Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 20 - 39)

WEDNESDAY 21 NOVEMBER 2001

SIR ANDREW TURNBULL KCB, CVO, MR PETER GERSHON CBE, MR JAMES STEWART AND MR PAUL LEWIS

  20. One of the objectives for the competition was to get the standard terms and conditions accepted by the finance markets. What you are telling us is that there were no problems with those standard terms and conditions. Is that right?
  (Sir Andrew Turnbull) I do not think there were. They have gone on to become the standard terms.

  21. Mr Lewis, funders usually undertake their own due diligence to examine the risk that they are looking at. Paragraph 1.15 tells us that this did not happen in this case. There was a company that was taken on to provide that facility for all the bidders. Tell us if that worked successfully and why, in your view.
  (Mr Lewis) I think it did work successfully. The fact that the Treasury Task Force was trying to use a standardised guidance and that we were asking bidders to bid on standard terms meant that the whole process of running the competition was a smoother one from issuing bids to the financial close. Comparison between one bidder and the other could be done in a much more efficient way.

  22. The costs of that were met by which party?
  (Mr Lewis) The preferred bidder, us, in this case.

  23. You met the costs?
  (Mr Lewis) Yes.

  24. Despite the fact that normally the bidding parties would do their own due diligence work and here you have a number of bidding parties, all of whom would have incorporated those costs into their own ultimate price, here the Treasury ended up picking up the tab for this?
  (Mr Lewis) I am not sure on that point.
  (Mr Stewart) The primary reason for doing this was to save time in that the due diligence work could be carried out in parallel with the bidding process such that it would be made available to all bidders and indeed the preferred bidder. To answer your specific question on the costs, normally what would happen is that the banks and the preferred bidder would delay the due diligence process precisely for the reason that you are alluding to, which is that none of the banks will want to take risks on those sorts of costs. Normally, the cost of that is passed on via a unitary charge to the public sector body entering into the contract. I do not think this was any different in terms of the end result to the normal situation.

  25. Except that a lot of companies ended up not being successful bidders ended up not bearing the costs of due diligence that they would have normally borne for not being successful bidders.
  (Mr Stewart) That is true to the extent that they would enter into an extensive due diligence process. Normally, you would not have got multiple banks to incur the due diligence costs while they were still in competition. There would have been a delay.

  26. In terms of the advisers that we had, Kleinwort Benson and Societe Generale, what was the cost of those?
  (Sir Andrew Turnbull) Right from 1996 through to the conclusion, I think it was £2.6 million. That is for all the advisers.

  27. Paragraph 1.42 says that the bond to finance the Treasury building cost 163 basis points above gilts. Can you explain why that was good value for money and why it would not have been cheaper to finance the project with gilts?
  (Sir Andrew Turnbull) I go back to why this 163 basis points existed. Principally, because there was risk in the project and if we had lent money at gilts rate we would have been lending into a risky project but making no charge for the risk, which is a mistake the government has made too often. Another point is whether lending at that rate was a state aid possibly. The main reason is that that 163 was there for a purpose. It was an acknowledgement of the risk of the project.

  28. The report does state that it was deemed to be good value for money.
  (Sir Andrew Turnbull) That was by looking at comparisons with other deals going on at the time.

  29. Referring to box one on page 12, where you have what in my view is an extremely helpful summary of the different financing characteristics of bank as opposed to bond financing, would it not have been possible to have got parity between bank and bond financing on the project and therefore open up the project to the possibility of getting the banks on board?
  (Sir Andrew Turnbull) We invited 28 people to bid, of whom 19 responded. A lot of them were banks. In other words, they were not thinking, "This is hopeless. There is no point in my bidding here." They thought that they could come up with a product which could compete. In the end, it did not work out that way as the bond, and the indexed version of it, and in turn the wrapped, insured version of it won out. It was not the case that people said, "You have set this thing up in a way which means that only someone offering an indexed bond has any chance here", because if that was the case they would not have bid. Quite a number of them did bid and quite a number of them got through to the short list.

Mr Bacon

  30. On this question of paragraph 1.42, you referred to how it could have been seen as a state aid if you had financed it through gilts. I take it you are saying it could have been seen as a state aid under EU rules, given that you had this Exchequer Partnership project?
  (Sir Andrew Turnbull) We would be lending to a private sector body at something other than the normal cost of capital.

  31. Nonetheless, this is a Treasury building. The thing that interests me about paragraph 1.42 is there is a spread of 163 basis points over gilts to accommodate the risks inherent in the project but why could not the Treasury have financed the development and refurbishment of its own building, which was a state building, using gilts?
  (Sir Andrew Turnbull) This is the first time this has been done in 90 to 100 years. The Treasury has never engaged in a major property transaction before. The idea of becoming our own developer would have taken us into completely new territory, asking us to do something we have never done before and probably will never do again.

  32. Who built the Treasury building in the first place?
  (Sir Andrew Turnbull) Probably the Ministry of Public Building and Works.

  33. Are you saying there was 100 years ago but there is not now expertise within government on managing this sort of project?
  (Sir Andrew Turnbull) The responsibility for buildings is devolved to departments. The legacy of that was Property Holdings which disappeared some years ago. That is the route that produces the Marsham Street building, if you do it yourself.

  34. There is quite a lot in the report on pages 16 and 17 about the bonds and issue of the bonds. Can you say how much money was raised by issuing the bond?
  (Sir Andrew Turnbull) £125 million.

  35. Was the 2.6 million for advisers' fees on top of that or were your net proceeds 122.4?
  (Sir Andrew Turnbull) The £2.6 million includes lawyers, quantity surveyors and so on.

  36. On top of?
  (Sir Andrew Turnbull) Yes.

  37. Was it 127.6 or was it 122.4?
  (Sir Andrew Turnbull) I think the £2.6 million is what the Treasury has incurred for itself.

  38. Is it not normal that if a company is trying to raise money it issues a bond and all the fees associated with raising the money are slapped on the bond?
  (Sir Andrew Turnbull) All the fees on the EP side would have been, yes.

  39. You raised 125 million.
  (Sir Andrew Turnbull) We did not. EP raised it.


 
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