Examination of Witnesses (Questions 140
WEDNESDAY 21 NOVEMBER 2001
TURNBULL KCB, CVO, MR
CBE, MR JAMES
140. To the advantage of their chosen funders.
(Sir Andrew Turnbull) We would be paying to the
141. Had the due diligence process been done
twice then? Had it been done in the original tender and then again
(Sir Andrew Turnbull) I think it must have been.
142. That is interesting, is it not?
(Mr Stewart) Can I just clarify what due diligence
(Mr Stewart) Due diligence is a firm of technical
advisers, a professional firm, writing a report on behalf of the
funders, giving their view of the risks of the project and inherent
deliverability. There is no insurance or anything else. There
is no risk-taking in that due diligence process, it is just a
statement of the factual position.
144. Paragraph 1.16 refers to the insurances
and it would be interesting to get a note sometime, if that was
possible, Chairman, on what the insurances actually were. Due
diligence, nevertheless, is the process the funders used in order
to determine whether or not to lend money against particular builders'
estimates. That is the truth of the matter. I am interested to
discover due diligence was done twice, once erroneously to the
advantage of the funders, according to this paper and according
to what you have just told me, and a second time resulting in
a £13 million less estimate. Am I understanding it right
(Sir Andrew Turnbull) What happened between 1996 and
the end of 1997, I would have to check up exactly what due diligence
process took place.
145. I only have a limited amount of time and
I think I have made my point but it would be interesting if you
could come up with that.
(Sir Andrew Turnbull) Your question is, was there
a previous round of due diligence? Okay.
146. This due diligence process is a fascinating
one. I take the view of Mr Gibb, to my left, but for reasons not
to do with my favourable attitude towards capitalism, rather the
reverse. If due diligence is good enough for the banks, and it
clearly was, and you participated in the selection of the professionals,
how is it that the Treasury does not use due diligence processes
itself in building contracts which it is letting? Is that not
a way actually of giving you some certainty about building contracts
in the future, something which the private sector have invented
which we might use to our advantage?
(Sir Andrew Turnbull) The experience is over the years
a poor one.
147. Have we used due diligence processes like
(Sir Andrew Turnbull) We would probably call it project
appraisal at that time, examining the project, examining the risks,
we would also be looking at the good standing of the potential
contractor. All that was done or is done under a conventional
procurement, but nevertheless the history is that this has not
been done as well and that the intensity of the process, in my
experience, is a lot greater when it is the private sector lending
in relation to a particular project, rather than simply lending
to HMG. They do not have to do much due diligence when they lend
148. I would like, if it is possible, Chairman,
to see where we used the same rigorous process of due diligence
where it failed in relation to Treasury funding, direct public
sector funding, relative to private sector funding. When it comes
to public sector comparators, it seems to me that if you were
to have provided the money yourselves rather than going to the
private sector, the money would have been cheaper.
(Sir Andrew Turnbull) The money would have been cheaper
but the assessment of the risk may have been faulty.
149. That precisely boils down to the issue
of due diligence. It precisely boils down to the question of due
(Sir Andrew Turnbull) It was that prospect which lead
in the construction of the public sector comparator, drawing on
a series of reports from the Efficiency Unit, the Central Unit
of Procurementthe history of cost overruns in the public
sectorto the inclusion of an allowance for cost overruns.
150. I think you have made your point and I
have made mine. I want to move on to a judgment made about bonds
as opposed to bank financing. A judgment was made at some point
that we were going to go down the route of bonds, and I am not
sure if I have understood this paper correctly or not but it seemed
as if the bonds were lending over a five year period longer than
the banks and therefore the annualised payments were less, and
that was a prime motivator for you deciding to go down the bond
route. Have I misunderstood that entirely?
(Sir Andrew Turnbull) That was one of the features
which made bonds attractive.
151. My memory tells me that is what this paragraph
says. How was the balance struck between the aggregate cost in
total and the annualised costs? What balance was struck between
the two, since borrowing over 35 years probably reduces the annual
payments but may increase the aggregate cost of the scheme as
(Sir Andrew Turnbull) The project itself was for 35
years, which is why it made sense to relate the borrowing to 35
152. I understand that, but the paper says that
the annualised costs were reduced by borrowing over a longer period,
and that makes sense, since we all know that is how our mortgages
work as well. What I want to know from you is, has the aggregate
cost increased as a result of the fact we are borrowing it over
35 years rather than 30 years? Is it costing the taxpayer more
in the aggregate?
(Sir Andrew Turnbull) It is costing us less.
153. In the aggregate?
(Sir Andrew Turnbull) On a discounted basis.
Jon Trickett: I would be interested in that
calculation. No doubt the C&AG, if he is still looking at
the scheme, will be looking at that. Thank you, Chairman.
154. Would I be right in thinking, Sir Andrew,
that to a great extent this project is going to be a flagship
for PFI, and that if this went wrong effectively you would be
a dead man? That is a technical expression!
(Sir Andrew Turnbull) Let me say yes to the first
half and I will pass on the second half. There was no doubt that
the Treasury has an overall responsibility for PPP/PFI and in
its own project it is very important that it makes a success of
155. What difference did that pressure make
to the running of the project?
(Sir Andrew Turnbull) We put a lot of resources in
it and we had the resources of the Treasury Taskforce who worked
very extensively on this project.
156. What does that mean in practice?
(Sir Andrew Turnbull) Some quite senior and experienced
people were deployed from the Taskforce to work on this project.
157. Would the quality of advice and the level
of seniority then not be available to the normal run-of-the-mill
departments who do this sort of work?
(Sir Andrew Turnbull) That is why we have set up PUK
to make sure it is, but it may not have always been in the past.
158. That is what I wanted to clarify. Is there
anything that is comparable to this in the way in which the financing
of PFI has been undertaken? I am trying to clarify just how unique
(Sir Andrew Turnbull) It was a first. There is one
other project currently going down this track, an MoD barracks
refurbishment. There have not been all that many projects which
it is suitable for. The MoD project was signed slightly before
this but the interesting thing about this report is it will change
perceptions and what will then be the response to the consultation
159. Is this the way things will be in the future?
(Sir Andrew Turnbull) I think the Chairman was trying
to manoeuvre us into the position of saying this was going to
be a minority taste. I do not know I want to accept that it is
for just a few projects here and there. It could become the norm
for large projects which are not too complicated , as discussed
somewhere in Chapter 2.
4 Note by witness: There was no due diligence
process between 1996 and July 1997 (when negotiations on the first
deal were halted). Although commerical heads of terms had been
agreed, arrangements for funding had not and were some way off.
It is not until potential funders are engaged that the question
of undertaking a due diligence process arises. Back