11 December 2001
CONVENER opened the meeting in private at 10:10]
Convener (Des McNulty): I welcome members of the press
and public, and the witnesses from whom we shall take evidence
under agenda item 3. Before that, item 2 is to invite the committee
to agree to discuss in private item 4, which concerns an interim
report from Norman Flynn on outcome budgeting, and item 5, which
concerns witness expenses. Is that agreed?
Finance Initiative/Public-private Partnership Inquiry
Item 3 is an evidence-taking session for our private
finance initiative/public-private partnership inquiry. The four
witnesses are all well kent faces. They are: Professor Phillip
Beaumont, who is professor of employment relations at the University
of Glasgow; Martin Gaughan, who is a regional officer of the Transport
and General Workers Union; Alex McLuckie, who is senior organiser
of GMB Scotland; and Dave Watson, who is the Scottish organiser
of Unison Scotland. Welcome, gentlemen.
Increasingly, our practice
has been to move away from hearing general opening statements.
We have received some written evidence from each witness and my
intention is to move straight to questions, unless the witnesses
have something particular to say at the outset.
The general thrust
of some of the arguments of advocates of PFI/PPP is that the public
sector is inherently inefficient and that the discipline of the
market is required to improve efficiency in the delivery of public
services. For the record, do the trade union representatives agree
(Unison Scotland): I shall not surprise the committee
by saying that we do not agree with that statement. I want to
focus on the two arguments that are given in favour of PFI/PPP:
the value-for-money argument and the "what works" argument.
The simple fact is
that PFI/PPP schemes cost more than schemes that use conventional
borrowing. Even the city analysts Chantrey Vellacottwhose
report I refer to in our written evidencerefer to the fact
that PFIs cost £50 million more for every £1 billion of capital
value. Every PFI scheme in Scotland that we have analysedthe
obsessive secrecy that surrounds PFI schemes did not make that
easyhas cost more than the project would have cost using
conventional borrowing. The main elements of that higher cost
come from the higher cost of borrowing in the private sector and
from the fact that the private sector mustquite reasonably
for the private sectorbuild in an element of profit.
How can it be possible
that PFI schemes, which cost more, are allowed to go ahead despite
the public sector comparator, or PSC, test? I notice that the
committee has, after hearing previous evidence, given consideration
to the PSC and understands what it means. As I show in our written
evidence, the problem is that the PSC uses a number of refining
processes, which is a polite way of saying that the numbers are
make the public sector
comparator appear to be more expensive than the PFI option.
In my written evidence,
I have listed those refining processes, of which the main method
is risk transfer. The simple fact is that if there was as much
risk as has been calculated for some PFI schemes, the lenders
would not touch the schemes with a bargepole. Banks are not in
the business of lending money against risk. If they lend against
risk, they do so with a heavy premium. That is the position on
If we compare the areas
in which there is growth in the number of PFI schemes with the
areas in which there is no growth, we notice that growth exists
where capital controls are tightest and decline exists in areas
where capital controls are weakening. Hence, we have a flood of
PFI schools schemes because local authorities are constrained
by section 94 consents, but there is a decline in the number of
PFI schemes in the health and water sectors, where the capital
constraints are not as great.
PFI schemes are ring-fenced.
That means that either services must first be cut to deliver the
scheme or, after costs start to grow, other services must be cut
because the PFI schemes cannot be cut. That deals with the value-for-money
The second argument
in favour of PFI revolves around the "what works" argument.
Some politicians and others say that all that matters is what
works. We are told that PFI schemes deliver better than conventional
schemes do. However, that that is not the case is shown by the
English experience, which I document in our written submission
and in the additional documents that I have lodged with the clerk.
Some of Scotland's first big PFI schemes have started only recently,
but the same problems have been experienced: problems with design;
problems with late delivery; and problems over inability to deliver
on what was promised.
In fairness, I accept
that similar problems could happen in schemes that are funded
by conventional borrowing but, to be frank, the method of borrowing
the money makes no difference to whether a large capital project
goes right or wrong. All sorts of factors are involved, such as
acts of God, the weather and bad client design. The way in which
a scheme is financed is entirely irrelevant to the process.
PFI is not a better
means of delivery. Apart from the other sideline issues that we
have addressed in our written submission, PFI is more expensive.
Convener: I want to pick up on two or three aspects.
Notwithstanding the finance issue, is there any evidence to show
that set objectives, such as the construction element, are delivered
more poorly or better
No. Nobody has produced even a solitary piece of evidence that
suggests that a building has been built better because the money
was borrowed using different means. There are many reasons for
that. We have highlighted many failures of big PFI schemes but,
in fairness, those failures have nothing to do with money, but
rather relate to design factors and client issues.
They relate also to management.
Your paper contains some statements for which I would
like to know the evidence. It states:
"Scotland is the
biggest user of PFI with almost half the UK total estimated capital
Do you have evidence
to support that?
Watson: The evidence comes from last year's red book.
It is interesting to have that quantified.
Watson: That statement concerns capital value, not revenue.
A problem in Scotland is that we can identify only the capital
value of PFI schemes. Calculating the real cost of PFI schemes
is much more difficult.
Convener: Do you acknowledge that any efficiency gains
can be obtained from PFIs and PPPs?
Watson: No; we have found no efficiency gains. However,
part of the difficultyI hope that the committee will address
thisis the obsessive secrecy that exists about such schemes.
I have analysed many PFI schemes in Scotland, but only those for
which we could obtain copies of the relevant documents. Public
authorities have been highly reluctant to release details about
many big schemes.
When the June 1999
rules on greater openness forced authorities to release details,
the authorities produced sanitised business cases. The Glasgow
schools PFI was a classic example of that; a copy of the business
case was leaked, which we analysed and published. However, the
business case was sanitisedit contained no annexes or hard
figures. The risk transfer figure for that scheme was quoted as
£70 million, but not one figure in the full business case backed
that up. If that £70 million had not been counted, the public
sector scheme was £35 million cheaper than the PFI.
That is all in your evidence.
Morgan (Galloway and Upper Nithsdale) (SNP): It has been
argued to us that an advantage of PFIs is that they force clients
to get their specifications correct and to make up their minds
finally, whereas conventional procurement allows clients to continue
to change their minds as a project proceeds. It is expensive to
do that when a contractor has a contract. What do you say to that
Proper capital procurement processes should be in place
in the public sector. There is no reason why the public sector
cannot organise a conventionally funded capital project in exactly
the same way as a PFI would be organised. Often, companies that
are involved in a PFI say that PFIs are better because built into
them is better design. For example, they say that they insulate
buildings better so that energy costs might be cheaper later.
That argument concerns the way in which capital projects are provided.
Exactly the same measure could be undertaken in a public procurement
arrangement. The only difference would be in the way in which
the money was borrowed.
The committee should
remember that most public sector capital schemes are undertaken
by private sector companies. Huge national health service or local
authority building companies do not exist. The same building contractors
would undertake the schemes under the conventional process.
Tom McCabe (Hamilton South) (Lab): That point is interesting.
In 2001, why has not the public sector developed processes that
make conventional procurement of projects as efficient?
In recent years, so much effort and officer time has
been spent on PFIs that such developments have not been allowed
to take place. The big NHS and local authority capital manuals,
which set out the processes that officers tend to follow, have
not been revised for many years. That is because all the resources
that have been availableincluding a huge amount of uncosted
time and millions of pounds for outside advisershave been
used to develop PFI schemes. The processes to which Tom McCabe
refers need development. If the public sector had a more rigorous
capital regime, we could improve those systems no end.
Adam (North-East Scotland) (SNP): North of the border,
a substantial amount of public procurement is done by PFI/PPP,
but less is done that way south of the border. Does evidence from
south of the border show that the lessons of improvements in public
procurement are being learned?
