158. You indicated unhappiness earlier on at getting a hard time on some points as though you wanted praise all the time. I see that you have a KCB and a CMG. You have had a fair bit of congratulation altogether. I am not sure whether that is a complete set or there are more to come if you do well?
(Sir Kevin Tebbit) I was not talking about me personally, I was talking about the project.
159. No, it was "I want a bit of a pat on the back". As you know, the role of the PAC is a concept with which the MOD might very well be familiar, which is to bayonet the wounded. We are here to pursue issues rather than simply hand out congratulations. I am sure you can understand why we are a trifle cynical when we discover that huge amounts of money have been spent, enormous investigations have been undertaken and it ends up that the private sector wins by £100,000. You can understand that looks a trifle suspicious at best, can you not?
(Sir Kevin Tebbit) Yes and I have just tried to explain throughout the hearing why that is unfounded.
160. Can you tell me whether or not the MOD, having gone through all this exercise and reached the final decision making day, have ever walked away from anything?
(Sir Kevin Tebbit) We do walk away from things, of course.
161. Can you tell me which PFI deals you walked away from?
(Sir Kevin Tebbit) This was the pathfinder, biggest PFI project we had. I am not aware of particular PFI deals which we walked away from. I have just been told that there is one called Project Waldorf.10
The Committee suspended from 17.50 to 18.00 for a division in the House.
162. May I return to the point about the anxiety many of us feel about the difference between the private sector build and the public sector comparator being only a handful of thousands? It just looks too good to be true, does it not?
(Sir Kevin Tebbit) It really is just that: it looks too close. May I come back very quickly with one or two simple points around that. This was a range, it is a benchmarking tool, it was never a real figure.
163. You agreed this Report.
(Sir Kevin Tebbit) Yes and I am not disagreeing and I am sure the NAO will bear this out. The competition was not actually between Modus and the public sector comparator, it was between a number of private sector companies and consortia who were vying with each other to provide and to win a competition.
164. There are two separate choke points then, are there not? There is a competition between the different contractors and Modus were successful there with a bid which was £44 million lower than their competitors and then later on it negotiated upward by some £37 million as a result of other things which were found.
(Sir Kevin Tebbit) All contractors would have found those costs.
165. The point was made that intrusive surveys could only be done when you had a single approved bidder. Why?
(Sir Kevin Tebbit) People were working in these buildings. The point here is that we were satisfied -
166. No, no, no. That is not the question I am asking you. I am asking specifically about intrusive surveys.
(Sir Kevin Tebbit) It costs money to do intrusive surveys. It cost the bidders lots of money to do intrusive surveys, so it adds to the costs.
167. Lots of money. After an intrusive survey £37 million of additional work was discovered.
(Sir Kevin Tebbit) Yes.
168. I should have thought that was fairly substantial. Do you not think that if competition is such a good thing, a bit of competition between the last two bidders about their bid before the intrusive surveys and after the intrusive surveys would have held the lid on the cost of work discovered after the intrusive survey?
(Sir Kevin Tebbit) These are perfectly normal techniques which would be true of a conventional procurement as well as a PFI. There is a hugely increased bid cost if you get both companies or consortia doing these surveys. There is also a great deal of dislocation to the building and disruption of work. It is perfectly normal to wait until you have a preferred bidder and then this is part of the process which goes between there and the final contract. The point I was making earlier was that I can demonstrate to you that those costs were absolutely genuine, were necessary and would have been found by any winning bidder at that stage. In other words it was not just Modus -
169. That is an interesting point. They would have been found by any bidder had they investigated. Presumably the advantage of competition is that it might have driven down the costs that the bidders estimated as being necessary to remedy that work. You must at one stage or another have taken your car along to a garage for a certain quote and suddenly found out later on that enormous costs were going to be incurred which they had never mentioned to you before.
(Sir Kevin Tebbit) In terms of meeting the specifications and in terms of cost, the lead this particular consortium had over the next one was sufficiently large for it still to be ahead anyway.
170. That is an interesting point. You are satisfied that you were still getting the cheapest bidder, but without competition for the additional work you cannot be satisfied that you were getting the cheapest possible bid.
(Sir Kevin Tebbit) I was still satisfied that we were getting value for money. The mathematics are very simple; they were £40-odd million lower.
171. Stop evading the questions I ask you. If I ask you a question about something, I prefer to have an answer to that question and not to a question I did not ask.
(Sir Kevin Tebbit) I am sorry, I did not answer your questions about my medals either. I shall try to remember that.
172. Now, now. No need to get upset. I did ask: how can you know that the additional £37 million was the keenest price available when nobody else was in a position to give a quote for that?
(Sir Kevin Tebbit) Because they claimed £60 million and we agreed to £37 million. In other words, we used an independent method of beating down the claim they put in and that is how we were satisfied that the £37 million was a fair and final figure.
