112. Mr Busby, it is a strange set up, is it not? We go through all this system and I bet you must wish for the bad old days or the good old days again. When we were building hospitals in the good old days, we would start off with a price of £200 million to build a hospital in two years.
(Mr Busby) Yes.
113. Then by some miracle we would find things go wrong or things not up to standard, we suddenly found the floor was not good enough, we would call the architect and say: "That ward there would look much better if the floor was wood or the doors would look much better in glass and if they had gold handles on it would be much better, you know". The architect was trying to keep costs down because he was paid a percentage of the final price. He would say "Oh, no, all right" and we would get this extension and it would take three years to build and cost £300 million and you use the three years and the £300 million and then suddenly you got cut back to produce this building in two years for £200 million. Do you not rue the day anybody thought of this scheme? Yes, is the answer.
(Mr Busby) It was a considerable shock to the industry when the scheme was initially suggested by Government. The industry struggled significantly with the additional risks that they were asked to take on board as a result of PFI but there is no doubt that the good old days-as you describe them-did a number of things. It certainly in the main, if you use hospitals as the example, did not provide value for money to the public sector, of that I am absolutely convinced.
114. It was awful.
(Mr Busby) It was awful, yes.
115. They were all part of the same gang.
(Mr Busby) The returns that the contractors get, I am fascinated by some of the comments that have been made around the construction industry shafting the public sector. The reality is that my industry probably makes a return on average of about two per cent of turnover, that is the return that we as an industry on average will get. My company has been very proud to announce for the first time it has managed to get one per cent profit margin on its turnover. There are industries which I know contract to the public sector, Mr Gershon, where margins of, let us say, ten per cent are thought to be more appropriate. That does not happen in this industry.
116. IT Companies are 15 and 20 per cent.
(Mr Busby) Fine, yes.
117. Construction is quite well known and recognised. Schedules and rates, for example, you can work these things up reasonably simply and easily. Here is the old building, you have a chance to maintain it, taken over a 30 year lifespan where you have a responsibility -
(Mr Busby) Absolutely.
118. You have to make sure it is built right to start with.
(Mr Busby) Absolutely so.
119. I am surprised you find it amazing you have to take wards out. You have to take wards out to paint them.
(Mr Busby) Yes.
120. To put new windows in to them, new lighting systems in, ten years you have to refurbish the ward as you go through the hospital. This is a normal maintenance programme.
(Mr Busby) That is the point I was trying to make but clearly failed. As far as I am concerned if you, for example, do not paint a ward every, say, two years, I do not quite know when but say every six years, I think that is wholly unacceptable to the patients. Are we going to paint the ward whilst they are in it? Is the ward available during the process? If it is not then it is right that the deductions should be made for non availability. I think that is healthy.
121. When you set out these schemes, if you stay on this theme of hospitals for the moment.
(Mr Busby) Yes, I am happy to talk about hospitals.
122. If you sat down and wanted a good deal, and the good deal was "We can build this, not with the 15,000 changes which we used to do to push the revenue over a three year period, but we can build with 15,000 changes over a two year period and then maintain it" if you sat down with an open book and said "This is what I am going to do. This is what it will cost me. This is how it will turn out", then we had a contract where if things did go wrong, through no fault of anybody's, you could not predict the risk, there was some variation of contract to take this into consideration and if it cost more the contract could be altered and if it cost less it would go down. Did you ever approach this sort of stance?
(Mr Busby) There is a considerable number within here who do operate on an open book basis, not the hospitals, I would suggest, but other parts, other types of PFI would come into that category. The way it is set up is that we have to assess risk on day one of the contract. If we get that wrong, and we often do, then we end up paying for it. That is part of this process. That is why I said when the idea was first promulgated the industry really did take two steps back and worried considerably about whether it was in a position to cope with these risks.
123. I have not seen any figures on this. If I was going to try and defend PFI and say "Under the old system this hospital has cost £300 million, it came in a year late, there was a 30 year maintenance contract on it. I had to pay £300 million or X million at a discount of six per cent. This has now cost us £200 for 30 years", it would not make a hell of a lump sum difference as to why we should not go into a PFI contract or not, let alone transfer risk. I have never seen the figures. Have you worked on these figures?
(Mr Busby) They exist.
124. They exist?
(Mr Busby) I am sure they do.
125. Can I ask the Treasury, do these figures exist?
(Mr Glicksman) I think the bit of the Treasury which would see them would be more likely to be the Office of Government Commerce, which is a part of the Treasury.
126. Mr Gershon, do you have the figures?
(Mr Gershon) We have the public sector comparator. You talked about the maintenance, what the contractor is obligated to provide is a service environment in which he has to do maintenance.
127. Of course.
(Mr Gershon) He is contracted to provide service levels. He has to make decisions then about the maintenance, and the frequency of it, and that can influence his decision about what equipment he has. He may spend a lot more money to buy equipment that needs much less maintenance.
128. I accept all this. I went through all this with Mr Busby just now. I said do we ever do the comparators, the figures, as to why PFI is a good deal?
(Mr Gershon) In every PFI decision there is a comparison made as part of the process, not exclusively but as part of the process of the determination of value for money over the life of the project there is comparison made with the public sector comparator.
129. Why do we not get them? Do we have to ask about them?
(Mr Gershon) In some cases in the NAO report the NAO has commented on the comparison between the chosen alternative and the public sector comparator.
(Sir John Bourn) Yes. We have produced reports on particular projects and one of the items included in those reports is exactly that kind of information, yes.