Some evidence exists, which
driven largely by members' counterparts at Westminster. A good
example of that is refinancing. The National Audit Office produced
a report on the refinancing of the prison contract at Fazakerley
that showed that private companies were simply refinancing risk
and making huge profits. As a result of the work of the Finance
Committee's equivalents in Westminster the rules changed so that
the benefits of that refinancing are now shared between the public
and private sectors. However, it was a year after the NAO's report
was produced before the Treasury changed the rules. We are always
behind the game in such changes.
Adam: I am talking about refinements from the PFI/PPP
process that have been applied when the public procurement route
has been decided on. Is there any evidence that, when the public
sector does not commit to PFI/PPP, the public procurement route
has been improved through refinements that resulted from the PFI/PPP
I do not work in England, so I do not have up-to-date
evidence of that. Some changes have been made because of the greater
availability of conventional capital as a result of the current
round of public expenditure.
One reason for cuts
in conventional capital programmes is that a programme starts
with a budget but, as Mr Morgan said, clients ask for additional
items. That requires cuts in other areas. If additional requirements
were designed earlier, that problem would not exist.
(GMB Scotland): Difficulty is caused by the phrase "the
only game in town". Councils have had difficulty in comparing
the traditional route with the PPP/PFI route because they have
been told that PFI/PPP is the only game in town.
Councilwas the first to enter into a PFI scheme for five
secondary schools. A year previously, the council had produced
a primary school on time and to high standards. In the press,
the council said that it was a public authority that could deliver
to a high standard against private sector competition. One year
later, the council had to undertake a PFI, because that was the
only game in town. If the council wanted new schools, it had to
use a PFI. It would not be given the money for the conventional
Mr David Davidson
(North-East Scotland) (Con): I will pick up some of Mr
Watson's earlier comments about evidence against the PFI/PPP procurement
system. Do you agreein a way, you have already done sothat
much of that evidence relates to many public sector clients not
getting their acts together to design ahead? They design
for the short term
and, as Alasdair Morgan said, they then modify the contract.
Do you agree that,
as academic evidence shows, some early schemes went awry because
of a lack of initial design? It has been claimed that that is
the fault of PFI, but it was a fault of the design of the schemes.
Some academics in Scotland have argued strongly and produced evidence
that suggests that additional costs went against the image of
PFI/PPP. What is Unison's view of such evidence? It is important
that the committee hears a balance of opinions on both routes
and that we do not decide that one route is bad just because of
the sector from which it comes. Is the initial set-upthe
system of designingfundamentally at fault? If so, how can
that be remedied?
It is, particularly when PFIs are used, difficult to know the
reason why there is significant growth in costs between the start
of a project and its completion, because details on schemes are
unavailable. I have debated the matter with academic colleagues
who have also not seen the information. However, we know that
scheme after scheme has started as X and ended as Y. That has
usually involved great additional cost or a massive reduction
in services. For example in hospital schemes, the average reduction
in bed numbers between the time before a PFI scheme starts to
its being finished is 31 per cent. A similar thing happened in
the Glasgow schools scheme, in which there were reductions in
the number of classrooms, swimming pools, gymnasiums, teaching
areas and so on.
We know that the costs
of PFI schemes grow. I argue that there has not been a similar
exponential growth in conventional capital schemes. However, to
be fair, conventional schemes must be planned for the long term,
taking into account revenue costs as well as capital costs. In
the public sector, historically we have separated capital and
revenue, to the extent that they have been regarded as two different
budgets. We have adopted a lot of artificial systems to take account
One of the reasons
why there have been problems with school PFI schemes is that people
believewrongly, according to the Treasury and everyone elsethat
they must get the scheme off balance sheet. That is because of
the way in which departmental capital and revenue budgets are
All those issues are,
if you like, artificial; the real issue is that we must design
for what is required. We must work out both the revenue and the
capital implications and we must almost ignore where the money
is coming from. Good design and good project management are important
irrespective of who provides the money.
The committee is taking evidence in an effort to pick
out all the flaws and benefits of PFI and PPP schemes. We hope
that we are doing so on a fairly neutral basis. The first page
of your document suggests that you are agin such schemes, just
because you are agin them. I accept that you give evidence for
that view, but we are looking for remedies and not only evidence
that indicts. How should such schemes be reviewed?
The starting point is to say, "The schemes do not worklet's
do something different." We want to deal with the issue of
the alleged off-balance-sheet treatment. In Scotland and throughout
the UK there still exists a problem of advice being given to public
bodies to the effect that a scheme will not work or will not be
approved unless it is taken off balance sheet. Despite what the
Treasury has said, local officials are being told that schemes
must be taken off balance sheet. That is quite wrong.
Staff transfer is a
big issue. It has not been required since June 1999, but there
is still a problem of incorrect advice being given to local officials
on the issue.
The third issue that
we would want to deal with is the need to identify capital expenditure
and to revise capital mechanisms to build in best practice in
the delivery of conventional capital schemes. The way forward
is to fund schemes by conventional capital means and then to build
in appropriate disciplines so that schemes can be delivered to
the original design and on time.
It is a fairly serious allegation to suggest that officials
are giving advice that is contrary to Treasury advice. Do you
have specific evidence of that? Could you at least point the committee
in the direction of specific contracts in which that has been
the case, so that we can investigate further?
Glasgow City Council stated wrongly that there must be a significant
transfer of staff to the private sector contractor. That was included
in a document entitled "Public Service, Private Finance"
by University College London's school of public policy.
however, is that the transfer of staff to the private sector should
be subject to a separate value-for-money appraisal and that cost
savings should not be achieved through worsening the terms and
conditions of current and future staff. Schemes that involve a
reduction in the number of staff should be compared only with
public sector comparators that have also been adjusted to reduce
staff numbers. That information is from a document that gives
an update of the first operational school contract and which can
be found on the www.4ps.co.uk website.
North Lanarkshire Council
made an announcement last month in a document that I have here,
which is entitled "Education 2010". Our officials have
been involved in that. The first working paper was drawn up on
14 September 2001 and it states:
"The partner also
owns, operates and maintains the facility for a period of approximately
25 years. Each PPP project involves the negotiating the sharing
of risks, responsibility and power between the public and private
sector and these include ... the provision of support and community
Later in the same document
is report 4 from 18 September of the member-officer working group.
That report says that part of any public-private partnership project
is that the private partners provide a number of services in new
build or refurbished buildings over the lifetime of the contracts.
Services that are normally included in schools PPP projects include
building and grounds maintenance, cleaning, waste management,
caretaking, site supervision, security, catering and cleaning
That information is
in a document that was put on the table last year. That says to
our officials that, for us to get funding, there must be risk
transfer. That means transfer of employees in catering and cleaning,
who are part-time women workers.
I want to pick up on the points about getting stuff off
balance sheet. Providing that the Treasury sticks to the definition
of the public sector borrowing requirement, a time must come when
you want to get things off the balance sheet. Surely there are
ways of getting things off balance sheet without using PFIs. For
example, we have heard about trusts for the London underground.
Trusts would be one alternative.
There are ways of keeping things off balance sheet, but they are
extremely difficult. We are talking about Treasury rules and there
is obviously a problem for us in Scotland in dealing with such
matters. In various documents, we have spoken about other ways
in which the Treasury could do thingseven if we did not
have the favourable capital balances that we have at the moment.
We could easily fund all PFI projects from the surplus that the
Chancellor has in his current budget plans. PFI is therefore entirely
unnecessary, even if a project needs to be off balance sheet.
We have also demonstrated
ways in which the Treasury could change accounting rules, especially
if we adopted the general government financial deficit as an alternative
model. That would create a huge amount of headroom for
The problem that risk
transfer causes for us is that officials believe that they must
transfer staff to achieve it, as Alex McLuckie pointed out. However,
the Treasury has said clearly that that is not the case. It has
also said that schemes do not have to go off balance sheet to
get approval; however, I ask committee members to ask officials
how many on-balance-sheet school schemes have been approved. Non-school
schemes are off balance sheet, because of the scope that they
are allowed by their capital consents. Local government officials
have the problem that, if they put a scheme on balance sheet,
it counts against their capital consents.