173. How do you know that had there not been another bidder, that £37 million would not have been reduced further?
(Sir Kevin Tebbit) That is what we have our advisers for. That is why we have the technical team advising us.
174. Could you repeat that figure for me? The contractors were originally saying that the additional work cost how much?
(Sir Kevin Tebbit) Sixty million.
175. As soon as they discover that they are not under competitive pressures, their bids are overstated by quite a substantial amount. Do you understand why that gives me cause for some anxiety?
(Sir Kevin Tebbit) Not at all; it is perfectly normal to have non-competitive tendering in all sorts of areas and the way in which we make sure that value for money is achieved for the taxpayer is by having expert technical advisers who challenge those figures, which is what we did.
176. May I ask about the process of the final day, which is of some interest to all of us? Can you tell me whether or not at that stage the MOD had ever walked away from a PFI which had got to this stage, had got to the final day, or were you so locked in effectively, politically-with a small "p"-and everything else, that you tried to negotiate downwards but you were stuck with taking what was on offer?
(Sir Kevin Tebbit) No. The factual answer to your question is no, we have not walked away from a PFI on the last day like that. It is a bit of a tautologous thing because if it is the last day how do you know it is if you walk away from it? If you just walk away it would not have been the last day.
177. Yes, that is a good one. Have you ever walked away from anything? Can you tell me about a contract before that?
(Sir Kevin Tebbit) Yes, we often do. The point is we have -
178. How often? How often? How often?
(Sir Kevin Tebbit) Many times.
179. No; how many?
(Sir Kevin Tebbit) More times than I can possibly recount. The point is we have -
180. Could we have a note on that?
(Sir Kevin Tebbit) No -
181. What do you mean, "no"?
(Sir Kevin Tebbit) You must allow me to answer your question.
182. It is a fairly simple and straightforward question. I am seeking to clarify whether or not it was reasonable for the contractors to believe that there was a possibility of losing the arrangement by you finally saying that you were not accepting that and you were away.
(Sir Kevin Tebbit) Yes; indeed that is what they felt on that last day, that we would have walked away.
183. What evidence did they have for that on the basis of your past experience?
(Sir Kevin Tebbit) None. Our past experience which I was referring to was that we often fail to proceed with projects where our Investments Approval Board at an earlier stage says it is not worth doing it or we will not do it like this.
184. At an earlier stage.
(Sir Kevin Tebbit) Yes.
185. Once you had got to the stage we had reached here, there had never been an occasion when you actually said "No, I'm away".
(Sir Kevin Tebbit) We only conclude deals when they are value for money.
186. Yes; quite. May I turn to the point which was made earlier on about the contracting work? It seems to me, looking at this, that a lot of the contracting work has been done far better than it could have been done elsewhere. The difficulty I have is with the cost of providing the finance. I do not quite understand why it was that we were not able in some way to marry the undoubted construction and technical and management skills of the contractors with the lower cost of money from the public sector, which would have been available through the Public Works Loan Board.
(Sir Kevin Tebbit) This was the company borrowing money to build a building. They had to borrow the money at market rates rather than essentially at Treasury rates, the rate the Government can borrow at, because they were taking on risk. That is the reason for the difference. The taxpayer would otherwise be bearing the risk. If the taxpayer provided the money at the lowest possible rate, at gilt rates, that would mean that the taxpayer was bearing the risk of this project instead of the company bearing the risk.
187. May I just clarify that? I can see that if the taxpayer provides the money, the taxpayer is then running the risk of interest movements and so on, but they are not necessarily bearing the risk of construction or similar things.
(Sir Kevin Tebbit) The great virtue of this to me is that we make one unitary payment of £55 million. If there is cost overrun that is the contractor's problem. If they do not finish on time, that is the contractor's problem. If they do not deliver the services to us, we deduct penalties according to the formula in the Report.
188. Fine; I am happy with all that.
(Sir Kevin Tebbit) That is the risk they are taking in the market.
189. I understand that.
(Sir Kevin Tebbit) They also have an incentive to be efficient and to build the thing on time, which often does not happen through other procurement methods.
190. I understand. Mr Webber, may I clarify whether or not, instead of going to the market at 7.8%, you would have preferred to have had money in some way from the Public Works Loan Board or whatever money was available at that time? Which one would you have chosen?
(Mr Webber) We are getting to the root of PFI here and that is a question of whether you want us to raise the money and take the disciplines of private sector money and the way in which it manages contracts. In abstract, I suppose if we can borrow the cheapest amount of money available, then we would. But we are not a gilts quality borrower, so there is no way we could do so.
191. But the Government are.
(Mr Webber) Yes.
192. Had you produced a profile of your spending plans, produced in some way an indication of how much money you wanted and when and then presented that to the Treasury and the Treasury arranged the borrowing for you so that the construction side of things, which you seem to have handled very well, was separated from the financing side of things, where you seem to have overpaid, would that not have been the best of all possible worlds?
