Q101 Greg Clark: Can I ask about the building costs inflation? If we turn to paragraph 2.21 of the Report, which is on page 17, we see that the construction costs inflation in public sector work has been much higher than the increase in general retail prices. Indeed, the RPI has increased by 18.5% and public sector construction has increased by 49.2% during the same period. Why is that?
Mr Coates: The note in figure 16 attributes this to high recent construction inflation costs caused by large purchase of materials from certain overseas countries and a large demand from government building projects.
Q102 Greg Clark: So there are two explanations for that. One is a general effect that one might expect to see in building costs generally, and that is reflected, I think, in the BMI index, which has increased by 22%, but we find that public sector, particularly PFI building projects, has increased by at least twice or building costs have increased in the country as a whole. You say that this is because of the increased demand for PFI; does that mean that there has been so much money chasing so little capacity that the government has been getting less and less value for money?
Mr Coates: As figure 16 points out, there is an element where the supply side or demand side has caused inflation.
Q103 Greg Clark: Can we just be clear on that point? The fact of PFI schemes has itself caused the cost for these schemes to rise?
Mr Coates: No, I think the note says general government contracts, not PFI contracts; it is saying that there has been an increase in demand from the government in terms of building contracts and that has had an impact on the indices.
Q104 Greg Clark: If we look at PFI projects in particular-and in this one in particular-there has been an increase of well above the general public sector increase; why is that the case?
Mr Coates: We have been looking at these indices and why they are changing as part of our analysis of the Report by the NAO and what we have concluded is that the BMI index is a maintenance index and therefore inappropriate when looking at major construction projects. The MIPS index is an index of public sector building projects. It is derived from DTI-based data but it is specific to the NHS; but it excludes PFI contracts. So the MIPS data is one of general traditional building contract prices.
Q105 Greg Clark: Do you expect to find that PFI contracts have been increasing more or less than MIPS?
Mr Coates: A good question. We then turned to the Royal Institute of Chartered Surveyors and looked at their indices and this showed that their BCIS index, which is the general tender price index for all contracts, including PFI, public sector, et cetera, have risen in line with the MIPS. Theirs have gone up by 41% and MIPS have gone up by 49%.
Q106 Greg Clark: So in general it is the case that where the government is spending the money inflation for building is high; where it is the private sector, spending the money not for government contracts, then it is much lower?
Mr Coates: No. The BCIS index includes all contracts, including PFI contracts, for the governments.
Q107 Greg Clark: I am not worried about that; I am comparing that to the BMI index, the general construction.
Mr Coates: The BMI index is one of maintenance.
Q108 Greg Clark: What is the relevant comparator for private sector construction costs that have nothing to do with taking money from the government?
Mr Coates: We believe that MIPS or BCIS is relevant in terms of PFI.
Q109 Greg Clark: So MIPS or?
Mr Coates: Or BCIS index, the RICS index that I just talked about a minute ago.
Q110 Greg Clark: But that includes government projects, you said?
Mr Coates: It includes all projects.