Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 120 - 139)



  120. And the service fee is the maintenance of the building?
  (Sir Andrew Turnbull) Security, maintenance, cleaning, all the rest.

  121. So that £3.433 million is a considerable drop from the £9 million?
  (Sir Andrew Turnbull) The £9 million was the total cost of what we are paying at present, some of which included the rental equivalent. Someone asked me, did I have in my head the figure for the facilities management bit of this, and I said I did not but I can—

  122. So the £9 million is not the facilities management fee?
  (Sir Andrew Turnbull) No.

  123. That really undermines the answer.
  (Sir Andrew Turnbull) The £9 million is equivalent to the £14 million. That was clear between us. I do not have a figure for what is the equivalent of the £3.433.

  124. Will the £14 million increase over the period?
  (Sir Andrew Turnbull) The increase will be in line with RPI.

  125. So it will go up with inflation every year, the £14 million?
  (Sir Andrew Turnbull) Yes.

  126. When you calculated the net present value of £170 million, did you take that—
  (Sir Andrew Turnbull) I did that in real terms.

  127. What assumption for inflation did you use?
  (Sir Andrew Turnbull) It was done in real terms.

  128. So you used a basis of 6 per cent?
  (Sir Andrew Turnbull) That is the discount rate. All these Green Book evaluation projects are done in real terms.

  129. But the 6 per cent return includes an inflationary element.
  (Sir Andrew Turnbull) No, it does not.

  130. That is real?
  (Sir Andrew Turnbull) It is 6 per cent real plus risk plus cost of raising the money, so it is a composite.

  131. I do not know that I follow that. Maybe there are clever people here who can.
  (Sir Andrew Turnbull) 6 per cent is not meant to be a nominal rate.

  132. So is that the real rate then, the 6 per cent?
  (Sir Andrew Turnbull) It is the rate which is used to evaluate public sector projects.

  133. Yes, but—
  (Sir Andrew Turnbull) All of which are done at the prices—

  134. The Bank of England lending rate at the moment is 4 or 5 per cent, but that assumes there is a certain amount of inflation in the system. When I borrow a mortgage at 6 per cent, that assumes there will be a level of inflation.
  (Sir Andrew Turnbull) If you are borrowing at 6 per cent, that is not the same 6 per cent as this 6 per cent.

  Chairman: I do not think we are shedding a lot of light on this.

Jon Trickett

  135. I do think that certainly there is some rigour and some ingenuity in this scheme as revealed in this paper, but I also think there are some flawed judgments, or at least judgments which appear to be flawed in it, and I think we have revealed some of them or hinted at some of them already. I want to return to risk. When you were originally asked about risk you referred to the risk inherent in the building contract. I agree, the risk inherent in the building contract to some extent affects the risk inherent in the financing but the two are conceptually separate. You did not, and have not in fact, indicated any risk involved in the financing part of the competition. It would be hard to say there was any risk since effectively you are exchanging financing for annual payments of several £14 million a year coming from the Treasury, so it is hardly a great risk to any funding institution. The only risk is whether the building contract is produced in line with the original estimates. I want to separate the two sets of risks out. I want first of all to ask about Exchequer Partnerships and the fact they were appointed on a bid which came sometime before it was finally accepted. Why did you not go back out to tender?
  (Sir Andrew Turnbull) We had to have a project, because we knew otherwise we would have incurred this wasted payment. The first was time, and time in this case was money—each year which went by we would be doing more and more maintenance. Secondly, we had a bid and we were advised within the framework of that bid we could reopen it, negotiate the changes which we and Ministers wanted. It was not without risk to us if we had re-opened. We could have found the new competition was not actually as favourable as the original one. In the same way, EP had invested a lot of time in understanding the building, what its problems where, how it could be used, so too had the Treasury team, so we knew a lot about this. So we thought the best thing to do was to seek the changes we wanted within the original contract but to have various safeguards, the principal one being what we are talking about today, the fact we were—

  Jon Trickett: I am going to come to that in a second. Not only conceptually but in reality, there were two separate sets of competitions, and in fact there were two separate sets of risks really. One is to do with financing and one is to do with the building contract. If we can just stay on the building contract for a second, because it impacts on the way in which the financing competition was run, it may be that you may have taken a risk to go out to tender, that you may have ended up with a higher price, but there is no certainty of that. The rest of Government operates on the basis of open tender, does it not, and years had elapsed, the building industry changes, each contractor in the market has more or less extensive workloads at the time at which they make a bid, and sometimes they go out and find work. I put it to you that you cannot say to me or to this Committee that you got the best price from Exchequer Partnerships for the building contract. You cannot demonstrate that.

  Chairman: Can I interrupt for a moment. To be fair to Sir Andrew, we are just dealing with the finance at the moment, we are going to come back to the wider issue.

  Jon Trickett: I accept that but the two relate. I do not want to disagree with you, Chairman, but Sir Andrew himself talks about all the risks being inherent in the building contract. Would you mind if we got an answer to that question and then I will move on?

  Chairman: Go ahead.
  (Sir Andrew Turnbull) This was a judgment we made. You can always say, had we done it the other way it would have been better, but what we know is that that price, when you take account of the movement in market interest rates generally and the specification change we made, is a better price than we had before, and the indications are that we are going to get into this building next summer.

  136. Speed was one of the points you made.
  (Sir Andrew Turnbull) It may be that it might have gone better the other way. Hindsight will tell you that. We have so far had no reason to regret the judgment we made.

  137. I think you have accepted the point I was making and the Chairman wants me to move on. The reason I raised the building contract was it does seem to me it is inextricably linked to the way in which the matter was financed, and the issue of risk boils down it seems to me to due diligence. This paper is quite clear that the contractors and funders actually minimised the risk by the process of due diligence, presumably using professional insurances and various other methods to draw in other professions to say the building contract was properly constructed. Is my understanding right in terms of the due diligence process?
  (Sir Andrew Turnbull) I think so, yes.

  138. The due diligence process is used by the financiers, the funders, to determine whether or not the building project is a secure thing to lend money against, and you said that the risk which you were offloading from the Treasury was to do with the building contract, but the truth is you offloaded the risk by the process of due diligence and so did the funders; the process of due diligence was used.
  (Sir Andrew Turnbull) No, we transferred risk and then the funders had to assess whether the risks they were taking on were ones they were prepared to fund, and EP were an organisation they believed was competent to manage those risks.

  139. The fact of the matter is that this contractor here was really the Treasury by any other name. They were doing what you wanted and this document is an advocacy document for the processes you adopted, and this document quite clearly states that the funders utilised the process of due diligence, in other words finding professionals and all their insurances and associated techniques which they used, to determine whether or not to lend money against a building price which the building contractors have established. That being the case, there are several questions which come from that. The first is this: why did the due diligence process not operate at the time of the first tender? The first tender, which was £13 million incorrect, not to the advantage of yourselves, must have used due diligence.
  (Sir Andrew Turnbull) Not to the advantage of—

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