146. Mr Busby, the Kier Group that you are in charge of turns over one billion pounds a year.
(Mr Busby) Yes.
147. Can you tell me what proportion of that is PFI?
(Mr Busby) In turnover terms last year less than 50 million of it.
148. Is that all? Okay. So there is 50 million in turnover. I think you said you expected over two per cent return on turnover, that you were hoping to reduce it to one per cent. I hope the shareholders are not listening to that. Can I ask how your expected rate of return between PFI and non-PFI compares?
(Mr Busby) PFI returns, on the experience to date, are higher.
149. How much? What are the figures?
(Mr Busby) About 2.5 per cent, I would estimate.
150. On PFI?
(Mr Busby) On PFI.
151. What is your normal rate?
(Mr Busby) One per cent on other contracts.
152. Right.
(Mr Busby) But, if I could add to that?
153. No, do.
(Mr Busby) The risks involved in this process are significantly greater. For example, the contract that such a return made, because it is really largely one contract, required us to invest £4 million before we had a signed deal. Right up until a minute to midnight that deal could have aborted and we could have lost £4 million, and that is more than we made on the job.
154. You invested £4 million before signing a deal?
(Mr Busby) Yes.
155. In preparation with solicitors and all the rest of it to get the contract?
(Mr Busby) Yes.
156. For a contract of what value?
(Mr Busby) Just under 70 million.
157. Seventy million?
(Mr Busby) Yes.
158. I thought you said a moment ago your total turnover was only 50 million for all PFI projects.
(Mr Busby) Last year that 70 million contract was of two and a half years duration.
159. So what value of contracts have you established with PFI extending into the future if you brought all that cash flow together?
(Mr Busby) In contract terms I have not got that. Can I come back to you on that?
160. You are a fairly small player because we are looking at something like-
(Mr Busby) We have about half a dozen contracts under PFI.
161. In the generality of this report, on the 400 projects the Government do they have already committed £100 billion and you are a very, very small fraction of that, you are talking about millions of pounds, or are you into billions?
(Mr Busby) In total it would be 150 million-ish on construction work over the half a dozen that my group has.
162. It is small beer in the totality of things. Basically in ballpark terms, and I know from what you say this is being distorted by this one contract, you are looking at, say, 2.5 per cent return versus one per cent on normal activity, so two and a half times the level. You think that is a reflection of inherent risk, yes?
(Mr Busby) Yes, I do.
163. If there is inherent risk, risk goes both ways so you would expect in the wash that it comes out at the same level, one per cent, because you win some and you lose some.
(Mr Busby) No, I do not. I am not being asked to invest £4 million up front in any other part of my business.
164. Do you think 2.5 per cent return is normal or below average?
(Mr Busby) I am sorry?
165. Do you think 2.5 per cent return is normal or below average, because it seems a bit low from the figures I have heard before?
(Mr Busby) We are in a competitive marketplace. Every contract that we have been awarded under PFI has certainly been in competition and I would be surprised if our returns-
166. Have you lost a lot of bids?
(Mr Busby) Yes, of course.
167. Okay. You think it is rational from the point of view of your shareholders to put forward £4 million bidding for a contract, paying solicitors or whatever you did, for a £70 million contract?
(Mr Busby) There are times when we questioned it, but yes.
168. If you had not won the bid then that £4 million would have been lost money. Would that have been factored into other PFIs?
(Mr Busby) That is why I believe the returns that we are getting are fully justified. We have lost contracts.
169. In this example, what was it for incidentally?
(Mr Busby) A hospital.
170. Presumably there were competitors who also spent £4 million and did not get the deal, is that correct?
(Mr Busby) No, I think that is wrong. There could well be competitors who spent up to, say, £1 million.
171. £1 million?
(Mr Busby) We have certainly incurred £1 million of costs on a project that we have not got.
172. If you are running, as you are, a successful private sector enterprise then you need to stay in business. In the global analysis of PFIs, if each PFI is four companies bidding, for argument's sake, and they all put forward in this sort of contract between £1 million and £4 million up front for the bid then we are talking about a net loss in this sort of industrial system of three or four million through that competitive activity that you have to recover from prices if all these companies are to keep going. That is true, is it not?
(Mr Busby) Your numbers are not correct.
173. They were your numbers, with respect.
(Mr Busby) Taken out of context.
174. Let me give you it again then. You said in this example you put £4 million and other competitor companies were putting £1 million up front. Is that an abnormal situation, is that what you are saying? That was the situation because that was the evidence you have just given.
