Q51 Jon Trickett: Maybe, but later in Appendix 4 you will find that that is not an accurate statement that you have just made. I just want to establish this. After you have added £156 million for the public sector comparator, if you had adopted the current discount rate, even with that £156 million added, we would then have been within £20 million of a PFI bid. It is a very narrow fraction of money.
Dr Pepper: That is true, but may I comment please? The model that you are comparing with there is what we concluded at the time was the most likely thing that the Government would have instructed us to do had we not been able to go in for PFI.
Q52 Jon Trickett: The Treasury seems to me to be a co-conspirator if they are saying you should add 24% to a bid and also to be arguing for 6% discount. Anybody knows that the market was operating at much less than 6% at that time.
Dr Pepper: There is a point which I need to make, which is that although this was adopted this time as the PSC in the sense that it was the most likely alternative had we not gone ahead, this model would simply have refurbished on a rolling basis over many years our existing accommodation. It would not have bought the new single building and it would not have delivered any of the benefits. Yes, it is possible, by pushing some of these factors to the margin, to produce a situation in which the PSC and the PFI cost more or less the same, but the benefits that would have come from the PSC would have been minuscule compared to those with the PFI, so in value for money terms the case for proceeding with the PFI was absolutely overwhelming.
Q53 Jon Trickett: I think there is an ideological predisposition to go in for the PFI which often beggars statistics. I want to go to Appendix 4. Under the paragraph headed "Services", which goes on to a separate column, it argues that if the cost estimates had been stepped as the private sector, as I understand it, had stepped them, that would have saved a further £49 million to the public sector comparator figure. Am I understanding that sentence right?
Dr Pepper: What that paragraph is trying to say is that we had to build into the PSC some assumption about what the costs would have been to have replaced various plant and so on during the life of the building. There are various ways in which you could profile that. One approach is simply to put 7% uniform across the lifetime. Another is an attempt to model precisely how you would have done it. Clearly, different models come out with a range of answers. I think what that is trying to explain is that under different assumptions your PSC will go up or down by this sum of money.
Q54 Jon Trickett: Fifty million pounds is a huge amount of money to buy a lot of spooks. At a time of the war against terrorism we could do with a few more than we have got. I want to try to understand this a bit further. As I read the document, what I think were called UPs (unitary payments) were stepped up?
Dr Pepper: Yes.
Q55 Jon Trickett: And yet, whoever was calculating the public sector comparator, you and your fellow conspirators in the Treasury decided to calculate the public sector comparator financing figure in a way which was prejudicial to the public sector comparator. That is how I read this sentence because you were assuming a different way of paying for it than the private sector was using, and this has made £50 million worth of difference.
Dr Pepper: The use of the UPs as a stepped model, and I have been looking at them in the last few days, is an odd thing to have done. The point about stepping the UP is that after 10 years we will exercise an option to take out of the contract some of the services being delivered and buy them completely separately. It is not obvious that that is particularly closely connected to the lifecycle replacement cost. This was just one model that was adopted in testing the sensitivities.
Q56 Jon Trickett: I can only go on the sentences which you have put. You are the co-author, Dr Pepper. What it says is that if the lifecycle costs estimate were stepped to match the profile of the unitary payments, ie, if the public sector comparator-this is my interpretation now-had utilised the same mechanisms as the private sector, it would have saved £50 million on the public sector comparator. There is no other way of interpreting that sentence, is there, whatever gloss you want to put on it? That is what the sentence says.
Dr Pepper: It is saying that, in order to test the sensitivity, if you adopt a different model other than a flat lifecycle replacement, and this is one possible model you could adopt, you get that reduction.
Q57 Jon Trickett: I think you are agreeing with me but I want to look at it in another way. If there is £50 million there, a further £50 million under paragraph 5.20, and I have not referred to paragraph 5.19 which shows that even with the figures which were adopted to get the public sector comparator figure higher, the lower end of the public sector comparator was less than the private sector. We have already got over £100 million disregarding paragraph 5.19, and a further £156 million in 5.16. It strikes me that all round it is £250 million which was loaded on to the public sector comparator which was not added to the private sector comparator because it was constructed in a different way. Is it not reasonable to read this document to say that you cannot demonstrate that you have got value for money, whatever gloss you want to put on it?
Dr Pepper: No, I do not think it is reasonable to read it that way. If you take the risk factor I would suggest that it is absolutely sensible to include a risk factor because that 24% comes from the history of public sector-
Jon Trickett: That is because you as civil servants have lost confidence in the capacity of the public service to deliver.
Q58 Mr Allan: Could you repeat that last bit of your answer about the history of-?
Dr Pepper: Actual public sector constructions. That 24% is based upon the history of the way public sector constructions have tended to go. They normally come out with quite a wide range of cost overrun. To have ignored that I suggest would be to give a misleading impression of what a public sector comparator costs.
Q59 Jon Trickett: Time is up. I will certainly look at the Treasury website which I was not aware of. I do not wish to fight with you personally at all, but it does strike me that that sentence you just used illustrates precisely what I have been saying for some time, which is that the public sector has lost its self-confidence, at least in relation to these kinds of projects, in that there is an ideological predisposition now to go to PFI whether or not the figures stack up. I feel, and certainly it has been confirmed by the C&AG, that the risk factors added time and again to public sector comparators-well, every single time that the C&AG is aware of-have actually made the difference between the public sector winning and losing a PFI. I will leave my questioning there.
Sir David Omand: May I just add one comment, Chairman, so that the committee is in no doubt that the processes which were used throughout the assessment of the public sector comparator were done according to the best practice that could be found? There may well be different views as to whether that is genuinely the best practice but it is the practice that was followed and was done with complete integrity, so there can be no question of anything being fiddled.
Jon Trickett: I am not suggesting that in any way. I am just suggesting that there is an ideological predisposition, probably in the Treasury, to PFI, for whatever reason, and the figures time and again, Chairman, as we have seen, have been used in a particular way which has produced a particular result. It is hardly surprising if you believe in PFI that the figures produce the kind of evidence which is coming out time and again.
Q60 Chairman: Do the Treasury want to comment on that before we end this questioning?
Mr Glicksman: I would simply say that the figures that we have produced are based, as Dr Pepper said, on a historical comparison of past projects.