It is ironic that Alex
McLuckie used the phrase "the only game in town". I
smile every time a leader of a council says that or every time
I see it plastered all over the newspapers. "We have to have
PFI because it's the only game in town," they say. There
was a good example of that in North Lanarkshire. However, if North
Lanarkshire Council had put in a bid for a scheme to the Scottish
Executive finance and central services department at Victoria
Quay on the basis that PFI was the only game in town it would
have been thrown out, because that is not allowed. There is a
good deal of misunderstanding. To be fair to local authoritiesespecially
to councillors on committeesthe issues are enormously complex.
It is very complicated to explain the figures that relate to a
PFI scheme and to explain concepts such as net present value,
net present cost and so on, as distinct from hard cash. It is
difficult to explain what off balance sheet, risk transfer and
staff transfer mean. Those things are not always explained clearly
to councillors in committee when they must make decisions.
We have heard in evidence that the higher cost of private borrowing
is not a significant factor in terms of the relative costs of
PFI and public sector schemes. You say that PFIs are necessarily
more expensive. What are the main factors in that?
The cost of borrowing is not hugely significant, because the cost
of borrowing for PFI schemes has decreased in recent years. We
must ask ourselves why. It has decreased because all the risks
remain in the public sector. The most bizarre rule of all is highlighted
in our submission. If a PFI contractor defaults completely on
a scheme and the local authority or health board must replace
the contractor, the contractor must still be compensated. That
is crazyin a conventional scheme, a penalty would be levied
on the contractor. That is not the case in PFI schemes. As a result,
bankers are bound to take the view that their money is pretty
safe. If they are guaranteed to get their money back whatever
will get a fairly reasonable credit rating. The difference in
cost is not huge, but it still exists and it still adds up to
many millions of pounds for big schemes.
You are saying that, because the transfer of risk to the private
sector is fairly insignificant, the risk remains within the public
That is right.
So it is secure borrowing.
Yes, it is secure borrowing. In addition, a rate of return still
has to be built in. You will remember having a quick look at water
PFI schemes in your previous existence as a member of the Transport
and the Environment Committee, and you will recall the sort of
figures that were quoted in relation to the finances of water
schemes. A return of 18 per cent on capital employed was discussedI
wish that I could get an 18 per cent return on my savings, tax
free or not, but I am afraid that I cannot. Such schemes are therefore
still fairly profitable areas, and that profit payment is a cost,
which clearly does not apply to the public sector or public procurement.
However, when we considered the water schemes, those figures were
not borne out.
You will recall that I told the Transport and the Environment
Committee that, as it did not have the opportunity to do an analysis
of a scheme, it was a bit difficult to know about such figures.
Given that no water scheme has ever been published, it is hard
to know how the financial criteria of such schemes are worked
You said that such projects could be done equally well under public
sector procurement. I am thinking in particular of small local
authorities. Do they have the resources effectively to plan and
co-ordinate a major venture such as a significant schools procurement
project? Even the larger authorities have difficulty identifying
the correct specification, in both PFI and conventional schemes.
Many problems have been associated with poor specification at
the outset affecting the way in which projects can be carried
through. How do you envisage the public sector dealing with such
problems as a lack of expertise or a lack of resources in planning
such major schemes?
One of the lessons that are beginning to be learned from PFI schemes
is that we should not constantly reinvent the wheel. I attended
a meeting with the former Minister for Finance and Local Government
not so long ago. I am aware that he initiated a projecton
which I presume the officers who used to work under him are still
workingto discuss rationalisation and the
introduction of common
standards to schemes throughout Scotland.
Some work was done
on that down in England, through the pathfinder schemes. Some
examples of such schemes exist in Scotland, including schemes
for schools in Falkirk and Glasgow and a couple of the big national
health service PFI schemes. The intention behind pathfinder schemes
was to learn lessons and to produce standard documentation and
so on. However, they have not really been developed. The problem
was that most of the pathfinder schemes were not very typicalin
fact, they were atypical in many ways.
Some lessons could
still be learned. I mentioned capital manualsmany standard
processes could be built in if they were developed across Scotland.
Local authorities and health boards and so on could then pick
them up as being standard arrangements and fit their local requirements
Many of the contract-related
and other elements do not need to be reinvented each time. Local
authorities and other bodies need to decide how they need to design
a particular facility to meet needs. We have never been precious
about this; we have always recognised that, in some cases, the
private sector might have some expertise in the areas concerned.
In reality, however, if only one or two hospitals are built over
an awfully long period, nobody will have the expertise at the
end of that time.
The NHS used to have
a building division, which contained all the experts in building
hospitals we might want, including architects and engineers. The
previous Government privatised that division and turned it into
a company that bid for PFI projects but did not win as many contracts
as it wanted. Now, some of those leading architects and engineers
are designing oil rigs for the North sea instead of designing
hospitals, which is where their expertise lay.
Expertise must be built
up, but it can only be accumulated by doing. If it is decided
that refurbishing Scotland's schools is a major issuewithout
any argument, that is an issuerelevant expertise is developed
across Scotland and the appropriate documentation is built in.
The local authorities are then approached and assigned that expertise;
the local authorities add in the local element, which is not a
huge task, and we end up developing good, well-qualified experts.
We used to have schemes
involving standard-sized buildings for different functions. Off-the-shelf
designs could be produced for the particular purpose. All that
is being lost because the wheel is constantly being reinvented
in the spurious chase for a bit of competition.
That is not always disadvantageous, if we consider the schools
that were built under the standard schemesthere are swings
That is true.
Even you would not argue that the public sector is perfect. Assuming
that the levels of employment and the skill mixes in the public
sector could be made efficient, how could PFI/PPP improve on inefficiencies?
How could PFI bring any benefit and improve the skill mix in the
public sectoror do you think that PFI is entirely disadvantageous
in that regard?
There is no particular evidence that the skill mix in the private
sector is any better than it is in the public sector. There are
supposed to be value-for-money exercises on major PFI schemes,
but those have never taken place. If you read the full business
case presented for the Glasgow schools project, you will find
that no such analysis took place. That is partly for the reason
that Alex McLuckie identified: that officers mistakenly believed
that that was not an issue.
If we consider the
VFM exercises that have been carried out, it turns out that many
of the lessons of competition, for example in relation to soft
facilities management, have resulted in very similar skill mixes.
It is hard to differentiate between the direct labour organisation
and many private companies in the way in which they organise cleaning,
catering and other arrangements. The difference is that in-house
provision carries some flexibility, in that if changes have to
be made, it is not then necessary to renegotiate the contract.
The techniques are not vastly different.
Let us suppose that we take PFI out of the equationpresumably,
that is what you want to do. If we do not go down the route of
PFI, how do we ensure that the public sector develops the required
skills and expertise?
That is already covered by the best-value legislation, under which
continuous improvement is required. I believe that the final draft
report on this matter gave the same seven criteria that had to
be met under best value. We envisage those improvements continuing
in the public sector.
I believe that the
accounts commissioner produced a report last month, in which he
examined whether we are making the progress on best value that
we should be. In the main, that report gave a clean bill of health
to what has happened so far.
I return to my earlier
point about the mistaken belief that is held in some areas that
staff have to transfer because of PFI. In considering how PFI
affects staff issues,
we have to take into account the fact that local government workers
have given a lot of service in the public sector and will want
to remain in the public sector. From some of the PFI schemes in
which I have been involved, I recall some quite heated and robust
debates involving local government employees who asked why they
were being dumped after 30 years' service. That is not necessarily
what had happened to them, but that is how they felt.
Given a fair wind,
in-house provision could give value for money. The difficulty
is that that is not being allowed, because of a mistaken belief
that there must be a transfer of risk. Some new evidence is making
matters worse in my view. In the last two PFI projects of which
I am aware, the employees were asked whether they wanted to remain
with the council or move. If they all choose to remain with the
council, I do not quite see where the transfer of risk is.
On employees issues,
we are also concerned about the provision of pensions. Another
great concern of ours is the creation of a two-tier work force.
One thing in the PFI scheme that I believe
We will come to specific questions on those issues.
