Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 80 - 99)



  80. Can I ask the Treasury for their view on that? Is it correct that there were not any index linked bonds around a few years earlier that could have been used in this way?
  (Sir Andrew Turnbull) This is a question relating to corporate index linked bonds. This was a market which was developing.
  (Mr Stewart) There were a number of small index linked bonds. There was no real liquidity in the market. There was great uncertainty as to their deliverability. When the funding competition was launched, there was much more liquidity in the index linked bond market and banks were looking at offering an index linked product as well, although they were struggling to do so. The market had moved on between the time when the original bid was put together and when the funding competition was run.

  81. Had we gone ahead in 1997, as we would have done if there had not been a government change, the whole project would in practice have cost £13 million more because the option which was finally chosen was simply not available because companies were not producing index linked bonds.
  (Mr Stewart) It undoubtedly would have cost more. The Treasury were seen to have influence in the negotiating power and the power of the Treasury generally had an effect on the market at that time. You have to compare a competition that was run by Exchequer Partnership but in close consultation with the Treasury with a competition which was run in isolation within Exchequer Partnership.

  82. Mr Gershon, paragraph 1.14. The compensation being offered to Societe Generale if they did not come in with part of the funding—why exactly was that done in the sense that I would have thought it would be more logical to wrap that up in whatever price was being paid to Societe Generale anyway.
  (Sir Andrew Turnbull) That is probably for James or I. You have to separate their role as an adviser. We would not want to wrap up their role as a provider of funds with their role as a provider of advice. The explanation for this is that they had, in the original bid, offered to provide this mezzanine level of debt. We wanted to have a competition for that. We wanted to compete that as well as the senior debt, but we were also advised that it was quite difficult just to have a separate competition for that one tranche. We wanted to hope that the people providing the senior debt would also offer this mezzanine debt. There was some doubt as to whether people would do that so you could have got a situation where you had one bidder who provided the senior debt and the mezzanine debt and another bidder who only provided the senior debt. Therefore, you would not have a competition. We arranged with SocGen that they would maintain their offer to provide this, which might get taken up and it might not. In effect, we bought an option with them. What it means was that when we had these two bids came in, we had the Ambac bid which was for both the senior and the mezzanine debt and the FSA bid which was only for the senior debt. We were then able to combine that with the SocGen offer which had been maintained and kept on the table since 1996 and effectively we were able to then have two competing proposals. This was an offer which we think is entirely vindicated because if we had not done it we would have had a problem with this competition. It was worth paying that fee to maintain that option.

  83. Can I come back to paragraph 1.25, which talks about the number of institutions originally invited and the number that declined? You said that the need to agree the standard terms was not one of the reasons why any of the nine declined. We are told in the report that the reasons were, .".. mainly because they did not feel that they would be able to offer a competitive bid and did not want to commit resources to the competition." I am quite surprised that there were so many that you did not have some pretty good idea in advance that they would not be able to provide competition or the funds.
  (Sir Andrew Turnbull) We did not know how many other fish they were chasing at the same time. Some of them said, "We do not want to go in for this because we are making an effort somewhere else", which was a perfectly reasonable, competitive business decision for banks to make.

  84. It seems quite a lot to me, that about a third of the total refused to bid at all. Is that usual?
  (Mr Stewart) A lot of people often prequalify for these things to find out what is going on, purely to get the information into their hands and the documentation. What the banking market at the time was having to assess was whether they would have a chance of winning. The term of this deal, which is 35 years, means that any bank that was going to be competitive would have to lend extremely long term. At this time, the building societies were entering the fray and pushing out the term of debt available in the banking market. To be honest, people looked at the competition, at the Abbey Nationals and the Halifaxes of this world and, because they were beginning to be very competitive, they took the view that it was not really worth the effort of continuing.

  85. Or even prequalifying?
  (Mr Stewart) There were 28 expressions of interest which were trying to get hold of the initial information and I think the surprising thing is that 19 submitted term sheets.

  86. You said 28 expressed interest. I thought it was 28 invited by the Treasury to express interest.
  (Mr Stewart) You are right. 28 were invited, received a bit of preliminary information and 19 submitted term sheets of which they short listed down to the six financial institutions and the two bond arrangements. I think 19 is the more surprising figure.

  87. We are told " mainly" because of these two reasons. Do you know what the other reasons were? Presumably some of these nine dropped out not for those reasons but for other reasons.
  (Mr Stewart) Primarily, it was the fact that they were not going to win. They could not compete on the term or the period of the debt that they were being asked to offer.

  88. The fact that they would not be able to offer a competitive bid is listed here as one of the reasons but I am wondering what other reasons there are.
  (Mr Colman) It is up to the banks to decide at the time whether they want to proceed and there can be any number of reasons for a particular bank to be unenthusiastic about proceeding.

