Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 100 - 119)



  100. So EP, being your preferred bidder, your contractor, has looked at all the risks, where do they finish? Where do you go over the line and say, "We now as the funder recognise the risks we took on, for instance we understood the construction costs, but it has gone awfully wrong, or the cost of raising the money has gone awfully wrong, where is the loophole?" Where do they come back and ask for more money?
  (Sir Andrew Turnbull) If they come back and ask for more money, which I do not think is going to be the case, the first thing which would happen—assuming there is a big catastrophe—is that their equity would have been used up, the mezzanine debt will have been used up, so some quite considerable risk transfer would have taken place. You may get this argument which says that the danger of some PFI projects is that you transfer risk and you are kidding yourselves, because if eventually something serious goes wrong you end up taking it back or renegotiating the contract. We do not think this is that kind of project. That happened in the IT world but this is a building refurbishment. We do not know what the risks are; we need to wait another 35 years to know whether the assessment of risk they made turns out to be correct. What I will observe is that the most risky phase is when you open the building up and start trying to do the construction. We are past that phase now, so I would be very surprised if it turned out to be one of these boomerang projects because I think we are past the point where the most serious risks of this project have been identified.

  101. The standard terms and conditions were accepted, and it was important we got these accepted by the bidders, was it not? Very important. How much did it cost us, because some bidders did not come in because they did not want to accept these standard terms and conditions, how much did it cost us to get these accepted?
  (Sir Andrew Turnbull) I do not think we know. What we know is that these standard terms have now become the standard terms. The private finance market has continued. If anything it probably has not cost us, it has probably saved money, both for ourselves and for private finance contractors.

  102. If no one had taken part in the competition, who assessed the risk that was an outcome?
  (Sir Andrew Turnbull) One of the criteria that the C&AG has identified is when is it a good idea to have a competition, and it is when you can be reasonably sure that you get the commercial close—you have the building, the engineering, identified, and you can take that project and finance it. You are not going to get into a position where you go to the financiers and the funders and they say, "This is the kind of deal we do not want to fund." We were pretty confident we would be able to fund this deal. Obviously the terms on which we might fund it could vary but it was not going to be one of those things where people just said, "This is just not a bankable project." Paragraph 2.25 says something like: "Using this technique we can be reasonably sure you can settle the commercial characteristics of the deal and then take it away and get it funded." That is what we thought was the case with this project and it turned out to be right. If we had seriously thought that the funders were going to raise all sorts of questions and start unpicking the commercial part of the deal, then that is the kind of project which would not have been suitable, but we did not think that was the case and it has not proved to be.

  103. So there was no fall-back position? You knew you could sell the deal?
  (Sir Andrew Turnbull) We were confident we could, yes.

Mr Gibb

  104. Essentially this project is the Treasury instructing a contractor to spend £125 million doing up the Treasury and instead of paying the bill, the £125 million, once the private sector had done everything which needed to be done, you wanted it paid over 30 years in HP instalments of £10 million a year? Is that not essentially the difference? That is where you get into this problem of this risk transfer.
  (Sir Andrew Turnbull) This is the argument about why are we doing PFI. There are lots of people who think that is what PFI is all about, and they are wrong. You are kidding yourself if you think you are saving money. If you do the true financial calculation, instead of borrowing money and having it added to the national debt and then having an asset, you have a liability spreading out into the future. In terms of your true balance sheet, those two things are equivalent and you should not get into the PFI if that is your only motive. The main reason for getting into this was we thought we could do it better, would get a better project, we could transfer risk, we could get more innovation and all the advantages I listed earlier.

  105. I see that in terms of getting a private contractor to do the work, to manage the work, to get a private contractor to take care of the maintenance of the building, all very good, but I do not understand why you need to have the funding of this project done by the private sector.
  (Sir Andrew Turnbull) The funding is what drives the contractor. The due diligence of the funders is the thing which is exerting pressure on them to do this thing well.

  106. Why? I do not understand why that should be. Why is it not just saying, "You can construct the contract to do the repairs, to do the refurbishment, to do the servicing on an annual basis"?
  (Sir Andrew Turnbull) We have 30 years of experience of borrowing money and getting people to just build things for us.