(Mr Webber) In arithmetic terms, yes, but it would have de-linked the sense of capital and ownership and proper risk and return from the transaction and ultimately that pushes you back to an older fashioned method of procurement which is the Government using its own resources to pay for these things and facing the direct risk of overruns or errors or whatever.
193. Surely you as a construction firm and other things must on occasions take contracts which are not just simply cost plus, where you bear some share of the risks.
(Mr Webber) I am not a contractor, I am in effect a financier. I am a financial shareholder of this business.
194. Maybe I should ask Mr Mitchell?
(Mr Webber) He is a member of the management appointed by the shareholders to do it, so I am the wrong person to ask.
195. Fair enough. You deal with the money and he deals with the hard questions.
(Mr Webber) I raise the money to invest in these projects and he looks after my interests and the customer service.
196. Having made Mr Webber and his colleagues redundant and you able to get the money necessary from somewhere else at a cheaper rate, would that necessarily have imperilled the commercial running, the efficient running, the managerial disciplines that you and your colleagues were operating here?
(Mr Mitchell) If one could have maintained the disciplines as are generated through the PFI process, then where the money came from as far as the contractor was concerned, does not make that much difference.
197. Speaking of yourself as the person who is responsible for this, could you just clarify for me what difference it makes to your job on a day to day basis whether or not you have the discipline of having raised private money as distinct from having money at a much cheaper rate from the public sector.
(Mr Mitchell) The source of money makes no difference to what I do every day.
198. That is what I thought. Does it make any difference to what you do over a longer period, over the period of this whole contract?
(Mr Mitchell) Provided the same discipline is attached to both sets of money, it makes no difference.
199. So there was a way of financing this project which would have been a substantial saving to the public sector had the Treasury allowed it.
(Mr Mitchell) If the Treasury had allowed it, but I cannot -
200. Indeed you cannot. I think my point is made.
(Mr Webber) The Treasury would have to employ a lot of people to apply those disciplines to that pot of money.
(Sir Kevin Tebbit) The other way of putting it is: would the taxpayer be happy if there were cost overruns, in other words if those risks were borne by the taxpayer, just to fork out the extra money? That is the real issue.
201. I must confess I do not see that as being the alternative. It is not beyond the wit of our officers to devise a contract which means that the building risks, the construction risks continue to fall on the contractor and that the financing risks are borne in a different way.
(Mr Glicksman) We would not permit an arrangement whereby the Government, whether through the Department or through the Treasury or any other means, lent money to a private sector firm at the same rate of interest that the Government was able to borrow at. The Government are able to borrow at that rate of interest because it is a risk free loan as far as the people lending money are concerned. Government will not default on that loan. When people are lending to this company, they are charging a higher rate of interest because there is a risk associated with it and the risk is that the company will not be able to repay that loan. If the Government lent money to that company, then we would have to lend at a rate which also took account of the fact that the company may not be able to repay the loan because they may fall flat on their face in doing the construction work.
202. With respect, that is a statement of the Treasury view. It is up to politicians to decide whether or not that remains the Treasury view, is it not really?
(Mr Glicksman) It would not be value for money to the taxpayer to lend -
203. It is a political decision, is it not really, for us to take?
(Mr Glicksman) It is a value for money decision and one has to assess the likely cost to the taxpayer in the light of the returns.
204. May I turn to the point about the 4,000 or so civil servants whom you require to be in London? I understand the point about the need to be near to Downing Street and the need to be serving the Chiefs of staff and so on. What independent assessment has been made of the need for there to be as many as 4,000?
(Sir Kevin Tebbit) It is 4,300 total; one quarter of those will be military Officers and three quarters civil servants. It is an integrated headquarters. The judgements about how many we need in Head Office are taken ultimately by me, using my management and organisation teams, looking at how we deliver outputs, how we run ourselves. We have been coming down pretty swiftly from a much higher figure.
205. You have PricewaterhouseCoopers and other accountants and advisers. Has anybody else externally ever examined the conclusions you have come to?
(Sir Kevin Tebbit) We do all the time look at our numbers and our processes. We usually do it in terms of outputs; 4,300 is an input figure and is not the best way of measuring it.
206. I asked whether anyone external had looked at this.
(Sir Kevin Tebbit) Yes. We have used and I have used over the last four years a number of different consultants and advisers in reprocessing various bits of the organisation, McKinsey for example when we were sorting out some of this.
207. Has anybody looked at the whole thing?
(Sir Kevin Tebbit) No, because that would not be an appropriate way of looking at it.
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10 Note by witness: MOD would not normally walk away from any PFI once a project had achieved Initial Gate approval in the evaluation and approval process. As far as we are aware, MOD has withdrawn from one PFI competition after reaching the preferred bidder stage and this related to a recent project-Project Waldorf-for the provision of Service Family Quarters in Northern Ireland.