31. You say they were not fooled but something went wrong clearly. You think that what happened was that the authorities made a mistake, they misunderstood what they were letting themselves in for?
(Mr Gershon) Or there was lack of mutual understanding about what was really required.
32. It does not seem to me that it matters much whether the contractors understood or not. The point is that the authorities thought they were getting a good deal; now they do not. It may still be satisfactory but it is certainly a worse deal than they thought they were getting.
(Mr Gershon) Yes.
33. Either they were being deliberately fooled or they made a mistake and misunderstood what they were doing.
(Mr Gershon) Or potentially they selected the wrong partner.
34. In that case they made a mistake. Selecting the wrong partner seems to me to be a clear case of making a mistake.
(Mr Gershon) Yes. What do you do then to try to make the relationship work? In one instance in which I had some personal involvement helping the parties come to a revised arrangement to put the relationship on a stronger footing was the PFI contract for the Armed Forces Personnel Administration Agency where, after the contract was awarded, the relationship went through a bad period and it was necessary to reconstruct it to get to a point where the client now believes that it has the potential to start to deliver value for money. If you look at the NAO report it also illustrates RAF Mail which went from excellent to marginal but also records somewhere else in the report that the relationship has been redefined and the early signs following that reconstruction are encouraging.
35. Let me pass on from that if I may and say that if we again compare figure 1 to figure 36 the apparently successful outcome of PFI in the NAO view seems to depend very heavily on figure 1. In other words, as Mr Williams was saying earlier, you seem content with what is happening because most people seem to think it has gone well but this is after all a fairly subjective view of what was happening.
(Mr Gershon) I was careful not to express contentment in the answer I gave to the Chairman's questions, Mr Rendel.
36. You indeed said there was no cause for complacency. Nevertheless it seems that your general view is that on the whole most people feel that these arrangements have been at least satisfactory and yet within one year of their start in 23 per cent of cases the perception of how good the value for money is has deteriorated within the first year.
(Mr Gershon) I am slightly confused by this reference to the one year. I recognise the 23 per cent but I do not recognise the one year.
37. I think somewhere in here we were told that most of the ones that are being looked at had been in operation for about a year.
(Mr Finlay) The contracts had been let for at least a year, so some contracts had been operating for a year, some two years, some three years.
(Mr Gershon) For example, one of the projects here, which happens to be in my direct area of responsibility, was let in 1996. It was four years.
38. The point I am making is not whether it was one year, two years or three years but they are still on the whole, because PFI is a fairly new business, at the early end of their existence. Some of them may be halfway through by now. They have been three years of a six-year contract but a lot of them will be a lot longer than that. Some of them, as we know, go right up to 30 years and are right at the beginning of their term. That being the case, and given that apparently the estimation of value for money is falling away, are you confident that at the end of these contracts we will still have more than 50 per cent in the satisfactory or better area?
(Mr Gershon) As I said, we are taking a number of measures to strengthen client capability. If you take these 100 projects what could be done to improve value for money would be in the areas of looking at the skills involved with people in managing the contract, the partnering, the strength-
39. Excuse me, Mr Gershon, I do not think you are answering my question. What I want to know is, if you look at figure 1 and you take figure 1, not just at the contract letting which is the light blue and concurrent which is the dark blue, but if you were to take all these at the end of the contract time, would you get a graph which still showed more than 50 per cent in the first three blocks?
(Mr Gershon) My belief is yes.
40. How much more than 50 per cent? At present you are at something like 80 per cent; is that right? Somewhere in here I think I saw a figure of that sort.
(Mr Gershon) I am clear what number we should aim for.
41. That is not the point. What are you getting?
(Mr Gershon) What is my belief?
42. Yes.
(Mr Gershon) How many would be better than satisfactory?
43. Yes, satisfactory or better by the end of the contract. How many of the authorities will still think that these were good value for money contracts when they come to their final year?
(Mr Gershon) At least the same number who think they are satisfactory or better today.
44. Really?
(Mr Gershon) Yes.
45. Although it seems to be falling, and yet you are saying that from now on it is not going to fall any further at all?
(Mr Gershon) First you asked me a question about what would happen at the end of the contract, and that was the question I answered. As I said, I think we are taking a number of measures that will help clients' capability to manage these contracts and strengthen the ability to derive value for money from them.