(Mr Busby) Yes, that was the situation, but you said that, in fact, there were typically four bidders, all four bidders would not be spending at least £1 million. There is a process here.
175. How many bidders would there be?
(Mr Busby) Typically four, but in the early days of getting down to the final two the costs are much lower.
176. Is there a sense in which some prospective competitors are actually excluded from the competitive process by the very high entry costs in terms of lawyers and all the rest of it?
(Mr Busby) Yes.
177. If I was running a company and knew that you were bidding and you were going to spend £4 million even though I could do a better contract, I would think, I would not be prepared to bet £4 million, I would go elsewhere.
(Mr Busby) Yes.
178. Could I ask Mr Gershon just on this narrow line really. You are in the midst of reviewing the rates of return for PFI deals, are you not, or rather your organisation? That is correct, is it not?
(Mr Gershon) We have commissioned a review, yes.
179. Tell me the spread of rates of return you are picking up?
(Mr Gershon) The review is under way, it has not concluded.
180. I know that but I asked you to give me an indication of the spread of return or do you have no information at all?
(Mr Gershon) We do not have that data, as yet.
181. You have begun that review but you have no information at all having begun the review, is that correct?
(Mr Gershon) I do not expect to have until the external reviewers are ready to report against their assignment.
182. Have you any idea, a rule of thumb, of the sort of rate of returns you would expect or have you simply no idea what the review will generate? You are a man of considerable business experience, I know that, so what is reasonable, do you think?
(Mr Gershon) I do not know what the review will highlight.
183. When you get the figures you will have no idea how to evaluate whether it is fair or not?
(Mr Gershon) I can only tell you from my own experience, which is largely not to do with PFI, what one might consider to be acceptable rates of return if you were looking at an investment.
184. Precisely. So what sort of rates would be reasonable for the private sector?
(Mr Gershon) If you were using the shareholders' own money as opposed to using debt, if you were using equity to find an investment, if it was an investment in a piece of capital not just in a contract, in terms of internal rates of return, post tax, in real terms, you would normally be looking at something in the range of somewhere between eight and 15 per cent.
185. So eight to 15 per cent. So Mr Kier is not doing very well for his shareholders, is he?
(Mr Gershon) No, what Mr Busby talked about-
186. Mr Busby, sorry.
(Mr Gershon)-was a margin which is looking at a profit to sales ratio, which is not the same as looking at the return on investment.
187. Fair enough. What is your return on investment actually, Mr Busby, so we are not talking apples and pears?
(Mr Busby) The targets within PFI, and I think that is the relevant here, are in line with Peter's estimate.
188. So eight to 15 per cent?
(Mr Busby) Post tax it is maximum 15.
189. I will move on, I do not want to get too bogged down in this. Can I just ask the NAO something. I do not want to dwell on this because Jon picked it up, but am I right to say that this report is not really a test of value for money and the like but simply, as has been put, a questionnaire and one of the questions that emerges out of this is when are we going to have a consistent methodology for measuring value for money and PFI projects? This almost masquerades, so I was fooled, but basically it is just asking a lot of people what they think, is that right?
(Sir John Bourn) It is a report that does what it says it does. It is a report that looks at the replies to a series of questions on 121 projects. It shows what the people who were responsible for the management of those projects believed to be the case on the level of satisfaction as they saw it. It is not less and it is not more than that.
190. Obviously there are all sorts of bias in terms of who responds and all this as to whether they think it is good or bad, but alongside that, given that PFI is the political menu of the day, there will be a propensity for people to feel they should say "this is great, we get a lot of added value".
(Sir John Bourn) I do not think there is any greater incentive to say that than if they were people responsible for a traditional procurement, because if that was what they were working on and if you say because they are working on it and in a way their careers are going to be judged on it, there will always be a propensity to say that what you are doing is going well, whether it is PFI or anything else.
191. Can I ask Mr Gershon, you mentioned you did not know much about the PRIME project, did you not? I was surprised by that.
(Mr Gershon) I am aware of the NAO report and what I know is based on the NAO report.
192. I only mention my surprise because I understand from the report that half of the total value of penalties paid for failures of contract, half of £5.6 billion, on page 11, 1.22, was in this PRIME project. I would have thought you would have found out quite a lot about the failures of that but you did not, did you?
