Q151MrWilliams: That is what the value for money budget is for. That is what we gave it to you for and that is why we increased it from 50 Reports a year to 60 Reports a year. Why do we not have a value for money assessment in relation to this project?
Mr Burr: We do identify a number of the risks so in that sense it is a value for money Report, for example, the fact that there was no provision for sharing in refinancing gains and that clearly prejudiced value for money.
Q152 Mr Williams: But you were not able to conclude whether it was or was not value for money?
Mr Burr: I think it is always difficult to do that with a deal of this kind because you are comparing it with something that did not happen and therefore it is difficult to quantify precisely.
Mr Finlay: Can I add to that. This particular Report developed out a piece of correspondence raised with us by an MP focusing on specific aspects relating to the refinancing, so it did not start out as a complete examination of all aspects of this deal. It focused on the specific issues which were raised with us. Having completed that piece of work we felt this was a Report which should be presented to Parliament, but it started out as a piece of work answering particular questions which were posed to us.
Q153 Mr Williams: Mr Forden, you were not there at the time and I know it happened before you were in office, but do you think in hindsight it was very clever to modify a contract part way through because our experience has been that modifying contracts in the middle of the contract means that you are over a barrel and you virtually have to take whatever terms you are offered?
Mr Forden: I am a great believer in future-proofing especially buildings because it is so difficult to change them later and it is always much more expensive than if you did it in the first instance. Saying that, the trust did take advice from the advisers to demonstrate that had the trust actually built the building the way it finally ended up, it would have been in line with the original financing. The additional construction costs were not so different from the original deal that we actually lost out.
Q154 Mr Williams: I know we came across a case that looked appalling in Northern Ireland where a new hospital was built and as soon as it was built the X-ray department was demolished and a new X-ray department was constructed. We came here as a Committee (although not this particular membership) ready to chase them round the room for doing anything so absurd and they were able to demonstrate to us that it was cheaper to complete the existing contract and then negotiate in a completely free position for subsequent contracts. Is there anything to suggest, despite what you have just said, that you might have got a better deal if you had done that?
Mr Forden: No, if you actually visit the hospital, the way the extension has been done is very much an integrated part of the whole building. It is not a separate building that has been built. It is part of the whole infrastructure of the unit. My personal belief is that was the right thing to do at the time which was to build it as it was needed for the demand then and the demand as is now.
Q155 Mr Williams: This contract has been an absolute cash machine as far as Barclays, 3i Laing and Innisfree are concerned. The trouble is it is a cash machine where they have drawn out someone else's money. Have they been eager participants, can I ask the Department, in subsequent contracts?
Mr Coates: 3i are not as far I am aware bidding for any other PFI contracts at present. All the other investors are still active in the PFI market.
Q156 Mr Williams: Thank you. This was an early contract and we recognise that there is a degree of testing the water and so on in the early phase, and this was accepted by us when PFI first came before us, but looking at this particular project, as it was one of the early ones, what are the key lessons you think the Department has learned from it and how far have they applied those lessons to future contracts?
Mr Coates: I think for this particular contract what being Head of the Private Finance Unit in the Department I felt I learned is that perhaps we could be more pushy on the private sector and try and push them along more quickly in what they are trying to do and try and make them be less lawyer and bank driven than they are at present.
Q157 Mr Williams: That answer rather worries me because it sounds rather like an off-the-top-of-my-head, what-the-hell-do-I-say-now reply than an example of systematic analysis of something that was a bit of a financial debacle. Did you analyse what had happened, what had gone wrong, and what could be done differently?
Mr Coates: This particular contract in terms of outcomes is a fairly good example of a hospital building contract. It has won awards for design and in our view in terms of does it deliver a good product and a good-quality product it does do so.
Q158 Mr Williams: Why has the Department stuck on the 30-70 formula? When I first started raising questions about refinancing I put a question down to every department and the NAO then on the basis of all the answers I received produced a Report on refinancing. Why have you stuck on the 30-70? Why have you not pushed for 50-50 because it is still a good deal as far as the contractor is concerned?
Mr Coates: As I said, at the time the code was being applied to this contract, it had not stuck.
Q159 Mr Williams: I understand that was the case then but you are still applying 30-70 now.
Mr Coates: Only to contracts that have been signed already. New contracts are 50-50.
Q160 Mr Williams: They are 50-50? Since when?
Mr Coates: Since the code was produced.
Chairman: I think there are a few supplementaries from Mr Bacon.