46. I hope you are right. Probably neither of us will be here in the year when these contracts end.
(Mr Gershon) I sincerely hope that at periodic intervals the NAO will do similar reviews to this so that we are all able to monitor what is happening and the effectiveness of the management actions that are being taken.
47. It will be very interesting to see how this graph changes over the years, and no doubt the NAO will wish to reproduce this graph as years go by. Mr Busby, may I ask you a question? Twenty five of the firms concerned have had deductions made as a result of failure to fulfil the contract terms totally.2 Are you not a bit worried about the figure? It seems to be quite a lot. Presumably if they were, as one hoped they all were, tendering for the minimum price which would nevertheless give them a reasonable return on the amount of capital employed and the workforce employed, and 25 of them have actually not got that price because they have had deductions made as a result of failing to fulfil the contract, is that not rather bad news for the contractors?
(Mr Busby) It certainly puts pressure on contractors. If I can use the example of the hospital, the contractors will get paid for two things in hospitals on the service side. One is the provision of the service and the other is the availability of the service. For example, if a ward is taken out for maintenance the authority involved would be entitled to make a deduction for that particular non-availability and would in fact do so. It is that area where I believe the deductions have been made. I do not think it is a fundamental assessment of the performance under the contract. It is a process within it that allows for deductions to happen in those terms.
48. So you are saying that this is not a case in which they are making less of a profit than they thought they were going to make?
(Mr Busby) It could easily be that, yes. I would expect the deduction to reduce their profit undoubtedly.
49. I may want to come back to that later because it was not quite how I understood it. Mr Gershon, are you aware of any cases in which deductions could have been made but were not?
(Mr Gershon) I personally am not aware of any such cases.
50. Can I ask you now about the timescale for putting these contracts into place? It seems to me from experience, particularly in my own constituency, that very often putting a PFI contract into place takes a hell of a lot longer than going down a straightforward paid-for-by-the-government-out-of-public-funds type of contract. Is that correct, in your experience?
(Mr Gershon) Yes, I think that is a fair top level statement to make.
51. In that case what notice is taken of that when you are deciding to go one way or the other, because clearly if we are talking about providing public services, if you can provide a public service perhaps at a slightly greater price now or at a slightly lower price in five years' time and add on the extra time taken to set up the contract, is notice taken of that in making the decision as to whether you go one way or the other?
(Mr Gershon) Yes, but offsetting those delays is the better performance that we are seeing of the private sector in PFI contracts bringing the assets in on or ahead of the schedule demanded by the contract compared to what we regrettably have seen too often in the past, that through traditional procurement the assets come late, sometimes many months, sometimes years and years later than the original plan. Therefore, although yes, you may get additional time at the beginning, you have to look at what happens overall in the life of the project.
52. We are looking surely at value for money in both cases. If you have a straightforward contract and it comes in late, then presumably you have got something in the contract that says you get some money back or the price is lower.
(Mr Gershon) I am sorry, that is not always the case. In traditional procurement methods often the cost of the overrun fell to the public sector, both the direct cost and the consequential cost.
53. There is no reason for that, is there, if you write the contract properly?
(Mr Gershon) But historically most public sector contracting was not done on a prime contracting basis. It was done using more traditional procurement methods where the client in effect acted as his own prime contractor.
54. What you seem to be saying is that if you go for a traditional procurement method but you introduce into your contract some sort of penalty clause then that is very often going to be better value for money than going for a PFI scheme?
(Mr Gershon) No, I am not saying that at all, because there is a cost to the public sector of the asset coming in late in terms of delayed services. The point you make about the additional time is absolutely right. We are in discussion at the moment with the industry association of which Colin is the Chairman, where they have drawn to our attention a number of areas where the time that was being taken is a matter of concern to them and I am in dialogue with a number of the departments to understand what is driving these excessive timescales which are giving rise to additional cost for the private sector and the public sector to see what we can do to shorten the timescales in PFI contracting. It is not a given. There is no fundamental law of nature that says it should take as long as it does for some of these contracts to get awarded.
55. But it has done up to now.
(Mr Gershon) It has done up to now and it is a matter that I am paying attention to.
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