Q1 Chairman: Good afternoon. Welcome to the Public Accounts Committee. I should say that Kitty Ussher will not be joining us because she has been made a Parliamentary Private Secretary, so perhaps on behalf of the Members of the Committee I can send her our congratulations and warm good wishes. I would also like to thank the staff of the National Physical Laboratory for entertaining Mr Don Touhig and myself yesterday morning and for a very interesting visit which certainly brought the whole project alive. We were very impressed by the extraordinary calibre of the staff at the laboratory and the world quality work they are doing. It was fascinating. This afternoon's hearing is on The Termination of the PFI contract for the National Physical Laboratory. I would like to welcome back to our Committee Sir Brian Bender, who is the Permanent Secretary of the Department of Trade and Industry, Bill McNaught, who is Managing Director of Serco Investments Ltd, Adrian Ewer, who is Chief Executive of John Laing plc and Andy Briggs from Abbey National plc. Sir Brian, perhaps I could address my initial questions to you. Of course, if you want to refer your answer to anybody else you are free to do so. The first question is why did you give this contract to Laser when you had doubts about its ability to do this work, doubts which are well documented in the NAO Report?
Sir Brian Bender: Before I answer can I just introduce Mr Dawes whom I think you and Mr Touhig met yesterday and who has been Project Manager for this project for the last 11 years or so.
Q2 Chairman: Yes; he was very helpful in taking us round yesterday and we are very grateful.
Sir Brian Bender: There were two main reasons why we proceeded with Laser. The first is that in the case of the two companies who were the partners of Laser we had people who we believed had a track record. Laing had extensive experience of laboratory construction, the Central Science Laboratory, Glaxo Smith Klein and so on, and Serco themselves had experience in a different part of the company running the science facilities at NPL, so we believed that they were companies that had the expertise. Secondly, the doubts we had, that as you say are well documented in the Report, were at preferred bidder stage, but in the period between then and contract signature nearly a year later we and our advisers worked with Laser and their contractors to develop the detailed output specifications based on the performance of the existing laboratories; and by contract signature the designs that we had from Laser gave us reason, the Department felt at the time, to be confident.
Q3 Chairman: Do you think that Laing really had the financial capability to carry this through? Obviously, in retrospect, we know they did not.
Sir Brian Bender: We did due diligence at the time. They were a reputable company, and plainly what we did not know at the time was how much this project, and indeed the parallel difficulties they were in on the Welsh Millennium Stadium, would cause them difficulties. We had no reason at the time, as a result of the advice we had, either on technical or on financial grounds, to doubt their capability.
Q4 Chairman: Was the National Physical Laboratory really suitable for a PFI project?
Sir Brian Bender: We did some testing at the time and, of course, as the Committee will be well aware, this was one of the first PFI projects. It was a long time ago. The testing, the assessment, the advice we had at the time were that there was a case for it. The second point is that the alternative would have been piecemeal construction because the Department at the time would not have had the capital available to do a single new build like this. A piecemeal construction would have been more disruptive and we would not have ended up with a single new building of the type we sought.
Q5 Chairman: You see, I think that this is too complex. It is rather like very complex IT projects. It is too complex a project for PFI. We are talking about labs which are of an extraordinarily high specification and have to be very quiet and have very careful temperature control. The people who actually design these sorts of lab are the people who work in them. Maybe it would have been better if they had been much more closely involved in the traditional procurement mechanism and the design of this rather than putting it out to PFI. I am saying all this, perhaps you would say, with the benefit of hindsight, but we know that the National Physical Laboratory is at the absolute cutting edge of technology and surely somebody in the Department might have just questioned whether it was appropriate for PFI, which is fine for building a hospital or a school but not for this maybe.
Sir Brian Bender: If I may say so, you are using the benefit of hindsight and there are a number of lessons from this that you may want to ask about later on, but from looking at the papers myself I would make a number of points. First of all, the specifications were being met in the old buildings, strangely enough, and also, we believed, in the American National Institute of Standards and Technology. Secondly, as I say, having done the relevant market testing and having had the discussions with Laser along the way, we had no reason not to have confidence that it was possible. The third point I would make, that I referred to earlier, is that we have actually ended up with a single new build facility, albeit many years late, which, had we gone down the traditional route, we would not have had because we would not have had the capital available.
