Examination of Witnesses (Questions 1
WEDNESDAY 21 NOVEMBER 2001
TURNBULL KCB, CVO, MR
CBE, MR JAMES
1. Good afternoon and welcome to the Public
Accounts Committee. Today we are looking at the funding competition
used to finance the Treasury building PFI deal and we are very
happy to welcome Sir Andrew Turnbull, who is the Permanent Secretary
of the Treasury, Peter Gershon, Chief Executive of the Office
of Government Commerce, Paul Lewis, Managing Director, Exchequer
Partnership plc, and James Stewart, the Chief Executive Officer
of Partnerships UK. Could I ask you this, Sir Andrew: paragraph
nine states that all parts of the PFI deal are usually obtained
in a single procurement. Was the decision to use a separate funding
competition a departure from previous Treasury guidance?
(Sir Andrew Turnbull) Yes. The title
of the document is "Innovation in PFI Financing." This
was a first and we were trying to see whether this was a development
which could be successful and, if so, to extend it into other
areas of PFI.
2. Based on your experience, are you going to
be looking for a funding competition arising in many more PFI
(Sir Andrew Turnbull) The whole of chapter two is
trying to identify where a funding competition might be possible
and where not and recommending that at least it should be a question
that is always considered and that people should give themselves
the right to opt for it if they want it. It does not say you should
always have it; indeed, it indicates some circumstances in which
it would not be appropriate.
3. Can I ask you about paragraphs 1.13 and 1.16?
It states that the key to the success of the competition was the
appointment of skilled advisers. Was it necessary, do you think,
to rely so heavily on advisers?
(Sir Andrew Turnbull) It was a complicated deal and
we equipped ourselves with a good advisory team. If the implication
is that we were over-dependent on advisers and that the team we
had ourselves was insufficient, I would rebut that. At the time,
we had within the Treasury the Treasury Task Force who have now
grown into PUK. That was a very important source of advice and
we drew on them to be our advisers. The answer is that this was
a deal in which there was a balance of both strong, external advisers
but also strong, internal advisers.
4. Based on your experience of this deal, do
you think that there is a case for Whitehall to have more internal
expertise in this area so it does not have to rely so heavily
on external advisers?
(Sir Andrew Turnbull) That was a conclusion which
led to the setting up of PUK, a feeling that throughout the public
sector there were too many people inventing the wheel, putting
together teams of advisers, very heavily dependent on outsiders
for the first time. What PUK has done is taken what was the Task
Force, put it into this separate entity and we now have a group
of people who work full time on PFI cases. As they finish one
case, they are available to be redeployed on another. This should
create a cadre of expertise which is available for use throughout
the wider public sector.
5. Mr Lewis, paragraph 1.50 shows that all of
the benefits of the competition accrued to the Treasury. What
incentives were there for Exchequer Partnership to obtain the
best priced financing, given that all the incentives went not
to you apparently but to the Treasury?
(Mr Lewis) The funding competition was one of the
criteria that we were given for carrying on the project.
6. That was the incentive?
(Mr Lewis) Absolutely.
7. You had no choice obviously?
(Mr Lewis) Not really.
8. There was no other incentive for doing it?
(Mr Lewis) We knew that because of the negotiation
procedure a funding competition was probably the best route to
9. How heavily involved were the Treasury? Would
it be fair to say they were all over the funding competition,
standing at your shoulder the whole time?
(Mr Lewis) The funding competition was run by our
financial adviser but he did consult with the Treasury advisers.
10. Mr Gershon, paragraph nine of the executive
summary states that there may be a role for funding competitions
in future PFI deals. Do you think they should be used in every
(Mr Gershon) No, I do not. This is a sophisticated
technique which needs to be used very carefully in certain circumstances
and the report sets out the sort of criteria that might point
clients towards situations where a funding competition might be
11. If they are not going to be used in every
deal, and you seem to be throwing a bit of cold water on this
presumably because of the complexity, are they really a credible
option in the PFI process?
(Mr Gershon) They are certainly a credible option
in projects that meet the sort of criteria that are set out in
the report but as the report also indicates there are other ways
in which clients should take a close interest in the bidder's
financing, which need not necessarily mean running a funding competition;
looking to what extent the competitive tension is producing good
financing arrangements by, for example, benchmarking. There are
also other techniques that could be used to establish whether
the financing is of a competitive nature. For the future, we are
in the process now of producing revised standardisation for PFI.
We will certainly be recommending to all the public sector clients
that they always reserve the right to require a preferred bidder
to run a funding competition. We would expect that, by reserving
that right, that would introduce additional competitive tension
into the process to drive through competitive financing arrangements.