(Mr Gershon) That was an example of where the contractor was contracted to do a defined level of service and in the initial period-I think it was a year-of operation after hand over he clearly struggled with great difficulty to meet the contractual levels, fell short and paid a whopping penalty which then acted as an incentive for him to sort out what he had to do. It had exactly the desired effect in the eyes of the client.
193. More penalties mean good contract management. Can I ask you about your wider commercial skills agenda. The situation is that in the 1980s and 1990s we had the then Government bringing in skills market testing and a huge exodus of procurement managers from the Civil Service, a valuable asset, went to the private sector. Alongside that we have got a situation now where different people can enter different departments at the same level at widely different salaries and there are big differentials between departments, which stand as pillars, and that undermines the opportunity for you to move procurement managers, contract managers, around the system between departments. Is that a fair summary?
(Mr Gershon) It is not just looking at procurement specialists in a narrow sense. It will look at things like project management, contract management and other key disciplines that are necessary to ensure the successful management of the whole life cycle of a project. Yes, part of that is because departments have to respond to the business needs that they face and the market conditions at the time. If you have to go and recruit people today -
194. Are you paying them enough, these people, to match their private sector counterparts?
(Mr Gershon) I think I have been asked that question on a previous occasion by this Committee when I was examined on the management of the procurement of professional services. I said at the time in a number of key skills areas there were big pay differentials between what the private sector paid for certain practitioner skills and what the public sector pays.
195. Are there differentials between departments as well?
(Mr Gershon) There are also in some areas differentials between departments.
196. Are there incentive systems?
(Mr Gershon) They have to be careful. In some instances departments need people at a higher grade than other departments and that clearly also drives salary.
197. Can I ask you something about figure 8. It says in figure 8 we have a situation that only 55 per cent of accounts are open book accounting. We cannot see profit transparency. Only 49 per cent have benchmarking, so if unit costs go down in the market place we cannot track down our costs. Only 15 per cent are arrangements for sharing of refinancing gains. Do you not think all those are very profound indications of failure to deliver optimum value for money in PFI contracts across this sample?
(Mr Gershon) I did not catch the question.
198. Yes. All these indications, namely half the people do not bother with benchmarking so if the unit costs of what they are providing slips down they do not track that. Only 15 per cent have arrangements for refinancing. Somebody comes along and says "This is the cost" and they go off after they have shown there is no risk, it was all a pretence or misunderstanding. They refinance and lower costs of capital, make lots of money, there is no arrangement for refinancing in 85 per cent of cases. In 45 per cent of cases there is not transparent open book accounting, as it is called, so both sides know how much money is being made out of the deal. Do you not think that is a disgraceful situation in terms of delivering value for money for the public sector? What is your response to that?
(Mr Gershon) I think I have been asked that question before.
199. You keep saying that. Can I have an answer, not the answer "I have been asked that before". What is the answer?
Chairman: I am afraid in this Committee Permanent Secretaries get the same question over and over again. You have to give the same answer.
(Mr Gershon) Right. Well, I will give exactly the same answer as I gave before...
200. I am not talking to somebody in the Department now.
(Mr Gershon) This is not good. 15 per cent showing in refinance is clearly not acceptable. I have already indicated, the action we have taken is to move the position that it will become the norm in PFI contracts that there are explicit refinancing gains in all contracts for 50:50.
201. Okay. Just very quickly. On figure 8, the 15 per cent refinancing benefit within a year, that will be near 100 per cent?
(Mr Gershon) We cannot retrospectively do that.
202. I know that.
(Mr Gershon) If you took a sample of contracts going forward, let today, you would expect to see that number become 100 per cent.
203. Open booking accounting, 55 per cent now, is that going to move to 100 per cent?
(Mr Gershon) There are a range of other techniques to establish ongoing value for money. I would not necessarily expect to see open book accounting used in all contracts. I would expect the percentage to become much higher. I would not necessarily expect to see all VFM mechanisms used in all contracts.
204. No, but if you have a target. This cloudy language means people think they do not have to do it. I am talking about your focus on benchmarking, open book accounting, and you have already said about sharing of refinancing.
(Mr Gershon) Yes, and the Gateway Reviews explicitly test how the department is planning in the pre-contract phase to secure ongoing value for money in the post-contract phase.
205. You would expect benchmarking and open book accounting in the future, is that true, just so we are clear where you are going and where you have been?
(Mr Gershon) Yes.
Mr Davies: Thank you.
Chairman: That is a good way to answer on that. Thank you, Mr Davies. Mr Bacon.