(Aberdeen North) (Lab): Part of the answer to my question
has probably been covered. PFI started under a different Government
quite a long time ago, when compulsory competitive tendering was
still in operation. Do you acknowledge that the situation has
changed and that some PPP schemes that are being constructed and
designed or have been rolled out are different from schemes that
were originally rolled out? I understand that Unison has been
involved in a number of schemes down south in which staff have
remained in the public sector. Nevertheless, it was deemed that
going ahead with those schemes on a PPP basis was still worth
while for different and separate reasons.
We should give credit for some changes that have been introduced.
Members have probably worked out that there is much misunderstanding
about PPP and PFI. There is a view that PPP is a new Labour spin
on PFI, but it is not. PPP is a framework and PFI is one scheme
within the overall PPP framework. PFI has particular rules. It
is interesting that in Scotland, a shift is beginning away from
PFI towards broader PPP schemes, which do not have such rigid
rules. We must wait to see how that pans out. I hope that the
shift has occurred because there is flexibility, but I suspect
that it has happened because the same amount of scrutiny does
not fall on a broader PPP scheme than on PFI schemes. The
water industry is a
good examplethere are not the same rigours in respect of
Some benefits have
changed. The changes in accounting rules for PFI were important.
In fairness, they were largely driven by the Accounting Standards
Board, but nonetheless the Treasury eventually accepted its recommendations
after a major battle. The changes meant that staff did not need
to transfer to achieve the risk transfer. The Government also
made a useful statement on the subject of off-balance-sheet and
balance-sheet schemes and made it clear that one does not need
to go off balance sheet in that area. There have therefore been
technical issues. The Government is due credit for improvements
in the construction of contracts, although I think that a lot
more can be done. I hinted that we could do more in Scotland in
Those are important
gains. Important gains have also been made in staffing. The Cabinet
Office statement of guidance on staff transfers has been helpful
in making it clear that staff do not have to transfer, but when
they do, Transfer of Undertakings (Protection of Employment) Regulations
will apply. Revisions of the TUPE regulations have been long-drawn-out
and we are still at the consultation stage. Nonetheless, we are
moving towards improvements. Alex McLuckie mentioned that the
issue of pensions has been addressed. There must be at least broadly
comparable pension schemes when staff transfer in those areas.
Those are important
gains, but there are some shortfalls. There is Cabinet Office
guidance and there are TUPE revisions, but there are still two-tier
work forces post-transfer. Staff who transfer may be protected,
but new starts are not. Workers are therefore on different terms
and conditions andmost importanton different pension
schemes. Those new starts are predominantly women and low-paid
workers. In effect, PFI reinforces the low-pay cycle and a two-tier
work force. The Equal Opportunities Commission and others have
carried out work in that area.
Those are big issues.
In Scotland, we need a comprehensive staffing framework for dealing
with all types of PPPs, as distinct from only PFIs. Members may
recall that, a couple of years ago, the then Minister for Health
and Community Care announced a project on that issue and asked
the Scottish Partnership Forumwhich includes trade unions,
trusts, boards and employers in the health service in Scotlandto
produce a staffing framework for PPP schemes. The project was
not simply to do with staff transfers; it started a consultation
process to consider in detail how particular schemes are developed
and, if staff transfer is involvedmany schemes do not
involve staff transfer
and do not need toa number of arrangements to ensure that
there is not a two-tier work force.
I regret to say that,
although the document made considerable progress within the health
department, when it was passed around other Scottish Executive
departments, progress was slow, to say the least. We drew that
to the attention of the then Minister for Finance and indicated
that it was about time that progress was made.
If a comprehensive
staffing framework was in place, a number of staffing issues could
be addressed constructivelywe want to highlight that as
a particular issue for the trade unions. The lack of progress
says much. There should be a drive to bring the issue to a satisfactory
We will now move to industrial relations issues.
Perhaps my questions will be particularly relevant for
Professor Beaumont. What is the potential impactperhaps
the actual impactof PFI/PPP on public sector industrial
relations? If we continue down the PFI/PPP route, is it inevitable
that there will be lower levels of employment and lower real wages
in the public sector?
Beaumont (University of Glasgow): Two aspects of industrial
relations need to be distinguishedthe procedural aspect
and the substantive aspect.
On the procedural aspect,
this is a highly unionised sector. If the current process continues,
the unions will say that they have been told that PFI/PPP negotiations
are the most important negotiations and that they are excluded
from them, at least in the critical early stagesthat is
worrying. There is a concern that that will impact negatively
on bargaining throughout the public sector in Scotland. In a sense,
there will be adverse spillover effects if the unions are excluded
from important negotiations. That could disrupt the relationship
between unions and management in the public sector.
have been mentioned. If the design stage of the process is separated
from the implementation stage and stakeholders and people who
are making big decisions are kept separate, the implementation
process will be flawed, almost by definition. The unions are right
to say that there is a major inconsistency in the existing partnership
arrangements in the Scottish health service, for example. There
are potentially huge procedural issues.
There is also concern
about the two-tier work force. A distinction is often made between
who transfer over and
new hires. It is particularly important that contracts are very
long25 to 30 years. An incentive can be built in to ensure
that most employees will be late hires, who will not be covered.
Any employer will say that co-operation, co-ordination and teamwork
are extraordinarily difficult if people who are working alongside
each other are on substantively different terms and conditions
of employment. There will not be the same co-operation and co-ordination
in such circumstancesthat is a fairly natural human reaction.
Is there any evidence of that happening? The practice
does not simply relate to PFI/PPPit existed as part of the
CCT arrangements. Do you or the union representatives have any
evidence of industrial relations being destroyed as a consequence
of the type of change that you described?
Do you mean as a result of the two-tier system?
I mean as a result of there being new starts on poorer
conditions and workers who are TUPE protected, even if that protection
is somewhat inadequate. Is there evidence of poor industrial relations?
Is the evidence about poor morale and poor standards anecdotal?
In my replies to a number of questions, I will sound like a broken
record. The zone is largely data free. It is extremely difficult
to give evidence. There are many anecdotes and stories out there,
but not a lot of hard, objective evidence. That is not surprising
because the process is very new and these are early days. I cannot
put my hand on my heart and say that there is a lot of firm evidence.
I think that one can
make good a priori arguments for the likelihood of such co-ordination
problems. One can consider parallel situations. There has been
a huge concern about health and safety and whether accident rates
would rise if there were greater use of contract labour. Some
interesting work has been done on that. However, that is arguing
through analogy. At the moment there is not much smoking-gun evidence
that I can point you towards.
CCT, which was the forerunner to PPP/PFI, was put in
place in the mid-1980s. There must be some of way of assessing
Professor Beaumont is right: we are at an early stage in relation
to PFI and PPP schemes. Without doubt, new employees are coming
in on inferior terms and conditions of employmentthey get
fewer public and annual holidays, are put on different pension
schemes and have different sick-pay provisions and rates of pay.
We are currently dealing with some of those issues in Glasgow
The point was made
that those are long-term arrangements. People who transfer might
be comfortable in that their terms and conditions of employment
are not affected and new people are coming into the workplaceperhaps
they were long-term unemployedwho, for the moment, are simply
happy to pick up a job and have money coming into their household.
However, the difficulty is in the long term. Four or five years
down the road, those people will start to question why they are
being treated differently to others who are doing exactly the
same job. They will ask why, if they are part of the team, they
are treated differently from other members of the team.
At the moment, the
trade unions do not have people beating a path to our door. However,
I am sure that all the union representatives sitting here are
aware that in the future, we will have to deal with that problem.
It can be resolved, perhaps by the implementation of something
like the fair wages regulations that we had in the past. It could
be part of the contract that terms and conditions of employment
will be governed by the relevant negotiations at a local level.
There will be local variances.
How has the introduction of CCT and PFI/PPP impacted
on the nature of the relationship between the management and staff
representatives? Traditionally, in the public sector, there has
been national wages and conditions bargaining and local negotiations
addressed different issues.
