Q1 Chair: Peter Coates, welcome to you. This is a new way of trying to do the business: to try to look at PFI in a broader context, across Government. We have a lot of reports to the Public Accounts Committee around PFI, and I thought it would be interesting to have this overview, particularly as the two Reports are rather different. The one on DCLG is about procurement, whereas the one on the Department of Health is about management of the contract over time-the services element, really, of the contract- so it will be interesting. I will start with a general question. There's been a lot of experience in both Departments of procuring and managing PFI contracts over the last decade or so, so what do you think has worked well and what has been a total disaster?
Sir Bob Kerslake: Just a quick word of context first. PFI was one mechanism, if you like, for the delivery of the improvement of social housing stock. It's run for over a decade, but it was a relatively small proportion, in our case, of the way in which the improvement of housing stock happened; in fact, 2% of the total picture. What I think we've found in terms of what works well is it has enabled the transformation of some places and some of the stock, and it has achieved a standard that went beyond purely Decent Homes. I think of Grove Village, for example, in Manchester. For anybody who has been there, it is unrecognisably better than where it was, so I think that's one feature. So, used for the right schemes-
Q2 Chair: What does that mean? What do you mean by that, sorry? What are the wrong schemes and what are the right?
Sir Bob Kerslake: Well, I think where it's worked really well is where you've been achieving transformation or distinctive tasks; for example, the street properties in Islington, where you've had a very distinctive task, where the other funding mechanisms of ALMOs and direct funding and stock transfer didn't work as well; they didn't, if you like, reach the parts that PFI could. It's worked well on those, and it particularly enabled you to do the job where you had to go beyond Decent Homes, particularly to common areas and infrastructure. So, it's worked well in those sorts of circumstances; probably less well, if you like, on the more straightforward refurbishments and those sorts of schemes, where the risk factors have been higher. So, I think that's one area where it's particularly worked well.
I think the second thing I would say that it's worked well on is being able to contain the costs once you've signed the contract. So, to some extent, you go through a lot more pain in the procurement process, but once you've fixed the costs, they're a done deal and the project delivers. Clearly, it's a different story where you're using a more conventional contracting route, where you see some of the impacts-
Q3 Chair: Are all your contracts construction costs? The ones that are around special needs housing or housing for the elderly or housing for people with learning disabilities or whatever it is, is there a management element in there?
Sir Bob Kerslake: That was really the third point I was going to make, which is I think the evidence we have so far-and I have to say-
Chair: It's little.
Sir Bob Kerslake: The number of operational schemes is much less than you'll see on the health side-is actually quite a high level of satisfaction with the service that people are provided when we've done the scheme. So, I think those are three aspects where PFI has worked well.
Where we've learned about it, I think, is where you invest the time in the process. If you think of the process for PFI in three stages, which is going from approval through to the outline business case and endorsement, then procurement and then construction, I think what we've learnt is that putting more time into the earlier part-the part 2 endorsement-takes you a little bit longer but it definitely helps with the procurement stage. And in the early examples of PFI, not enough work was done on doing the stock condition surveys-getting a really good understanding of the condition of the stock-and then understanding what needed to happen to transform it. As a consequence, you saw cost increases during the procurement phase, and delays, and that's been an issue that we've had to address right through the process.
Q4 Chair: Is that the PFI methodology or is that something else? Is it because of PFI?
Sir Bob Kerslake: I think it's linked to PFI, because, clearly, the nature of PFI is that the risk transfer happens to the private sector, so they clearly will push very hard-
Q5 Chair: But you could argue, if it was a local authority thing, they should know their stock condition and what they want to do to improve it anyway.
Sir Bob Kerslake: What I'd say is it's true for any kind of funding mechanism-you're quite right-but you really do pay the costs of it in PFI.
Q6 Chair: Maybe PFI forced you to do jobs that you should be doing anyway.
Sir Bob Kerslake: I think that's right, and what we've learnt is that time invested at the beginning of the process gets you a quicker result through the process. I think that's one thing we've learnt. I think the second thing we've learnt is not to allow too much variation from the standard contracts, because that variation process potentially adds cost and it certainly adds time, so, in the later rounds, we had a much tighter process on what's called the derogations process on variations, really. I think that's a second thing we've learnt from the errors that we've made through the process.
Perhaps a third one is it's worth investing extra capacity in support to the local authorities. So, we brought into play what we call the transactors, which is a flexible team of people with commercial experience, who work with the local authorities during the process, and we felt that's really paid dividends when we've done it.
