Q121 Mr Bacon: We are all familiar with 15 year olds hacking into the National Security Agency computer in America, have you had problems with hacking?
Dr Pepper: No.
Chairman: I think we should not get into any close detail on this point, I do not think it is particularly relevant.
Q122 Mr Bacon: In that case, could I ask about the PFI and public sector comparator. When you said 24% for the risk factor, I was surprised because the Home Office, which we looked at only a week or two ago, was 9% and MoD was 16% from memory. The NAO tell me that the Treasury has done a study, or rather it got Mott MacDonald to do a study, on a wide range of procurements and, indeed, 24% is the accurate figure. Is it possible that you can let us have a copy of the Mott MacDonald report?4
Mr Glicksman: It is actually on our website. I have offered Mr Trickett that.5
Q123 Mr Bacon: I would like it as part of the evidence, if we could. The second thing is on page 25, this risk adjustment of 156 million, basic 600, 24%, could we have a breakdown of that? Is it possible that if you study page 24 of the NAO Report on the MoD building, which gives a quite easy to follow guide to the way the risk adjustment process is calculated rather than just a bald figure, we could have it shown in more detail?
Dr Pepper: Yes. I have to say it will not have as many lines on it as the MoD page you are talking about because that analysis was about the refurbishment of an existing building, so there were quite a lot of individual risks that did not arise in this case. I do not know whether we did the risk adjustment at a detailed level, I suspect we did it simply by applying the 24% factor to the total cost. I am very happy to go away and see what we can provide.6
Q124 Mr Bacon: You raise an interesting point because when I talked to a local builder about the cost of doing up a barn as opposed to building a new house, he told me 60 quid per square foot to build a new house and 80 quid to do up a barn. You have got the barn, it is there, but it is actually more expensive to adjust something, and, therefore, although you would expect that big project to cost more, it is a higher risk than, say, to use your words, a new greenfield site. Why is your risk factor eight or nine percentage points higher than the MoD?
Dr Pepper: I cannot comment on a comparison with the MoD, all I can say is the risk factor that we used was taken from Treasury guidance on construction costs for new buildings.
Q125 Mr Bacon: Do you agree with the National Audit Office that the public sector comparator is pseudo-scientific mumbo-jumbo?
Sir David Omand: I think the way I would put it is there are two tests that have to be passed when you look at a project like this and when you are talking of a public sector comparator. One is that if you are trying to do approximately the same thing, one by the PFI route, the other by the publicly financed route, can you demonstrate the PFI route represents better value for money. The second test which applied here, and after 1999 was really the crucial test, was if you take into account the cost of technical transition and you compare, on the one hand, PFI with full technical transition costs and, on the other, what would have been the alternative to the public sector had the PFI not gone ahead, can you still demonstrate that the PFI route represents value for money. This project passed both of those tests.
Q126 Mr Bacon: In paragraph 5.19 this range of 221 million enables you to demonstrate anything you like, that is the point. In 5.20 it talks about the discount rate which, again, reduced the difference to 20 million. What I am interested in is this: you have got this risk factor of 24%, which I must admit is the highest I have seen, but I take it that the Mott MacDonald report is correct, and if that is right why do you assume the public sector is not capable of improvement? Classically the reason these public sector projects go wrong is because the client cannot decide what it wants and gets taken to the cleaners by the contractors, but in a PFI the contractor is in control of the design and once it is set in stone, that is that. Why can the public sector not learn from experience and why can it not replicate that model? Why can it not hire a few extra chartered quantity surveyors and start reducing those costs? Why do you not run some building procurements like this in parallel, run the projects in parallel, so you can see down the road which is proving to be better value for money?
Sir David Omand: I have no doubt that the Treasury will be doing comparisons between those projects that are publicly run and other PFIs so that these figures can be updated. Like you, I would hope that the public sector is capable of rather better performance than the historic figures show. The reason for doing sensitivity analysis is to try and bring out which of these factors are likely to swing the figures one way or the other. If you take into account the full range of factors, including technical transition, you come out with a range where at one end perhaps you can get figures, as we discussed earlier, which are about the same between the PSC and the PFI, but at the other end are at least £200 million more.
Q127 Mr Bacon: Can you just clarify something. This £221 million gap in the PSC, does that include that technical transition?
Dr Pepper: Yes, it does.
Sir David Omand: An assumption was made about technical transition in the two cases and, of course, the amounts of technical transition are different in the two cases.
Q128 Mr Bacon: They were wildly out in any case, 40 to 400, were they not?
Dr Pepper: This was long past the 400.
Sir David Omand: This was long past the 308 million.
Q129 Mr Bacon: My original question was why can the public sector not learn from experience? Why does it have to be 24%? Why can the public sector not reduce those risks by managing the process better, by learning what it is the private sector does, namely sort the design and stick with it? Why do the public sector not try and do that?
Mr Glicksman: Chairman, would it be more appropriate if I answered that question, which I think is more one for the Treasury than for Sir David Omand. The Committee will know from hearings with Mr Gershon that the Office of Government Commerce does have a variety of initiatives in hand to try and improve the public sector's performance in traditional procurement contracts. Simply because the Committee has a series of PFI reports coming before it, it should not get the impression that PFI is the only route by which the government procures capital projects. PFI, to my recollection, represents something like 10 to 15% of the government's capital procurement programme. There are a large number of traditional procurement projects going on within government. It may be that we will, in due course, update our analysis of the way in which government departments manage these large projects. Meanwhile, I think it would be irresponsible of a department to go into a traditional procurement project and assume that they could overturn the history of many, many years of cost and time overruns on traditional procurement projects, I think we have to be realistic about that.
Q130 Mr Bacon: It is not exactly ambitious, is it, assuming that you are going to fail before you start so you do not even try?
Mr Glicksman: It is simply looking at the historical record. I think we have to be realistic. It would be unrealistic to assume that they were not going to suffer similar problems in the future. As I say, 24% is actually the lower end of the range. Even assuming 24% is assuming a better outcome than has been achieved for the majority of public sector procurements.
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4 http://www.hm-treasury.gov.uk/mediastore/otherfiles/greenbk_mottsrep02.pdf;Ev 18
6 EV 19-20