Q6 Chairman: We were very struck yesterday when we were told that the original laboratories-the National Physical Laboratory which was opened by George off in 1901, so it has been there a long time- worked extremely well because they were in a solid brick structure built on gravel, but this new build is a glass and steel lightweight structure near a main road and a bus station. You do not think that some of these brilliant minds might have made the connection?
Mr Dawes: There are a number of issues here. The first is that yes, the old buildings are good in some aspects. The solid brick structure, as you saw, does give you good vibration performance but there are severe difficulties, and again, as I think we saw, in getting good temperature control the solid structures have good passive control but they tend to drift and there is not the space to get the good environmental equipment in there.
Q7 Chairman: I do not deny that the old buildings are not perfect. It just seems that this is all fairly elementary, is it not, that a brick building built on gravel tends to be less prone to vibration than a glass and steel structure that is built next to a main road.
Mr Dawes: Yes, but I think the care that was taken with the structure again we saw with the offices surrounding the central labs. The central labs being on pile foundations and separated from the main structure are a modern equivalent of getting a solid brick structure. It performs to the output specification so I think it is a compromise. You either accept a solid structure with very limited ability to control temperature or you have a modern structure with deep piling and a protected environment but having the ability to get good temperature control as well.
Q8 Chairman: Sir Brian, why did it take you so long to terminate this contract that was stuttering along in its death throes for three years?
Sir Brian Bender: The short answer, which I will then, if I may, elaborate on, isthat wewere operating on the best advice we had from our legal and financial advisers. There were three points along the way when we considered initiating termination ourselves: in 2001 based on the performance of Laser, towards the end of that year on the signature of the supplemental deed, and in the middle of 2003 we considered terminating on the grounds of late delivery. On each occasion we received firm legal advice that it would be very risky for us to initiate termination on that basis, particularly while the company was still solvent and willing to continue. I would also assert that quite a lot happened in that period to enable us to have a building that by next March will be complete, so quite a lot of good things happened while this termination process, as you put it, was not happening. The company was carrying on doing its best, albeit with problems and with its own financial problems but had we terminated successfully, despite the legal advice, in 2001 I suspect we would not have been in asgood a position now with a nearly complete building.
Sir Brian Bender: The short answer, which I will then, if I may, elaborate on, isthat wewere operating on the best advice we had from our legal and financial advisers. There were three points along the way when we considered initiating termination ourselves: in 2001 based on the performance of Laser, towards the end of that year on the signature of the supplemental deed, and in the middle of 2003 we considered terminating on the grounds of late delivery. On each occasion we received firm legal advice that it would be very risky for us to initiate termination on that basis, particularly while the company was still solvent and willing to continue. I would also assert that quite a lot happened in that period to enable us to have a building that by next March will be complete, so quite a lot of good things happened while this termination process, as you put it, was not happening. The company was carrying on doing its best, albeit with problems and with its own financial problems but had we terminated successfully, despite the legal advice, in 2001 I suspect we would not have been in asgood a position now with a nearly complete building.
Q9 Chairman: If it is such a brilliant way of doing things why did John Laing get most of the money for half the job?
Sir Brian Bender: I assume you are asking about the point that is in paragraph 2.28 about progress on each phase.
Q10 Chairman: For instance, you agreed to terminate for a sum of £75 million. You had calculated that Laser's entitlement might be as little as £54 million.
Sir Brian Bender: The question of the termination sum isset outas clearly as Icould have done it myself from the NAO Report. We had a negotiating position. It was informed by the provisions governing contractor default. There was then a wide range of likely outcomes, £54 million to £93 million, and on some of those our assessment was that our justification was weak, so we then refined that (this is in Part 4) to a more realistic range of outcomes, £73 million to £86 million, and the conclusion was the £75 million. We feel the outcome was satisfactory and I am reassured that the NAO in paragraph 4.6 said it was near the lower boundary.