It would be fair to say that there has been a lot of prodding
of certain terms and conditions to see whether there are weakness
and whether they can be changed. In relation to the Falkirk Council
PFI scheme, we were challenged on at least 10 conditions of employment
for janitors who transferred. The North Lanarkshire roads PPP
has provoked an on-going argument about whether we should move
away from local government terms and conditions towards the Construction
Industry Joint Council terms and conditions of employment. There
has been an attempt by the employers to move away from the national
terms and conditions of employment. At the moment, it would be
fair to say that we are trying to defend the current conditions
of employment for our members.
Previously, our stewards
were usually involved in issues outwith terms and conditions,
such as disciplinary action and grievances, because the terms
and conditions were negotiated centrally. Now, there is greater
local involvement. However, that involvement relates to protecting
terms and conditions of employment or trying to maintain the current
terms and conditions.
I have a couple of observations on CCT. The important element
of CCT was the capacity for the in-house bid. Ironically, that
encouraged two things: decentralised negotiationsone can
argue whether that was good or badand closer working between
the unions and local management. That was undoubtedly a factor
in the relatively high win rate under CCT. One could argue that
that was a substantial benefit at quite a difficult time.
If one considers the
substantive impact of CCT, the productivity increase can be brought
about in two ways: by pushing up the numerator, or pulling down
the denominator. The evidence of the Institute of Public Policy
Research suggested that the methods were very mixedsometimes
the numerator went up and sometimes the denominator went down.
In cases where the denominator went down, one must ask seriously
whether that was private sector innovation. I have a huge issue
about labelling something innovative, with its very positive connotations,
when it involves cutting terms and conditions of employment. I
must be blunt and say that I do not regard that as cutting-edge
There were lessons
to be learned from the CCT experience. At the moment there is
a dearth of good work on public sector industrial relations. Perhaps
the most alarming thing to come out of the recent Chartered Institute
of Personnel and Development study was the suggestion that although
there was not a huge sea change, several indicators were moving
negatively. Perceptions of the quality of the working relationship
between unions and management were that it was worsening.
Similarly, the ability
of employees to trust the management in the public sector was
tending downward. There were similar trends in the private sector.
As a policy maker, I think it is clear that the movement is not
in a positive direction.
Is it not true that the most common consequence of CCT
was that in-house bids wonwhether in the local authority
or the health servicebut almost always at the expense of
the total number of jobs and the package of pay and conditions?
Although it is fair to say that local experience in producing
a competitive bid was developed, the local management did not
have a great deal of experience of dealing with national conditions.
The trade unions did not have the experience either, because they
were geared towards a totally different arrangement. Has that
had a major impact?
We are focusing on PFI as opposed to CCT. Do you think
that PFI/PPP has
accelerated the trend
to which you referred? Have the problems suggested by Brian Adam
increased or changed?
It depends on whom you talk to. Some people would say that the
removal of the capacity for the in-house bid has worsened the
situation. In some ways, it is unfortunate that the public debate
has been shaped in those terms. Much of the media coverage has
focused on whether PPP is privatisation by another name. That
is not always a particularly constructive or positive debate.
The CIPD figures, which
are the only act in town, show a downward trend in the quality
of the relationship between unions and management in the public
sector. There are all sorts of explanations for that and different
people emphasise different explanations. The CIPD figures point
clearly to deterioration in the past two or three years and they
are the only decent set of data that exists.
Alasdair Morgan has a question about the two-tier work
A lot of the issues have been covered. The witnesses
mentioned the creation of a two-tier work force. Is that always
one way or can the reverse happen: can wages and conditions sometimes
improve so that there are better-paid private workers and more
poorly paid public workers?
We should separate two issues. There is not always a huge gap
in pay, particularly in the initial years; there is a gap in conditions
of service, particularly pensions. Professor Beaumont mentioned
research. Page 4 of our submission refers to our research, which
has been examined and commented on by the Treasury Select Committee
and the Health Select Committee at Westminster. The research showed
"90% of those
contacted said pay levels for new employees were worse than for
That is a two-tier
work force. Some white-collar sectors, where private staff have
slightly better pay but maybe worse conditions, are an exception.
In traditional blue-collar sectorswhich cover the bulk of
people who are affected by PFIpay and, most important, conditions,
such as sick pay, holidays and pensions, are worse. We are creating
a group of people who will have no occupational pension scheme
other than the new stakeholder pension arrangements.
A point that has not
been covered on industrial relations is the rebirth of demarcation.
For example, market testing or a PFI scheme might introduce into
a health team in a hospital ward people who work for a different
breaks down the health
team because it is decided that cleaners will only clean and nurses
will do only certain things. In areas without PFI or market testing,
we found a growth of housekeeping services and the creation of
a health team to deliver services in particular wards. We want
that industrial relations model to be developed in the health
service and elsewhere. We do not want the recreation of 1960s-style
You quoted a figure about conditions being worse for
new employees. Will you give usor send usdefinite
evidence that the figure discounts the fact that some people have
better rates of pay and conditions, such as bonuses and holiday
entitlement, because of their length of service? Can you separate
out the benefits that employees tend to accumulate over time?
Can you provide the committee with figures that are not a straightforward
I do not think that the research shows that. The research that
we produced for consideration by the Treasury Select Committee
and the Health Select Committee at Westminster did not break down
the figures into that detail. It showed a difference in wages
but, as I said, wages are not the big issue. The big issues are
conditions and pensions.
I want to hold you to what I said. I did not list simply
wages; I mentioned holiday entitlement and sick pay. Please stick
to the factual part of the question: can you provide the evidence?
It is important that we discover whether there are clear differences
and what they are. That is the evidence that we want.
We can make the evidence to which I referred available to the
committee without any problem.
I have a small supplementary on pensions. I believe that
employers who have more than about five or 10 employees must offer
stakeholder pensions. Does that mean that new PPP schemes, for
instance the ones with which Unison was involved in England, have
been negotiated with no pensions?
There are pension schemes, but they are not nearly as good as
public sector schemes. In sectors with no history of pension provision,
stakeholder pensions are an improvement, but they are a modest
first stage in providing pension arrangements. The research to
which I referred shows that none of the post-market testing or
post-PFI pension schemes are as good as the schemes that were
transferred from the public sector. I am not saying that none
exist, only that we could not find any that are the same. Some
form of pension provision will be made, but it will usually take
the form of money purchase arrangements, for which most employers
make only a modest
We would like to receive any evidence that you have on
that area, on a case-by-case basis.
(Transport and General Workers Union): I will take the
committee back to the Scottish Executive's decision to take the
roads contracts away from the local authority consortiums and
to award them to Amey Highways Ltd and BEAR Scotland Ltd. That
decision had dire consequences for our members, particularly in
respect of pensions. Although the Cabinet issued guidelines, private
companies do not strictly adhere to them.
For example, one of
our lads, who was employed by Glasgow City Council, took ill in
January 2001. He was advised two weeks prior to the transfer that
he was going to be transferred across to the contractor. During
the first week of the transfer, he went to get his wages from
the bank, but there was no money there for him. Obviously, the
local authority was no longer paying his sick pay. We contacted
the council, which advised us that he had been transferred. Then
we contacted the contractor, which told us that it did not employ
him and that there was no onus on it to pay him. We managed to
get the local authority to take him back, but I highlight that
example to explain that the money-purchase scheme that was offered
by the contractor is entirely different from the scheme that was
provided by the local authority.
The lad in question
is only in his 40s. If he had been retired through ill health,
he would have had to wait until he was 65 to be entitled to any
pension under the money-purchase scheme; under the local authority
scheme, he would have been given early retirement on the ground
of ill health. That is a major problem for people who are transferred
under PFI/PPP schemes.
We will move on to questions about TUPE.
There has been a substantial lack of clarity over how
TUPE has worked. Can you explain how, in your view, TUPE is supposed
to work? Has it been effective in protecting public sector employees?
If TUPE were to be reformed, what reforms would you like to be
madein an ideal world?