130. Let us move on. Mr Busby, it said 20 authorities thought there would be no innovation, according to the contract, and 30 per cent said no innovation afterwards. Is there anything in PFI which stops the private sector from innovating? Can you think of any illustration?
(Mr Busby) Inevitably if you are defining a level of service it imposes restrictions on you so I suppose I have to answer yes to that. I feel the environment that it creates is far more conducive to innovation and cost savings and sharing than any other process that, certainly, I have been involved with in the past.
131. You do not agree with the 30 per cent who feel there had been no innovation at all during the PFI system?
(Mr Busby) If you look at the contractor's view of innovation it is a much higher percentage, I think, if I am on the same paragraph as you.
132. Yes.
(Mr Busby) I think that is encouraging because there is clearly an attitude prevailing within the contracting side to innovate. I think this is still a learning process for everybody and the fact that there is quite a high proportion within the public sector which believe that innovation is there on the agenda every day is heartening. I am sure if you ask the question again in 12 months' time you will end up with a higher percentage than you presently have, it will evolve.
133. This is a perception which is different from the contractor.
actually.
134. It is bound to be. I have seen the statistic, which might be amusing, today somebody told me that 38 per cent of women have sex every day but only 26 per cent of men do. I cannot work out where the difference is. The perception between contractor and supplier would be different. Maybe it is a matter of time, maybe more openness.
(Mr Busby) There is no doubt that there is considerable innovation in the early stages of PFI.
135. Yes.
(Mr Busby) If you take the prison process, for example, prisons historically were built in situ, on site, concrete, each one bespoke. Now, to be quick about it, it is like lego. These things are produced in a factory, they come on site and are slotted together. I am simplifying it too much but that is it.
136. They should be.
(Mr Busby) Absolutely. That came out of PFI. The consequence of that is lower construction costs, shorter construction periods. I am told by my prisoner friends that they would much prefer one of those prisons than the traditional form.
137. What about the amount of damage in prisons?
(Mr Busby) That is why they are made out of pre-cast concrete. You have to be quite determined to damage a prison.
138. There is still an appalling level of repairs and maintenance in prisons.
(Mr Busby) Mostly on the older ones, I think, the brick built ones, Victorian design, for example, but inevitably there is, that is the inmates, I think. I hope it is the inmates anyway.
139. When you have these different schemes bolted together and we get some good ones and some more difficult ones, either way we are going to fail on some of them.
(Mr Busby) That is true.
140. Where are we passing the good ones on? Where is the source? Where is the centre? Is that Mr Gershon's remit? Do you pass on the good news and say "This is a good scheme. It is a good PFI. This is how it is set up. This is how it is run. These are the check points to abide by"?
(Mr Gershon) Yes. Part of the Gateway Review process is to get a much sharper insight on to where we see good things happening where we can encourage other clients to replicate them.
141. You use this term "encourage". Why do we not insist they pass through the process, the procedure, before they are allowed to PFI?
(Mr Gershon) I am probably going to get this wrong in constitutional terms, still as a relatively lay person. At the end of the day accountability for what goes on within a department rests with the individual Accounting Officer. He is the ultimate authority. He is accountable to you and to Parliament for the decisions that he makes. Now, with the Gateway Review process, my experience has been because of where we have deliberately focused the attention on the early life of projects where there is the greater scope for management to take corrective action, the accounting officers are paying a lot of attention to the recommendations that are emerging because much to my surprise most of them do not seem to like coming here defending what has gone wrong in the past. They seem to welcome the recommendations that we are providing to them to help try to get projects on to much stronger foundations in the future.
142. I think we try to be as helpful as we possibly can. One of the things I try and do is to explain that. When a person comes here as an accounting officer and says "I have put a PFI through the system. I took no advice. I did not put it through the guidelines.", they can expect to get roasted. You can take that message back. I am surprised as a Government we have not stopped them from going ahead with any scheme unless it is given clearance and they have gone through a set procedure, understood what the risks are and how to overcome the possibility of a risk. You say it is left to each individual authority or each individual accounting officer?
(Mr Gershon) It is still very early days yet. It can only have real benefit on projects which are still very much in their gestation period. With the Gateway Review, my experience has been that the Accounting Officers respond to the recommendations very positively.
143. If I can go on, very quickly. I think you did answer this. I noticed declining enthusiasm for PFI but I thought as the projects become less appropriate with PFI, as the risk was much more difficult to transfer, you said "Yes, there were one or two which now we have scrutinised we have decided to pull back from because there was recognition that you cannot transfer risk."
(Mr Gershon) Mr Ryan said that in a number of NHS hospital projects the client felt that there was better value for money to be obtained by going down a non PFI route than a PFI route. Therefore he went down the route which provided better value for money.
144. Mr Busby, quickly. How do we stop-this is almost impossible-the contracting team from your particular company or any other company having stitched up a deal, a very good deal, then moving off to stitch up another one? How do we ensure the contractor leaves his team in place for the duration of the contract?
(Mr Busby) I had a slightly different view to what was expressed with regard to this continuity because on my side of the business the skills needed to put the deal together are very different skills from those that are needed during the progression of the contract. Yes, there will be undoubtedly in any organisation some links but fundamentally the people that are building the hospital, for example, are not the same ones who will negotiate the contract to build it. This requirement for continuity from our side of the fence is somewhat different.
145. And impossible to maintain?
(Mr Busby) Always. If we felt that we would like to do that then I am afraid the market forces would obviously prevent us from achieving it, I suspect.
Mr Jenkins: Thank you very much.