Q51 Dr Pugh: What I am interested in is whether there will be provision for market testing that element of the PFI, because you can imagine that schools start off in a situation they are comfortable with and then they get told five or six years down the line, "I am sorry, it is time for an upgrade and you must have product X or supplier Y," and they cannot get out of it because there is no provision in the contract for benchmarking or market testing or outsourcing or any other alternative. Please assure me that is not the case.
Mr Stewart: That is not the case. To the extent that there is technology refresh it would be certainly one of those services which is benchmarked but, as I said, I think there is a very low educational software element.
Q52 Dr Pugh: In terms of soft service PFI provision of that, what is the average length of contract we are talking about for cleaning or catering, or whatever? What do schools and hospitals and so on sign up for, on average?
Mr Stewart: It is five to seven years.
Q53 Dr Pugh: And when they come to negotiate it, and I think it is specified in the NAO document, they are not in such a strong position, are they, because I think on page 12 of the Report on benchmarking it says that Nabarro looked at the robustness of the contracts and concluded that most of the benchmarking clauses and half of the market testing clauses were expected to have limited effectiveness . Why is that and what are we doing about it?
Mr Kingman: We agree that this is not a desirable situation that is described here. It is important to note that these were early contracts being looked at, and the NAO note in their Report that the quality of the contracts has improved since then, which is obviously important. I think it is important to bear in mind that whilst these contracts clearly were not as good as they could have been, in practice where authorities have had these contracts they have found ways to negotiate with contractors, and there is one such situation described in the Report.
Q54 Dr Pugh: If I were in a very weak legal position and I was going back to the contractor saying, "It is getting rather costly now or the amount you are demanding is more than we can afford," as seems to be happening in some places in hospitals and schools, I would imagine that I would be dependent upon a fairly compliant supplier who needed further business and needed to remain fairly amenable, but if I came across a supplier who wanted his pound of flesh it would seem fairly evident that unless the legal contracts are really robust he would get it, would he not?
Mr Kingman: I am not in any way defending contracts that are anything other than completely robust and I agree with the NAO that it is not desirable that Nabarro think these contracts were not tight enough.
Q55 Dr Pugh: One sign this was going on to a greater or lesser extent would be if a negotiation resulted in the person negotiating on behalf of the hospital or school realising that their position is weak, realising they have not got the money to pay the extra, realising they are in a fix, what they normally do is reduce the spec and they would actually ask for a little less from the contractor. Do you monitor that happening in PFIs? Have you got any figures on how many negotiations result in the person being provided with the service simply asking for less?
Mr Kingman: We certainly do monitor all PFI projects and indeed we publish data on them and I am going to ask James to say something about that in a moment. I just want to say there are case studies where bodies have had contracts that were not sufficiently tight but they nevertheless have managed to negotiate quite good arrangements. I am told there is the case of Victoria Dock Primary School which put in place an agreed profit-sharing scheme with the private sector that allowed them to take a share of the gains going forward.
Q56 Dr Pugh: Forgive me, I am sure there are anecdotes good and bad. What I really wanted to know is whether you could spot a general trend and one indicator that things were going really badly for people being provided with soft services under PFI would be a general trend to ask for a lesser spec as a way of getting by.
Mr Kingman: I do not think there is any general trend, partly because there have been so few of these benchmarking/market testing projects so far at the stage we are at in the programme.
Q57 Dr Pugh: You could not furnish any data on that now?
Mr Stewart: On benchmarking specifically, a typical benchmarking clause might say if the increase in the cost was beyond a certain figure then you have to go to market testing, so that is one of the protections that is built in the model. On the data front what we have been asked to do, as I said, is collect data. So far we have been to 43 project managers, which covers around 55 projects which we consider to be pilots, so the data is being collected, and one of the things we have held back on is going out to any more authorities because we wanted to actually have this hearing because we thought we might learn some thing from this hearing and that you might want some extra data, so following this hearing and following the consequences of this hearing we are proposing to roll out the collection of that data right across the programme.
Q58 Dr Pugh: Thank you but I do not think we do need more data! The NAO Report implies that the PFI solution is the preferred solution of Government policy and it says on page 7: "We are not, however, aware of any systematic overall comparison to date between the cost and quality experiences of facilities services procured under the PFI with conventional outsourcing"-a head-to-head comparison in other words. Have you go any evidence that PFI is a better way of doing things?
Mr Kingman: No, we actually take a rather careful position on this. There are situations where there is a case for using PFI for soft services but the Government is rather carefully neutral on this point, and indeed the documents that we published argue that our studies of the evidence suggest that PFI is neither preferable nor inferior to conventional outsourcing, and that is the evidence that we have had to date.
Q59 Dr Pugh: Okay, one thing you could have said and you have not said is that by having a PFI with an element of benchmarking you get a reduced price in terms of the initial bid that is accepted, but the NAO Report says that having benchmarking in the contract does not seem to afford much comfort to the supplier and does not reduce the overall contract price. You presumably agree with that?
Mr Kingman: We certainly agree that benchmarking is in general the less effective way of doing things and that is why we favour market testing as a better approach.
Q60 Dr Pugh: Does market testing make any difference to the bids coming in? If I have to sign up to a contract I am a supplier and it had a very robust market testing clause in it, that might make me have second thoughts and might make me put my initial price up rather than down.
Mr Kingman: Let me give you some figures on that. We are aware of 13 market tests that have taken place to date from our database and, of those, 46% of the incumbents have lost.