Members are probably aware that the UK Government's review
of TUPE has been grinding on for about two years. A revised consultation
paper has been produced on the basis of that review and we are
hoping that a number of improvements will have been made.
Most of TUPE's legal
difficulties have arisen around whether it applies to a particular
To be honest, my lecture
notes on TUPE law change about every two weeks, because of various
courts' decisions to vary this way and that the criteria for deciding
whether TUPE applies. We are entirely as one with the Confederation
of British Industry, the contractors' associations and others
on the most important point, which is that we would all like some
The provisions should
spell out that TUPE arrangements apply to first and secondary
transfers, and to any other type of transfer, irrespective of
whether there are assets or people, or any of the other daft legal
tests that have been churned out. We would like it made absolutely
clear that TUPE should apply to staff transfer situations. That
would be a huge step forward and it would take away 90 per cent
of the legal challenges over TUPE.
Consultation is the
next big area. One of the problems with TUPE is that it makes
no provision for consultation at the earliest possible opportunityas
happens with redundancy arrangements, for example. One could not
enforce time scales, becausenot in the public sector, but
in the private sectorsome deals are cut fairly quickly and
late in the day. In those circumstances, it is difficult to enforce
a time scale of 90 or 30 days for a consultation period, but including
in the TUPE provisions a phrase similar to "at the earliest
possible opportunity" would improve consultation arrangements.
To be frank, the arrangements are very poor indeed at present.
In the public sector,
it is possible to start at a very early stage. The staffing framework
to which I referred earlier contains a string of provisions on
the partnership approach to working, which would enable us to
consider the issues at an early stage. That would be a distinct
There are other difficulties
with the TUPE regulations and what happens post transfer. There
are a number of myths about the TUPE regulations. Some people
say that changes to terms and conditions can be made only within
12 months of the transfer. That is not the case; it was a misunderstanding
of the early acquired rights directive. The reality is that changes
to terms and conditions can be made at any time after the transfer,
but they can be challenged if they are connected to the transfer.
That is the legal position. Members will gather that that is a
major legal minefield. Nobody knows when a change is connected
to a transfer and when it is made for other good business or organisational
The last point on TUPE
relates to pensions. At present, TUPE does not cover pensions
at all. In the public sector, we benefit from Cabinet Office guidancealthough
it has not always been
applied. I am sorry
that I keep referring back to the trunk roads, but the guidance
was not applied in that case and that has been gone over on many
occasions. Guidance is not enough. Officials did not follow it
in that case and no good reason was ever given for that.
We believe that TUPE
should cover pensions specifically. We are not happy with the
current consultation document on TUPE. It gives a number of options,
but in our view none is satisfactory. We believe that the TUPE
pension provision should say that when staff transfer they will
be offered equivalent benefits and broadly equivalent administrative
rules. There are two elements there.
would give the pension schemes the same status as other terms
and conditions, such as pay and holidays. We accept that there
is a need to change the administrative rules of pension schemes
when trustees and the type of scheme are changed.
Other work could be
done on pensions in Scotland. We suggested to the former Minister
for Finance and Local Government arrangements for dealing with
Scottish public sector pensions. We believe that there is merit
in having a Scottish public sector pensions provision that would
cover all changes in staff transfers and all changes to pension
At present, every time
a piece of legislation that reorganises the public sector in Scotland
comes along, the civil servants have to go around reinventing
the wheel, writing regulations and issuing changes in either primary
legislation or secondary legislation to cover alterations to the
pension scheme. We believe that there is merit in pulling that
together in one piece of Scottish public service pension legislation.
We believe that it is possible to do that under the Scotland Act
1998 and we would like arrangements to be made for it.
In the short term,
a change to the TUPE regulations, which we hope the UK Government
will adopt, will help in those areas.
I appreciate the answer that you gave, but I return to
the point about how effective you think the TUPE regulations have
been so far in protecting public sector employees. I appreciate
the fact that that is a general question, but where, on a scale
of one to 10 do you see the regulations?
TUPE has been reasonably effective in protecting the terms and
conditions of staff who transfer. It does nothing for the new
starts or to prevent the two-tier work force.
I want to move on and to ask what happens when PPP projects
are introduced. There are a number of different phasesthe
design stage and the
implementation stage, for example.
have told the committee that one of the strengths of PFI and PPP
projects is much improved project management: a lot more time
has gone into the design of services, leading to lower maintenance
costs later on.
How do unions get involved
in current PPP projects, at both the design and the implementation
The answer is that unions hardly get involved at all at the moment.
That has, however, improved somewhat in recent years in the health
service in Scotland, with the adoption of the partnership arrangements.
There has been involvement at a much earlier stage.
The staffing framework
that we drew up in the health serviceas I said earlier,
it has ground to a haltlaid down stages of involvement.
Trade union involvement was included in the earliest stages of
the project, before any decision about the form of funding was
taken. It is important to have an input into the early design
The health service
staffing framework deals with all the stages. It involves people
in the initial stages, takes them through the various project
stages of the PPP or PFI scheme andif there is a staff transferdeals
with issues related to that as well. Outwith the health service,
there was some resistance in the public sector, where there is
less familiarity with partnership-type methods of working.
Various spurious reasons
are given for not involving staff and trade unions at an early
stage. Commercial confidentiality is the famous one. In fairness,
previous witnesses to the committee have highlighted that commercial
confidentiality is an entirely spurious issue in the early stages
of a project. There is no commercial confidentiality until someone
starts to put in hard prices and figures, or possibly some innovative
solutions to particular problems.
If there is commercial
confidentiality, there are confidentiality arrangements. All my
trade union colleagues at this table attend negotiations that
involve confidentiality every week of the yearit is a fact
of life. Most of us spend most of our time in the private sector,
where many such matters are share sensitive. We are used to dealing
with that type of information. There is no reason not to involve
In some parts of the
public sector in Scotland, we suspect that the reason for not
consulting at an early stage is that that would throw some light
on the process, which some officials would rather we did not throw.
Local authorities would be particularly reluctant to publish some
they know that we would provide a thorough and detailed analysis
of some of the information that they would present. That is why
they have refused point blank to publish all sorts of informationeven
excluding commercially confidential material.
The essence is a proper
staffing framework that involves trade unions at the earliest
stage. There is some evidence of that in the health service, but
there is not much evidence of it anywhere else.
Can you refer to any specific examples of early involvement?
Yes. In the health service, there was some early involvement in
discussion about the Larkfield Road unit at Iverclyde royal hospital,
where staff did not transfer. There was early involvement with
some of the schemes in Glasgow. For example, trade unions were
involved early onironicallyin identifying several
issues at the secure care unit there. In his report on the Glasgow
secure care unit project, Dr Simpson pointed out some of the advantages
of questions that the trade union had raised on the staff side.
Those questions were not always listened to, but we did at least
make an input at an early stage.
I want to move away from trade unions specifically to
the involvement of people generally with PFI/PPP projects. You
talked about the Glasgow secure unit. How are employees in general
involved in the different stages of PPP projects, whether at the
design phase or at the implementation phase?
Their involvement is fairly limited. There is usually some discussion.
With a new hospital unit, for example, there would be involvement
in some of the design issues. Sometimes that involvement is a
little too late and sometimes not enough expertise or advice is
given. Staff can be involved at an early stage in the design of
a particular facilitythat has been true, historically, for
conventional builds as well as for PPP projects. There is a need
to provide support and assistance on what is possible in the area
of design, but we would argue that staffwith professional
supportare the best people to make an input into the early
design of any facility.
I want to amplify that slightly. Are you saying that
alongside the hard specification for the business operation of
a facility there should be a soft specification for how the people
processes might be handled? Is that the kind of thing that you
I think that the two things should be intertwined. There is a
risk in separating the two elements into soft and hard. The success
of any operation, particularly in the public services, depends
on getting the people issues right. One of our problems is that
such projects have been
viewed as an accountancy
exercise, for which the number crunchers do the numbers and the
architects and engineers do the technical design stuff, while
the people side is left as an add-on. The process needs to be
There are staff and there are staff. At North Lanarkshire Council,
there is involvement with staff such as head teachers from an
early stage, but the head teachers are not the people affected
by any transfer. I am concerned that the people who are normally
affected by a transfer are janitorial, catering, cleaning and
maintenance staff. In my experience, the problem is that the first
time those people are consulted is when they are introduced to
their new employer.
