Q521 Baroness Kingsmill: Do you think that is the same with health?
Mr Coates: We have to work within the rules set by our minister of the government of the day, but you can look elsewhere in the world and say have other governments adopted different models of assets and broader structure provision that do allow for the provision of services in the control of operational staff? Countries such as Portugal do operate a different model and do so apparently successfully. There is always a but in this. My view on the but is that PFI is not a great vehicle for using to add on bolt-on services that are complex and changing all the time. They tend to be long-term contracts around certain outcomes: that the building does not fall down and that the roof stays on and that the windows do not leak or let in draughts. You have to look at a different form of contract if you are going to say you want to provide service and service outcomes. We use, for example, a joint venture for the provision of finance and accounting services, which are part of the core functions of a hospital but nevertheless we do outsource all that but through a different contracting mechanism.
Q522 Baroness Kingsmill: I do not want to push you on this one, but why could you not have a PFI for the provision of hip replacements in a particular area, for example.
Mr Coates: We do. We do have that and it is called the Independent Sector Treatment Centre, a programme which essentially outsources the provision of clinical services to private sector providers. That is a very successful and well-known programme. We do it in certain areas within certain constraints.
Q523 Baroness Kingsmill: I am sorry, nobody has really answered the question yet. What are those constraints?
Mr Coates: Those policies are set by ministers. Particularly in health there was a publication which essentially said that anybody who was covered by a Royal College of some form would not be subject to PFI contracting.
Q524 Baroness Kingsmill: So it is political rather than economical.
Mr Coates: From our department it is the ministerial guidance, yes.
Baroness Kingsmill: Thank you.
Q525 Lord Forsyth of Drumlean: Are there any examples of significant innovation arising from using PFI?
Mr Thompson: From our perspective we do not think there has been a tremendous amount of innovation through PFI. It has brought some industry standards to us but there is nothing particular about which I would want to say, "Yes, look at this. This is a fantastic innovation because of PFI," to be honest.
Mr Houten: I do not know whether you would call it tremendous innovation but I would point to interesting things that are happening through the incentives that PFI provides. For example, on sustainability in schools, given that the private sector has to manage the assets and live with it for 25 years and make sure that the profit flows then it gives incentives for the private sector to build in sustainability. I can think of a school in Nottingham where the local authority wants to be a zero carbon city, therefore it has insisted on zero carbon targets for its schools, and that encourages the private sector to think of creating ways of delivering that.
Mr Coates: We have a zero carbon LIFT contract with Newquay in Cornwall. I agree with the MoD that the structure of PFI tends to prevent real innovation.
Q526 Lord Forsyth of Drumlean: Forgive me, but that is not an example of innovation, that is just an example of applying conditions to the contract, is it not?
Mr Coates: Yes.
Q527 Lord Forsyth of Drumlean: Is this just the nature of the public sector? Are there any examples of innovation where contracts are procured conventionally?
Ms Mingay: My colleagues will talk about the work they are doing on managed motorways, where you effectively create your fifth lane by doing hard shoulder run-in with the use of gantries and technology rather than building the extra lane, would fall under that category. When we think about PFI we do not see it necessarily as a big area of innovation but more as a whole life costing, providing better focused planning and integration and that kind of thing. The example that I was going to provide on our side, which is a potential one, is in the area of street lighting, where the private sector providers are looking at the potential for use of a central management system, where effectively instead of having physical car-based spotters, they are looking to provide equipment to adjust lighting levels and report faults through a remote system. That kind of innovation is the sort of thing we are seeing.
Q528 Lord Forsyth of Drumlean: I cannot help thinking, going back over the answers of the last three questions, that if the PFI process is so circumscribed then it is no surprise that there is not any innovation. For example, this distinction that is being made between frontline services and core services, if we take education, which is probably the easiest one on which to focus, why could PFI not be about asking people to provide schools that achieve certain outcomes in terms of how many pupils leave able to read and write or how many pupils achieve certain things in the examinations? It seems to me to be focused on what size the windows are and what the building looked like and whether the building is going to fall down. Is there not scope to broaden it, and in so doing to get innovation which goes somewhat beyond the physical nature of the buildings or the precise nature of the surface on the road or whatever it is?
Mr Coates: From a health perspective we see PFI as part of an evolutionary process where you provide assets and services. I really would point to the LIFT structure we have, whereby a joint venture is between the private sector and public sector, in which both local authorities and health services are encouraged to take partnership, to design co-location of services, so that the public has one-stop shops to visit for health and social care and social services. There are now over 200 of these buildings operational across the country, where if you want to go into a library, you turn left for a dentist, turn right for a doctor and upstairs for social care. They are not unusual facilities. You say: Has PFI brought innovation? We should say: How can PFI evolve in a way that we can bring differences to bear on the way we provide services? I think LIFT is a very good example of that.
Mr Thompson: In the spirit that you are making your inquiry and in an area I would just do some speculating about, one of the issues is about the number of variables and the number of variables which are inside a particular third party's control or not. We have an outcome-based PFI which is about pilot training. There is a process but what we require are pilots who are fully trained to a certain standard. This for us is an interesting deal that we have tried to put together, but in terms of the conversations about: "Who is carrying what risks?" there are so many variables around how you get from place A to the outcomes, that you need to construct a deal in such a way that it fundamentally goes to the heart of whether somebody would want to do a deal in this way. It would be down to Peter to give you the answer about education, but my guess is that there are so many variables around it, could you construct a deal that would give you outcomes because of the tremendous number of variables?
Lord Forsyth of Drumlean: There are quite a lot of independent schools that do precisely that and make a deal with the people who pay twice, once in taxation and once in fees, are there not? I am sorry.
Q529 Lord Best: We have been struggling to find an objective basis for determining whether or when one might use PFI rather than traditional procurement processes. We are clear that that goes beyond just cost modelling tests and that all the other factors you have to take into account, but we soon get into subjective judgments about whether or not one or other is better. Do you think we are looking for a holy grail and wasting our time? Will we ever find a really objective basis for determining whether or when PFI might be better than traditional procurement? Mr Coates: We tend to agree with your analysis, in that, after a while, experience comes to bear and you know by experience what schemes will be suitable for PFI and what schemes will never be suitable. We know that infill schemes, trying to attach new assets on to existing assets, ones which require lots of maintenance, particularly of old buildings, are very, very difficult to undertake under PFI. Schemes that are not high in terms of value, the overheads there make PFI difficult to do. There is no hard and fast question to the answer, though.
Mr Thompson: In all our procurements, we are searching for value for money, affordability and delivery. If you focus on the third part of this, which is about delivery, then there is a huge range of non financial factors that we can bring to bear on making a decision. How fast, for example, could you receive the delivery of whatever it is that you are procuring? How confident are you in different sorts of methods of procurement to give you what you want? In some of the things that we do it is about availability of function or of service or of a piece of equipment and therefore you could say that there is something you could bring to bear that is not a financial issue, so there are some other criteria that you can bring to the decision-making process.
Q530 Chairman: Does it make any real sense to calculate a public sector comparator? Or is this just something that you go through as a matter of form?
Mr Thompson: It does for us because we have a range of different methods of procuring functions. We have PFI, we have traditional open market procurement where there is clearly competition, but we also have the fairly unique situation that some of the things that we require can really only be sourced from one particular supplier, and so doing a public sector comparator is definitely useful for us.