12. In the context of funding competitions perhaps
not being used on many occasions, can you tell us a bit more about
the way pressure can be exerted on the preferred bidder to obtain
best value financing?
(Mr Gershon) For example, in PFI competitions, the
public sector client will have advisers. He should look to his
advisers to give an input as to whether they feel the financing
that the bidder is putting forward is of a competitive nature
and to what extent the bidders have explored the various ways
in which the project can be financed to ensure that the keenest
terms are put on the table.
13. Sir Andrew, who was the manager of this
(Sir Andrew Turnbull) There was a structure of relationships.
There was a senior responsible officer in the Treasury, who is
one of my immediate deputies, advised by a steering group, who
then employed a manager from GTMS. It followed the structure of
relationships which is advised by OGC.
14. Was there continuity in the management of
this project, as far as the Treasury was concerned, or were personnel
changing during it?
(Sir Andrew Turnbull) There was a remarkable degree
of continuity. The Treasury team, with the exception of one person
who has retired, is the same team that started on this thing in
15. So generally this would be considered a
success. Just as a matter of interest, why is it that a project
manager in Whitehall does not ever become a permanent secretary?
(Sir Andrew Turnbull) There is a particular skill
set that has been thought to be needed to be a permanent secretary.
You are heavily involved in policy advice, working very closely
with ministers. I do not rule it out in the future. I think that
skill and experience in project Management will become more highly
rated in the future. We are all a product of 20 or 30 years of
history. If we are looking 20 years hence, it may well be different.
16. Mr Gershon, you are not a product of 20
or 30 years of history in Whitehall. What do you think of this?
(Mr Gershon) I am an anomaly. There is a difference
between someone coming into the sort of job that I have come into,
which is of a fairly specialist nature, where it is not necessary
to have a deep understanding of Whitehall ways and skills. I can
relate private sector experience and try to bring it to bear in
a public sector environment, but I do agree with Sir Andrew. Now
there is a tremendous shift in emphasis onto successful delivery
that is going to result in project management skills having much
greater significance and importance in the future than I sense
that they have been in the past, where the emphasis has been much
more about the policy aspects of the job rather than the delivery
aspects of the job.
17. It is really nice to be on a Public Accounts
Committee where we are not having to say, "Why the hell did
this go wrong?" and I think it is the first NAO report that
I can remember where, on the contents page, part one begins with,
"The Treasury competition was a success". I hope that
sends out the message to Whitehall that we do not always go digging
for muck and spreading it around. Sometimes we can say, "Well
done." It is also worth exploring when things do go well.
Having said that, one of the things set outI refer to page
two, paragraph 4(a)is, "The Treasury had two objectives
in requiring such a competition: a) to persuade banks and other
project funders to accept standard contract terms for future PFI
projects. . . . This was intended to streamline the procurement
process and reduce costs for both the public and private sectors."
If we go forward to paragraph 1.19, what is said therecorrect
me if I am wrongis that the evaluation criteria in determining
who was going to get this contract set out that bidders were to
be evaluated on three criteria, one of which was the acceptance
of the standard terms and conditions. Presumably, if you were
wanting to get those standard terms and conditions accepted, but
you were only going to accept bids that do accept those standard
terms and conditions, is it not rather a circular way of proving
that these standard terms and conditions can be successful?
(Sir Andrew Turnbull) I think it would have been slightly
odd if we had saidand I think there was a demand for this
from bidders"We are going to devise some standard
terms reconciling a number of different things that have appeared
in different contracts"; then to have produced it and said,
"We are not going to use it in this particular case."
It is not saying you then had to produce a bid that was standard
so there was no scope for imagination in the solution offered.
It is the terms that are being standardised; it is not the bid
18. What I am not saying is that if you are
trying to establish a model of standard terms and conditions then
you should not incorporate that in the model that you are seeking
to pilot it with. What I am saying is that if you are going to
evaluate those bids that come in for the contract and say, "We
are only going to accept those bids that go along with this rather
than any bid that deviates from those standard terms and conditions",
that is a bit circular. Am I being unjust?
(Sir Andrew Turnbull) If the standard terms were saying
something about the nature of the solution that was being offered,
you would be right because we would have been cutting out the
scope for innovation but this is trying to reduce the transaction
costs of this for the benefit as much for bidders as for the public
19. Of those companies that in the end decided
not to bidI think there were ninenone cited anything
to do with the standard terms and conditions?
(Sir Andrew Turnbull) Not to my knowledge although
I was not there at that time. I do not think that was the case,