the risk of construction but you cannot transfer the long-term risks of running the school.
Mr Thompson: We have a standard methodology to evaluate all procurements, but that was developed through PFI. We learned, if you like, the lessons in PFI procurements in terms of risk transfer and due diligence and all of that. Then in 2007 we adopted that as a standard methodology for all. Yes, we have certainly learned from the PFI experience.
Q508 Baroness Hamwee: This goes back, to some extent, to the start of the questions. I almost feel I ought to wash my mouth out after I have made this suggestion, but would it be a good idea to broaden the performance indicators for PFI projects to outcomes? Perhaps Mr Houten would have a go at this first. Could payments be made dependent on pupils' performance in PFI schools? Perhaps I will wrap up with that the performance of staff, and whether frontline staff are more effective in private financed projects. You mentioned designing out areas which might lend themselves to unobserved bullying, but what about staff performance?
Mr Houten: On your first point, clearly we wanted to hold the contractor accountable for as wide a range of things as possible within their gift to influence. But I think it would be rather difficult in the context of a school to ask the organisation running the building to take a risk on what the workforce delivered within that school. I think that would be rather difficult. Through Building Schools for the Future and through the vehicle that is called the Local Education Partnership, which includes the contractor and the local authority, in which we take a stake through the BSFI, we have a wider range of performance indicators for the local education partnership which do look at things like the outcomes for the children. In terms of the exclusivity that the contractor has for 10 years, the performance against those KPIs can impact on whether or not they retain that exclusivity over time.
Ms Mingay: I would give two examples from the transport sector where we try to identify the specific output that the service provider can control, which contributes to the outcome we are looking for rather than making them responsible for the general outcome themselves. One is in local authority highways maintenance PFI, where one of the things we are looking for is a reduction in traffic accidents. The output that we are looking for to contribute to this outcome is requiring skid resistance levels on road surfaces to be improved and maintained to specific levels. That is something that we can measure, and that contributes to the outcome of lower road accidents rather than them being exposed to outcomes themselves which may or may not be a function of things they can control. Another is a joint PFI we are doing with the MoD on search and rescue of helicopters, where it is all about saving the lives of people out at sea and in trouble. The service provided delivers outputs like "helicopter availability" or "air crews trained to required standards" or "response times go get airborne" and these kinds of things, rather than how many lives they saved, when the number of the locations of the incidents or the particular circumstances again may be out of their control. We find doing it that way works very well.
Q509 Lord Forsyth of Drumlean: You require them to put particular skid resistant surfaces on the roads, so someone in the department decides that that is the way to reduce the accidents on the roads.
Ms Mingay: It is not the only thing but it is one of the things which they can contribute, yes.
Q510 Lord Forsyth of Drumlean: Why not make the broad objective of reducing the number of accidents and relate that to the projects, so they decide whether the answer is skid resistant surfaces or a particular configuration of the road or a particular design of the road? Surely that would represent less opportunity for making the wrong decision as to what would be effective at the centre and the cost and the risk would be borne by the private sector. Is that not one of the whole points of PFI?
Ms Mingay: If you are building a new road, I would agree. On a highways maintenance contract, where you are effectively inheriting an existing area with existing roads, you are inheriting the configurations as they are and so I do not think they have the influence to control all those things without spending a lot of money, which is not conceived of that. On a new road, that might be more possible.
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1 Note by witness: The study was in fact undertaken by KPMG.