Q531 Chairman: I can see that from a defence point of view.
Mr Coates: It is a good discipline, particularly as you come to the end of a negotiation, where you can say, in effect, to the private sector, "We have priced out what it costs to do ourselves, and if you keep putting the price up it is no longer a viable proposition." It ends up being a useful lever mechanism to keep prices reasonable.
Q532 Chairman: It is a negotiating tool rather than a hurdle.
Mr Coates: I suspect we us it more as a negotiating tool, yes.
Ms Mingay: On the qualitative assessment, which we have got more robust with over time, it is ultimately an art rather than a science, where you draw upon your experience about what you have done elsewhere in other sectors and what has worked well or not; but it is still valuable in putting alongside the quantitative analysis to see whether on balance you think it is something that is worth doing. If you have not done the quantitative analysis, you will not know whether you can afford it or not or whether that is a better route to go along or not. I think you need to do both. They are not perfect but it is good guidance.
Q533 Chairman: Where PFI is the only show in town, as has sometimes been the case presumably, it is just a matter of form, is that right?
Mr Coates: It is a good discipline. There is a temptation, I suspect, to go out quickly and say, "Yes, I'll have a new hospital because there is a green light and the economy is good and the NHS balances are good," without clearly thinking through exactly what you require. The discipline of preparing a costed comparator is a good starting point for Trusts, to make them articulate exactly what they want and how they want it.
Q534 Lord MacGregor of Pulham Market: Some of our witnesses have argued that bundling of construction and long-term maintenance under PFI produces better quality infrastructure because the contractor has to live with the infrastructure over a long period of time. Others have told us of the benefits of the secondary market and the importance of a healthy secondary market in shares in PFI, not least because it widens the market for funding. Is there a possible conflict here, in that, if you emphasise the benefits of a secondary market and in a particular project the secondary market happens very quickly, you lose some of the benefits of the quality of maintenance over the long term?
Mr Coates: From our perspective there is no doubt that matched together those two things must produce a benefit to the end user of the asset. We are aware there are questions about the markets and the need to have a fluid market, but our perception is that was rather an early view of PFI, when there were different players in the market in the early days than there tend to be now. Our perspective is that there are more longer-term funds investing in PFI who see it as a long-term asset as opposed to a thing you can make a turn on, and therefore there is now getting a better match between long-term ownership and long-term viability. You also must remember that if there is a churning of the equity, there is still over 90% of the value of the contract in terms of banks and other investors, and there is always a performance regime in play within the contract. A very small deduction can make a significant impact on the profits of the organisations that run the contracts and can act as a very strong incentive even after several sales of the equity.
Q535 Lord MacGregor of Pulham Market: Are you saying that it was in some of the earlier contracts that they were passed on fairly quickly and you did not necessarily get the benefits long term, but that has been sorted out now?
Mr Coates: Different markets are playing in newer contracts, but once you have signed the original contract, then that equity has been passed on and that is history you cannot undo. My point is that it is not a significant issue because there are still many performance elements in the contract whereby somebody is on the rack for the money to be lost if they do not perform.
Q536 Chairman: Many of our witnesses have emphasised the benefits of whole life costing that arise from the bundling under PFI of build and service provision in the same contract. Other witnesses have told us that private finance is by its nature significantly more expensive than it would be if it had been public sector finance. Is it possible to achieve both; in other words, to have the benefits of whole life costing and the bundling on the one hand but not necessarily to have recourse to private debt- and I stress debt rather than equity. If so, how would that be done and what would the consequences be?
Ms Mingay: The advantage of private finance debt is that it does do that upfront due diligence on behalf of the lenders and the contractor is suitably incentivised to work through any problems and not walk away from their obligations through the life of their contract. Whilst in one sense you can go a long way to replicate the project scrutiny in the absence of private debt finance, we feel that the reduced through-life incentive is more difficult to replace. You can do some degree of ongoing incentive through performance bonds or guarantees, but these can be limited in financial extent and also not necessarily deal with contractor failure. In order to capture these whole life benefits, a project with private finance would need to create a substitute for this incentivisation. Whilst we have not had a lot of experience of that in transport, we would like to encourage efforts in this direction where possible.
Q537 Chairman: In a past guise I have been involved in projects which have been financed in part by the European Investment Bank, for example, and I have to say that the scrutiny that you got from the European Investment Bank and its due diligence was very strong. Is there not a possibility for having something else of that type?
Ms Mingay: I would classify the European Investment Bank as a lender of private finance, albeit that their ownership might be slightly different, but they act as a commercial lender effectively.
Q538 Chairman: Yes, it still does not quite get my point, that you can have a body of that sort which is capable of the same kind of scrutiny.
Ms Mingay: Yes.
Q539 Chairman: It is not beyond the bounds of possibility that a public sector body could have that kind of expertise, is it?
Ms Mingay: I think that is right. The debate is around whether people need money at risk to make that due diligence as effective as possible. When we bump along with problems, they get worked through, and people have the perseverance to work through them to make the project work rather than just handing the keys back.
Q540 Chairman: Of course you could have money at risk in the equity element of the financing, which is a significant part of a PFI deal, could you not?
Ms Mingay: Yes.