It is wrong that the
consultation with the trade unions is limited and delayed until
the last possible minute. Normally, we are faced by a series of
decisions that have already been taken and which we cannot influence,
and when the case for in-house provision has already been lost.
Given the fact that
many public sector employees have been delivering service over
many years, there should be earlier consultation with the trade
unions. Treasury guidance note No 4 details areas on which the
unions should be consulted. In fact, what it suggests does not
happen. The people most affected by PPP and PFI are those who
are consulted the least. That is a major issue.
I do not think that anyone disagrees that part of good,
effective project management is about ensuring that all the end
usersor everybody involvedare consulted at the very
beginning. The end users have an essential role in the design
process. Does Alex McLuckie see any change in that in the context
of current projects? Do you have any examples of good practice
I tend to deal more with local government. As far as local government
is concerned, I would say that the answer is no. I still believe
that the staff who are directly affected by PFI are consulted
In my evidence, I have referred to a particular master of business
administration thesis. I gave the person who wrote it an assurance
that I would not name them, but members can be assured that it
is a fairly high-profile, recent MBA awarded in Scotland. A number
of interesting phenomena were observed.
Because the initial
decision making was so dominated by general management financewhich
was quite right, because that is the perspective and strength
of general managementother issues simply did not get taken
on board and a very narrow perspective was taken. It was simply
a question of whether it was
possible to get the
finance in place by a certain critical date. That had three interesting
First, the managers
concerned assumed that people like new facilitiesas sure
as night follows dayand they worked on that operating assumption.
Secondly, the rumour mill started working big time, and they had
nothing in place to offset its effects. Thirdly, because no one
was speaking up for people management or human resources issues,
there was a realisation along the lines of, "Oops, we forgot
about that" after the event.
The managers had been
concentrating on the finance. With all due respect to those involved,
it was not rocket science. It was a matter of simple, basic communication
with folks and of telling them what was going on. If decision
makers miss the basic detail, that would seem to be a recipe for
the sort of problems that those concerned are experiencing as
Do you accept that whether there is good communication
among everybody involved is not a lot to do with its being a PFI
or a PPP project? Good communication has more to do with good
project management. You are talking about it in the case of a
PPP project, but do you accept that, in the past, project management
in the public sectorwhatever it is like nowwas awful
to the point of being non-existent?
One of the problems that the public procurement process had traditionally
was a lack of in-house expertise. Public procurement folks have
not had the status, terms and conditions, authority or power that
the process deserved. I would go a not inconsiderable way towards
agreeing with Elaine Thomson that insufficient value was placed
on the public procurement folks. At the moment, the problem is
that while there are a lot of good project management skills,
a very strong steer needs to be given from people such as members
of the Scottish Parliament.
Although I recognise
the limitations of arguing by analogy, Robert Solowthe distinguished,
Nobel laureate economistonce remarked that it is possible
to see computers everywhere except in the productivity statistics.
The analogy is good: when the design and implementation stages
are separated to the point at which there is no overlap in personnel
functions, mistakes will be made at the design stage that require
a lot of implementation time to correct. That is why the productivity
gains to computers and to new technology have taken so long to
There are weaknesses
in arguing by analogy, but because of the artificial segmentation
process it is possible
to see an analogous situation in some of the value-for-money projects.
I will pick up on the point about the MBA student. Is
that thesis a rerun of the Harvard Volvo project of 25 years ago?
That was about changes in working practice and the redesign of
the production flow away from demarcationthe unions mentioned
thattowards teamwork. If I remember correctly, the biggest
issue that arose was that Volvo had to step up its human resources
function to manage and communicate the change.
I return to that case
study because some of the evidence that we have taken this morning
indicates that, as Elaine Thomson mentioned, what is important
is not the end user or consumer of the product but how companies
take their work forces on board. That is what gives companies
the perceived management and financial gains. Is that a reasonable
That is a reasonable description. In the case that we are talking
about, there was a short-term focus on a single variableto
get the finance in place by a certain datebut sight of everything
else was lost. As I said, I cannot go into too much detail, because
members will work out quickly which company I am talking about.
It is ironic that, because of the pressures of time deadlines,
HR considerations were ignored and no one spoke up. This is not
about revisiting socio-technical systems; indeed, the lessons
could be extended to other stakeholders. Other folk missed out
in the process and the costs and consequences that the company
now faces are the result of people issues not being involved in
the critical early part of the decision-making process.
You mention in your written submission that the Chartered
Institute of Personnel and Development has produced evidence in
this field. After the meeting, can you point the clerks in the
direction of that work? Part of the remit of our inquiry is to
examine such work. If you could assist the clerks with that, we
would be grateful.
Certainly. You are welcome.
Does anyone have specific evidence of either good or
bad practice by PFI contractors? Does anyone have evidence of
contractors upping the game and being easier to deal with? If
not, is there definite evidence that the industrial relations
performance of private contractors is poor?
It is too early to tell with PFI in Scotland, as PFI
schemes, including the big ones, have not been operational for
long enough. The Hairmyres district hospital scheme has just kicked
off. Some of the big
PFI water schemes agreed early on that the staff would be seconded.
West of Scotland Water, for example, is a PFI without people.
We do not have evidence
either way about the industrial relations performance of PFI schemes.
Since 1997, when the Government changed the staff transfer guidance
rules, negotiations with contractors in some big PFI schemes have
been a good deal more constructive. There have been agreements
on transfer issues that might not have been achieved before the
Government guidelines changed.
Procedures and agreements
have dealt with some areas of concern, but they have not dealt
with the issue of the two-tier work force. We will have to see
in practice, as the PFI schemes come online, what industrial relations
machinery and practice develops.
I take it that your union colleagues share that view
and that they have nothing to add.
Throughout this session
there have beenI will not use the word "claims",
as that is perhaps too strongsuggestions that there is less
public scrutiny and transparency in PPP schemes than in public
procurement schemes. Do you have evidence to suggest that that
is the case? How would you improve the situation?
The first Minister for Finance, Jack McConnell, made
an announcement about openness arrangements in, I think, June
1999. He said, for example, that business cases should be published.
The difficulty was that all the big schemes had been signed off
before that announcement was made. There has been some openness
since then and a few schemes are beginning to publish business
cases. However, the big schemes were already signed off and so
we have not yet seen any great advantage from the openness arrangements.
I agree with Elaine
Thomson's point about project management. However, I draw members'
attention to an important difference in openness between PFI schemes
and public procurement schemes. In PFI schemes, spurious commercial
confidentiality and other commercial factors come into play at
an early stage. However, public procurement schemes start with
design issues. They say, "Right. What do we want? We want
a new school. What do want to put in the school?" All the
end users are consulted and a specification is built up.
A PPP/PFI scheme produces
only a broad specification at the early stages. Contractors then
come along and say, "Well, actually, we would like to do
it this way or that way." The problem is that the contractors
claim that people cannot be
as the contractors have innovative solutions for a problem. The
evidence about the Glasgow schools project illustrates that point.
Sometimes for spurious
reasons, but occasionally for reasons that have some merit, a
PPP/PFI scheme is less open and there is less consultation with
end users at the earlier stages than is the case in a public procurement
Is that partly because the clients do not have the game
sufficiently up to speed to be able to design what they seek to
deliver over the length of the project?
No. Lack of openness and consultation is a fundamental
part of the structure of a PPP/PFI scheme. When we compare the
stages of a PFI scheme with the stages of a public procurement
project, we see that the PFI structure, as well as having commercial
factors that come into play at different stages, causes lack of
openness and of consultation. PFI schemes in Scotland could be
considerably more open than they are. However, the PFI process
will always be less transparent than the conventional build.