  107. That is when you have managed it yourself. I am saying get the private sector to manage the project, get the private sector to manage the servicing of the building, but not get the private sector to raise the funds and fund it and give you an HP arrangement, which is essentially a big part of this contract.
  (Sir Andrew Turnbull) But the fact they have raised the funds, they then are managing the risks and—

  108. The risks you have talked about today are to do with the building project—the asbestos, the design, the listing problems. Is the Treasury a bad risk in terms of paying this?
  (Sir Andrew Turnbull) We are not a bad risk.

  109. So where is the risk in terms of the funding?
  (Sir Andrew Turnbull) They have to manage this thing efficiently, they have to make a decision at the start as to how they build it relative to how they subsequently maintain it, and then they have to take that proposition and get it funded.

  110. Only because you want them to get it funded, because that is how you want to pay for it. There is nothing inherent in a construction project that it be funded in this way, is there? You could quite easily pay for this up-front.
  (Sir Andrew Turnbull) You are suggesting we have a design build operation with no funding?

  111. Yes.
  (Sir Andrew Turnbull) We believe that bringing the funding in is what actually creates an additional pressure, because people are then backing their judgment of the risks of this project against the finance they themselves are raising.

  112. I think it goes to the motive of the project. I do not accept that at all. It does not make sense to me at all. I am a Conservative member here, so I am not opposed to capitalism and the free market. To go back to the original question, if the motive was simply to get this thing off the Government's books, that would be a wrong thing to do. I see the funding element of this as precisely that. I do not understand where the credit risk is in terms of this project. You are the Treasury, if you are a credit risk, God help the country, frankly.
  (Sir Andrew Turnbull) They are not lending money to us—

  113. But is that not the way you have structured it? Essentially, they are lending the money to you so you can refurbish the Treasury, and the only reason you have constructed it in this complicated way is so you do not have to include this as gilt-edged debt.
  (Sir Andrew Turnbull) No. We have constructed it in this way because we think we would get a better performance out of the people building the project and subsequently maintaining it if the money they have raised is at risk.

  114. I do not see that. You can transfer all that risk to the private sector by just having a construct, design, build contract and maintenance contract. You really can.
  (Sir Andrew Turnbull) Experience is against you.

  115. Where in the Government accounts then is this liability or this long-term financial commitment?
  (Sir Andrew Turnbull) In the Budget documents we report the future service payments of PFI projects.

  116. So it is all spelt out for the financial markets to see. If I get the Red Book out or the PBR in November, I will be able to see in that book—the Green Book or the Red Book—all the financial commitments the Government has entered into in these kind of arrangements in the long-term on an annual basis, is that right?
  (Sir Andrew Turnbull) I am not sure whether it goes right the way forward for 35 years, but certainly for the medium-term future.[3]

  117. Basically what you are trying to do is shift off the Government's balance sheet significant amounts of debt in the same way that companies in the 1980s shifted off balance sheets—
  (Sir Andrew Turnbull) That is not our motivation.

  118. It may not be your motivation but it concerns me it is the state's motivation to get this stuff off balance sheet, because I do not really see any other justification for it. I do not see that you cannot get this risk transfer in other ways. It can only be that the real motivation somewhere is to get this stuff off balance sheet. My concern is, what is to stop every government department loading itself up with these long-term commitments, provided they can meet the annual payments in the short-run, and then suddenly we discover in 10, 20 years' time we have a state sector riddled with debt which we do not see any sign of in terms of looking at the accounts now.
  (Sir Andrew Turnbull) The resource accounts will include these payments to departments, so they quickly get to the point where the sum total of all the annual payments they are making is actually a charge, is creating a pressure, on their departmental expenditure limit.

  119. Can I turn to page 30 in the report. The annual payments are £14.037 million. Am I right in thinking that is split between £10.6 million debt service and £3.433 million service fee? What is the difference between a debt service and a service fee? Is debt service the interest plus capital repayments?
  (Sir Andrew Turnbull) Yes.

3   Note by witness: Table C18 of the Red Book 2001 sets out the estimated payments under PFI contracts up to 2025-26. Back

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