Q171 Helen Goodman: In response to Mr Bacon, Mr Coates, you just said that the impact of refinancing was to reduce the risk faced by the private sector. My understanding of the basic principles of the PFI framework is that it is about risk sharing between the public and the private sector. If the risk to the private sector has fallen should it not therefore be the case that the returns that they get should also fall?
Mr Coates: Ordinarily yes, but the risks still faced by the consortium are the same post and pre-refinancing.
Q172 Helen Goodman: Sorry, that is not what you said a minute ago so could you just elaborate on that?
Mr Coates: What I meant by saying that they are around the profits is that profits in the future are uncertain. You cannot be certain you will make those profits until they are crystallised. By taking a lump sum refinancing gain you bring forward those profits and you take them in advance. The overall basket of risks that the consortium manages post or pre-refinancing is the same.
Helen Goodman: I see, thank you very much.
Chairman: Mr Davidson?
Q173 Mr Davidson: Mr Coates, I wonder if I could just follow up the point you made earlier on about taking this thing in the round in terms of gains and losses and so on and so forth, this swings and roundabouts argument. Could you just clarify for us if not now later on some evidence that demonstrates that this 60% surplus that this contractor was getting is balanced by an equivalent amount of losses by participation in other things. I am very struck by the idea that now so much experience has been gained by PFIs that maybe the level of risk is substantially down and that not only should that affect the 18.7% or so surplus that is being built into this contract so that overall these rates should come down but so the 50% to the public sector should go up.
Mr Coates: The only examples I can give you where risks have materialised beyond the Laing one is Sir Robert McAlpine's have lost over £100 million on the Dudley PFI contract and there is a Report in the Construction News this week that a Japanese construction firm Kajima have lost £80 million on a PFI contracting in schools and they are pulling out of that market.
Q174 Mr Davidson: That is two then, is it?
Mr Coates: Those are the only two I have today.
Q175 Mr Davidson: How many PFIs are you aware of? There must be hundreds of them so two out of 100 or so is pretty-
Mr Coates: About 100, yes.
Q176 Mr Davidson: I want therefore to come back to this swings and roundabouts argument, separating the sheep from the goats (and I am never quite sure which one you are after) but the swings one, where they make inordinately high amounts of money, seems to be much greater than the roundabouts one, which is where they do badly. In those circumstances is it not fair for us to think that 18.7% is unduly high and 50% gains from refinancing is unduly low?
Mr Coates: Those are the only examples I have for you today of risks materialising and gain. I will have to come to you in a note about other examples of risk.
Mr Davidson: I would be very interested, Chairman, in getting something back about trying to balance this issue of swings and roundabouts or "in the round", or whatever other cliché we have, in order to demonstrate whether or not 18.7% and 60% are reasonable.8
Q177 Jon Trickett: On the building costs inflation, which actually was commented on by the consultants, I want to go back to Mr Coates. I think you gave us two figures, one was a 49% increase in costs for PFI schemes and then you quoted another index, either the RBI or the RICS index and that was 41%, but the 41% included the PFI schemes, so my understanding of maths is that if the PFI schemes are running at 49% and they are included in the lower figure, the RICS figure, that would have dragged the average up to a higher point and therefore one assumes that if you take the PFI schemes out of the industry-wide index that you just used, it would be much less than 41%, would it not, because the mathematics are such that it can be nothing else but that, therefore it is a false comparison, is it not?
Mr Coates: I am afraid I cannot that question.
Q178 Jon Trickett: You must understand the basic principles of maths just as I do and anybody else around this table. If you put a figure and it is 49% as part of an aggregate figure which is lower, we are talking about averages, it follows as night follows day that the 41% would be lower for the rest of the building sector outside of the PFI, does it not?
Mr Coates: What I said was that the mixed increase does not include PFI contracts. It does not include PFI contracts, it is just ordinary government building contracts and that is 49% of the relevant-
Q179 Jon Trickett: So it is even worse. Nevertheless, the government contracts are increasing by 49%. That is a rate of inflation of building costs?
Mr Coates: Yes.
Q180 Jon Trickett: The other index which you used which you said was broadly comparable was 41%?
Mr Coates: That is right.
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8 Ev 20-21