I return to the point that Mr Davidson made about the
contractors. To step outside the PFI process for a moment, I will
add that some folks paint contractors as the sort of guys who
always wear the black hats. My view, for what it is worth, is
that contractors are an extremely heterogeneous collection of
The chemical industry,
for example, has a lot of expertise; it might be worth getting
input from it. In recent years, the industry has upped hugely
its use of contractors. Many people suggested that an adverse
consequence would be a dramatic rise in industrial accident rates.
In recent years, however, the Health and Safety Executive has
complimented the chemical industry on its handling of our colleagues
in the construction industry.
put it no more strongly than thatis that extensive use is
made of interviews with contractors, particularly on health and
safety performance. One suspects that good health and safety performance
correlates positively with larger aspects of good industrial relations.
There is a lot of accumulated experience, wisdom and insight in
the chemical industry, although I accept the point that it is
a different industry.
I visited Glaxo last week and got the impression that
the industry was strong on that point.
Absolutely. The industry has many useful insights that could be
drawn on. It has arguably had more experience than almost
any other industry
in dealing with the issue.
I have a supplementary question on the general area on
which we have heard evidence. PFI/PPP is designed to build, finance
and operate projects. The thrust of the unions' argument today
is that, even under current arrangements, the operation part is
not necessarily integral to such projects. The advice that other
people have given us is that a major advantage of PFI/PPP is that
such projects take into account whole-life costs and that the
design and build of such projects relies on the operation side
to ensure that, over the life cycle, there is a commitment to
good maintenance. In other words, the long-term commitment is
an integral part of the project. How would you rebut that, given
that you clearly do not see the operation element as essential
from the point of view of the private part of the project?
PFI schemes, which typically cover 25 or 30 years, do not take
account of the whole-life costs. It is not possible to work out
the life-cycle costs of any building over that period, because
regulations, maintenance techniques and staffing arrangements
change. That is why in most of the big PFI schemes the operating
elementparticularly facilities managementis broken
down and separated from the capital costs and the integral maintenance
of the building. Often, the special purpose vehicles that companies
set up to run schemes let out some of the facilities management
elements of the contracts on shorter contracts. It simply is not
possible to work out the life-cycle costs over the period of the
However, whether with
conventional procurement or with PFI, it is important to ensure
that we design and build public buildings so that long-term revenue
consequences are minimised. PFI and non-PFI hospitals have not
always been designed with the long term in mind. We have always
taken a short-term view of public buildings, although I suppose
that that is not fair to the Victorians. In the post-war part
of the 20th century, we have built to reduce the capital
costs of buildings and have not built with the revenue consequences
Whichever method of
funding is used, we must take into greater account the revenue
costs of running buildings, but that does not require control
over the operating element of the building. One does not need
to operate a building to take the operating element into account
at the design stage; that is an issue for the design of the building.
We argue that there is no need to include the operating element
in design, build or finance. We have had no great difficulty with
design and build; it is the finance element that brings in extra
costs. The operating element brings other complications into the
arena, which we have
As you have highlighted, the public sector has had a
poor record over the past three decades, if not longer, of maintaining
its buildings. Would PFI/PPP introduce that kind of discipline?
If we do not want PFI/PPP to introduce that kind of discipline,
how could it be introduced?
We simply apply the same discipline at the design stage. The answer
is that we do not know how well most of the buildings will be
maintained under PFI, because it is early days. We have already
given the committee a long listrunning into several pagesof
problems with maintenance and design in PFI schemes. I could have
given the committee a book load of such problems. The jury is
out on whether a PFI building is better maintained. However, let
us say that it is. My answer would be that we should introduce
to a public procurement method the same discipline on design and
build as there is in the private sector. In other words, we should
take into account the revenue consequences of the capital decision.
That is not rocket science.
Surely under PFI/PPP the risks are transferred to the
private sector, whereas under other arrangements the risks are
with the public sector.
I am afraid that that is not true in all cases. Risk
is often not transferred to the private sector. We could still
build that in. We can insure; we can build all sorts of safeguards
into a conventional build.
I do not know whether the matter is as simple as being
about revenue consequences. Much of the maintenance of the building
is to do with contract specification. You are right: it remains
to be seen whether greater contract specification under PFI/PPP
will produce more satisfactory results. Do you think that greater
contract specification on maintenance in the public sector would
be acceptable as an alternative to PFI/PPP?
Are you talking about specification at the design stage?
I was talking about specification at the maintenance
That is one of the difficulties, whether we are talking about
PPP or contracting out. Those of us who have worked in local government
and the health service can think of all the efforts that have
been made to specify the minute detail of the maintenance in the
contracts. That is extremely difficult to do.
Many years ago, when
compulsory competitive tendering was introduced, a long-standing
officer who was used
to dealing with such matters specified in a contract on a public
lavatory that the contractor should visit the toilets twice a
day. The contractor visited the toilets twice a day, but the officer
had not specified that the contractor had to clean the toilets
twice a day. I tell that anecdote every time I am asked about
the topic, as it illustrates the point that specifications have
to be made in enormous detail.
Every contractor will
say, privately, that they always price up to the specification
on the assumption that they will make no profit at all. They make
their profit from variations, because however good they areand
we have improved a lot since the days of that anecdotethey
will always have problems in specifying.
I deal with big multinational
companies that outsource various things. They will say that they
have the same problems in specifying those issues. The process
is very difficult. We can get better at it; we can share expertise,
as was said earlier. Indeed, direct labour organisations did that
through the Association of Direct Labour Organisations and other
arrangementsexpertise was beginning to be shared. With PFI/PPP,
however, a lot of that good work has disappeared or has been dissipated.
Competition is nothing new in catering and cleaning; we have had
it for a long time under CCT. Given a fair wind, the direct labour
organisation or direct service organisation can provide the service
as well as the private sector can. We sometimes lose sight of
the difficulty. The DSO is not given the opportunity to compete
because of the information that is given out at an early stage
where there has to be a transfer of risk. That is an important
issue for DSOs. Competition is nothing new to cleaning and catering
The problem with PFI/PPP
is the concept that there must be a transfer to the private sector.
There is competition between one or two private sector companies
to provide a service. In a consortium, no one company deals with
every aspect. A catering company deals with the catering, a cleaning
company deals with the cleaning and a maintenance company deals
with the maintenance. They all come together and no one company
If we are serious about
best value, we have to consider all the providers, including in-house
provision. That is not happening, however, because ill-informed
peopleor perhaps well-informed people who are determined
on taking a certain routeare saying that there has to be
a transfer. I believe that, when bids are considered against a
contract specification, the DSO could compete for and win those
contracts. Our difficulty is that we are not being allowed to
because of the
way in which people
are interpreting the rules.
We have exhausted our questions. I thank the trade unions
and Professor Beaumont for giving evidence. On a couple of issues,
we might want further concrete examples from you. You said that
some local authorities have blocked the issuing of details of
PPP/PFI contracts. If you have specific examples of that, we would
be interested to see them. One of your summary points says:
are not affordable and result in substantial cuts in services."
If you have specific
examples of that, again, we would like to see them. We will probably
consider a number of other issues from your evidence; if you could
supply us with further evidence on or examples of those, that
would help the committee.
We have been interested in examples of traditional or
conventional public procurement that meet modern standards and
provide the best project management. We would be interested in
some examples of that.
I thank our witnesses again for their evidence, which we will
ponder. I suggest that we take a short break for three or four
minutes. Our next items will be in private.
I have one point to mention before we go into private.
It is important to mention it in public. It had not quite clicked
with me, convener, that you declared your membership of the Scottish
Parliamentary Corporate Body. The committee has an unusual role
in that we scrutinise the accounts of the SPCB. How do you intend
to address that issue the next time that it crops up?
I have asked the clerk for advice on any potential conflicts
of interest that relate to that. While I remain a member of the
SPCB, my intention is to step aside from any discussions on that
matter and hand over the chair to the deputy convener. I hope
that you will bear with me until I get advice from the clerk on
until 12:15 and thereafter continued in private until 12:52.