  89. We are told most of the nine dropped out because they could not offer a competitive bid or because they did not have the resources but presumably because it is "mainly" there were some other reasons as well. I am trying to chase up what the other reasons were.
  (Mr Colman) We have been told while we were doing this work that some of the banks did not like the standard terms and they were not supposed to like them because the Treasury was wishing to achieve something with the standard terms which might not please all banks. That may have been a factor.

  90. We were told by Sir Andrew earlier in answer to Mr Gardiner that that was not one of the reasons.
  (Sir Andrew Turnbull) We eventually had a field of 19 bidders to play with. We did not curtail this field to something that was a problem to us.
  (Mr Stewart) I have a whisper in my ear that no reasons were expressed by some of the bidders.

Mr Jenkins

  91. One of my colleagues asked a question with regard to funding it by gilts and you said it was inappropriate because of state aid rules. If I have a subcontractor and they are the preferred bidder, where does the resource cross the state aid line? If I am giving them special advice, if I am doing the risk assessment and all that has been funded by the Treasury, where does the other resource, the cash, cross the state aid line?
  (Sir Andrew Turnbull) We are paying for some of our own costs, to have our own advisory team. If we then make available money to a private sector organisation which does not reflect the current costs of capital in the market, that is something on which you can frequently find yourself being challenged.

  92. There must be a distinct dividing line that says, "This is state aid. If used inappropriately and if I allocate resources of one sort or another to a company in the private sector which may not be able to purchase those resources or gain those resources in the market place such as the risk assessment, such as the special advisers", where does that not transgress the state aid rule; whereas providing the cash from another resource does? It is both money at the end of the day, is it not?
  (Sir Andrew Turnbull) If we just bought it, we would be just back to a conventional construction project. In this case, we are lending money to a private sector organisation which then has access to that capital which is not available generally. It does not reflect what other property companies will have access to.

  93. But this is the preferred bidder. This is your contractor. All you are doing is supplying a resource, the money.
  (Sir Andrew Turnbull) They still have that piece of business. In the competition, we had never hinted that we would do it this way. There is a change of terms where we say, "One of the things you will get if you take this contract is this money at the gilt rate." All the people who did not bid or dropped out earlier would think, "Wow, I would have come in if it was on that basis."

  94. You have still confused me here. If I had two different companies they are not going to get any more out of allocated funding. That has all been taken as part of the price of the total contract, the package. This competition does not mean that Exchequer Partnerships are going to get any more money, does it?
  (Sir Andrew Turnbull) I interpreted funding by gilts as meaning we borrow the money and on-lend that money to our contractor.

  95. You are saying that contravenes state aid rules?
  (Sir Andrew Turnbull) I am saying it could do.

  96. The truth is it was not even checked?
  (Sir Andrew Turnbull) We did not want to do it this way because this is the argument which says the government can borrow cheaper; therefore, anything that it buys from anyone, if anyone selling to us is borrowing in order to fund its activities, it would be much cheaper if we lent them the money. Down the end of that road, you say to the window cleaner, "Do not buy your own ladder. We will lend you the money." The difficulty with that is that the terms on which people are borrowing in order to equip themselves to provide services to us reflect the risk they are undertaking. It is a distortion for us to lend to people at the risk free rate so we would have to set up a proper banking arrangement so that when we were raising money we were then assessing what were the risks of the project. What is the creditworthiness of the people to whom we are lending money. We do not have an apparatus like that in government. By and large, the state does not want to be in a position where it is the all purpose lender for everyone.

  97. I did not think I said that. I just said if I have a contractor—my window cleaner is a good example—and if he was coming round to do my 2,000 windows every week and I said, "I want to employ you on a labour only contract and I will provide the materials", it is quite common in business, is it not?
  (Sir Andrew Turnbull) It would be probably wise to do it on commercial terms. If you happen to have some privileged source of finance, you would not necessarily assume that because you could borrow at that rate you could lend it to him at that rate.

  98. If he is working for me I see no reason why, if I can get the price down by doing that. I would be stupid not to do it.
  (Sir Andrew Turnbull) In the calculation you have made in getting the price down, you have to take the risk into account, and you probably have not.

  Mr Jenkins: Yes, I would have done, believe me. I would not fund him up-front, I would make sure he got paid on a weekly basis.

  Chairman: Can we get back from window cleaners.

  99. I want to bring it down to the basics, Chairman, because it is a basic, everyday requirement, raising cash. I have read this report and read about the funding in the city and how effectively it is working and it is a simple way of raising cash to fund this project, but I am more interested in assessing the risks of this project because I think most funders would know what the risks were and would have done it themselves, but we have done it on their behalf. How much risk does that entail, doing the risk assessment for them and then handing the package over to them?
  (Sir Andrew Turnbull) We have not done that; they have assessed the risk of all the things I listed in earlier questions. We have not duplicated EP's assessment of risk. What we have assessed is what are the risks we no longer have to provide for, and in the calculation we then put those risks into our comparison of doing it as a public sector project.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 17 July 2002