Peter Coates: I've been involved in it since 1995, now, and I tend to see just the big things. I think there's lots of common lessons we've all learnt across the piece around devoting time, attention, the right people and whatever. But for me two things stick out; the first is that, on the plus side, it has empowered the local health service to take control of its budgets and take control of its delivery of assets, and it's taken away from them the stop-go mentality of public capital, where it was given and taken away, given and taken away. Provided, in essence, the trust can afford the revenue payments, it directs and it controls the procurement process.
Now, the relevance of that for me is that, in 2000, the then Government announced, to me, a very ambitious programme to build 100 substantial new hospitals within 10 years, and I've been dealing with trusts that have been waiting 20 years to try to build a new hospital. PFI enabled those trusts to control their own fate, own their own fate, and direct the direction of travel they wanted to go, and that has resulted in those hospitals being delivered. I think over 120 have been delivered or are in construction now, and I think the fundamental change in the state of the estate is a thing that PFI has brought about in a way that public capital would never have done.
Bizarrely, the thing that I think I regretted most about it is that we never confronted the arguments about PFI and the urban myths about PFI, and the perception that it's a bad thing, it's bad value for money, and the taxpayer's been legged over. I think it's a shame that we never tried to win those arguments more robustly than we did.
Q7 Chair: On the whole, with that massive wealth of experience you've had in Department of Health-I think we all understand around the table that it enabled hospitals to be built that would not have been built-was it value for money? Are the arguments about money right or wrong?
Peter Coates: I think, if you look at every individual hospital, you'd say that elements of that would be more expensive or less expensive doing it in a different way, but if you take the whole programme- and all our business cases support this principle-in the round, there's no difference between PFI and ordinary public procurement. The taxpayer, by and large, has the same result in terms of value for money through PFI as they would have done through public procurement.
Q8 Chair: Well, the financing costs are a bit higher.
Peter Coates: But equally, the way we do public procurement is very inefficient. Going back some time now, when we built things ourselves, we tended to charge ahead with the procurement, for example, before we knew what we wanted, and we ended up in a repent-at-leisure-type situation, where you had to pay considerable sums of money to put right what you did in the past. There are, no doubt, lots of examples where public procurement is done very well, and lots of examples where PFI has not been done very well, but if you take all things in the round, the taxpayer is no better or no worse off. In those situations, one says, "Well, what are the other benefits?" and the answer to me is quite clearly, "We wouldn't have got 100 new hospitals if we hadn't done it this way", and it's the other benefits that really spring out from PFI for me.
Q9 Chair: Let me just press you harder: on the negatives, is there anything else that you regret or you think we got badly wrong in the way we took forward PFI over the last decade?
Peter Coates: There are difficult times, I think. When you announce a major procurement process, as the NHS did, the market overheats, and I think controlling the market was quite difficult for us, particularly as trusts were very interested in controlling their own destiny, you might say. I think that was a difficult time and perhaps some of the prices we paid may have reflected the market conditions at the time.
Q10 Chair: It might be helpful, actually, if both Peter Coates and Bob Kerslake had copies, if we've still got them, but let me raise with you how we manage these PFIs, because what NAO have provided us with is something that I'm sure you are familiar with, so don't be worried about it. You are familiar with it. Over time, the private sector has bundled together PFI projects through financing institutions. What are these companies? One is Innisfree and the other one is Semperian. So, Innisfree, if we take that one first, now has taken over and run the contracts for 24 of your hospitals and has interests in transport, education, defence, etc. In doing this, we assume they've been able to extract fantastic value and efficiency savings. Really, the question, therefore, is: that's never translated, particularly in looking at the health things, into any public benefit at all. So, all the added value and profitability has gone into the private sector by the bundling together and the economies of scale; none of it's come to the public sector.
Peter Coates: This was explained to me, this point, by the NAO, and on one level I did struggle slightly to understand it, because if you take, in principle, that all of our contracts were tendered, which they were, then, when Innisfree or any other of these firms were up against each other, with the first one they do the best price they can, but certainly, if they won, say, two or three contracts in the same location, I take your point that they will have economies of scale and they'll be able to operate or offer lower prices. But it does seem to me that Innisfree will always be in competition with someone else at that particular point in time, and the challenge for them as a company is: "Do I keep my prices high and risk losing this tender in competition, or do I make use of those economies of scale and produce a much lower price that guarantees me winning this tender?" Bearing in mind the cost of putting forward these tenders, I would find it difficult to believe that they would want to risk millions of pounds for the sake of, say, 50 pence or a pound lower or higher price.