Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 160 - 179)

WEDNESDAY 21 NOVEMBER 2001

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

  160. On the question of the advisers which cost £2.6 million for the Treasury in all of this, how much cost would it have been had it just been a normal Government procurement? What I was not clear about was whether or not this was an additional cost or the total cost.
  (Sir Andrew Turnbull) I do not know that figure but I think I would have said we would have spent too little on advisers and probably would not have done it well. That has been the historical experience.

  161. That is not quite as precise as I was looking for.
  (Sir Andrew Turnbull) I have not costed an option we did not follow.

  162. No, but I am genuinely unclear as to whether or not you would have normally spent 100,000 or 2.5 million on a normal procurement and therefore how much of a difference there is in all this in terms of the advisers.
  (Sir Andrew Turnbull) I may be able to find a figure. It certainly would not have been as little as £100,000.

  163. It would have been as much as 2.5 million?
  (Sir Andrew Turnbull) Probably not because the £2.6 million included the—

  164. You can understand why I am keen to explore this because much has been made of the advantages of PFI and so on, and 2.6 million for advisers does seem a lot but I am not quite clear what the costs were anyway.
  (Sir Andrew Turnbull) I am not either. All I know is, this is not very much money compared with the project going 10, 15, 20 per cent over budget.

  165. I understand that. Why, in that case, would you not normally spend enough money on these things?
  (Sir Andrew Turnbull) Because we are also bringing in not just our critical scrutiny of the project but what we have been talking about, the due diligence of the funders, which is also raising the questions.

  166. I do understand that, but you said earlier on, when I asked about how much you would spend on that, not enough, and that would seem to display a lack of due diligence simply by yourselves, would it not?
  (Sir Andrew Turnbull) There is an OGC chart which shows where projects go wrong, and the answer is, they go wrong very early on. The message which is now being given to departments is, whether you are procuring this by PFI or conventional means, invest heavily in getting the project right, specified right, in its early days.

  167. I accept and understand that, but I am slightly puzzled by this. One of the great advantages you have been telling us and others have been telling us with PFI is the due diligence and expertise it brings in and so on. Yet, when I was asking about an alternative route, you admitted you would not have spent enough money on it. That seems to be a circular argument and it seems to be a rigging of the ballot in favour of the PFI route, if by definition you are geared to make mistakes had you done it the other way.
  (Sir Andrew Turnbull) This is the argument which says that all this risk transfer, contract performance, we could have got anyway without involving the F bit of PFI. The only thing is that the experience is completely against it.

  168. Can I clarify the bond issue? Could you explain to me in words of one syllable why, if it is such a great idea for this, it is not a good idea for London Underground?
  (Sir Andrew Turnbull) That is a process which is going on at the moment. There were originally three projects, now down to two because two merged, and it could well have a very large bond element in it.

  169. I do not quite understand the point you have been making in response to some of my colleagues about the question of funding it yourself, providing it by gilts rather than a commercially-obtained bond. It seems to me if you were agreeing you were going to have somebody managing the money as well as managing the project, and they were operating the bond and you gave them the money, not only would you have gained in the interest rates, you would also have a gain presumably on the bond arrangement fee since there would be no risk, and you would also have removed completely the risk of not having raised the money at all, but you could still have the bond financier holding the money as it were and using their expertise to lay off the money they were not using at any particular time. Would that not have been an entirely reasonable way of combining the best of both worlds?
  (Sir Andrew Turnbull) That is assuming that the public sector could develop as good a credit inspection, as good a due diligence—

  170. The private sector could do all that. There comes a point, as I understand it, in bond raising when you actually go out and say to people, "Give us your money", and they come in with bags over their shoulders, put it on the counter and then it goes—
  (Sir Andrew Turnbull) What does that then do to the performance of the contractor? The contractor has a relationship direct with the market place, and that is incentivising them—

  171. No, I would not change that. I would have you as the Treasury representatives on earth taking the money along and giving it to the banks—
  (Sir Andrew Turnbull) We give the money in your scheme to Ambac and they manage it.

  172. Yes. As I understand it, you are not buying from the bond arrangers the money, you are buying the due diligence, the expertise, the ability to make the best use of the money when it is not being used and so on, and you would still access that and have these other gains surely by supplying the money yourselves. If you re-worded the terms so that was available to everybody, so anybody who won a contract would get that, that would presumably overcome the competition rules?
  (Sir Andrew Turnbull) The money we had lent, if it was properly risk-adjusted, would be lent with a risk premium in it, so the price we would get it for at the end, the £14 million, would still be the same, because if we were lending this money to a contractor and not making a proper allowance for risk, we would be taking an unpriced risk.

  173. I am not convinced by that but you have managed to baffle me so I will move on to something else. Can I ask you about the competition that took place not producing any benefits in the price of the bond arrangers' fee. Does that not suggest that there is no competition for this sort of work?
  (Sir Andrew Turnbull) Actually what it says is that three people came in with the same price. What it does not say is that there were five others who came in with a different price.

  174. That is in the report you agreed? Why did you not raise that?
  (Sir Andrew Turnbull) What is there is the fact that the three best bidders offered the same fee which suggests there is a standard fee for this work and the competition did not provide any savings in this area. The reader is led to think there were only three bidders and they all bid the same, but actually there were eight of them.

  175. This reader certainly thought that. The reader who gave us the question thought that as well. You saw that, why did you not correct that?
  (Sir Andrew Turnbull) I confess I did not see that until we were doing the homework for this hearing.

  176. I was under the impression that part of the homework was you actually checked the report.
  (Sir Andrew Turnbull) We do. This is one of those questions where, if it is true, you do not necessarily change it.

  177. If I have not been able to catch you on anything else, I have caught you on that one. Societe Generale was going to be compensated 100,000 if they did not provide part of the financing. Why was that compensation agreed?
  (Sir Andrew Turnbull) I think I explained that about an hour and a half ago.

  178. Sorry, time flies when you are enjoying yourself.
  (Sir Andrew Turnbull) This was an offer to provide this level of financing which they made originally in 1996. We did not know whether the people providing the senior debt would also bid for this mezzanine type debt, so it could have ended up with a situation where we had no competition for the mezzanine debt at all, we only had someone doing the senior debt. What this meant was that we at least had in our back pocket someone who was prepared to offer at the terms originally agreed the funding of this kind of debt, which meant we could wheel it out if we got no other bid from someone for that debt. So that was an option and therefore there was a commercial negotiation about what we should pay for it, and that was the result.

  179. That is pretty much similar to the answer you gave us an hour and a half ago. Finally, can I ask what circumstances are there that would make you want not to have a funding competition? To reverse it slightly: if this had been successful, from now on will we always have funding competitions?
  (Sir Andrew Turnbull) Going to paragraph 2.7, "Relatively simple projects in mature PFI sectors . . .." are likely to be suitable; 2.8, "More complex projects . . ." raise doubts, in particular where the allocation of risk, in the sense at the commercial stage when you took it to the funders, the funders might say, "We will lend against if it is constructed in that way but not in precisely the way you have constructed it", so you get an iteration backwards and forwards, and you end up with paragraph 2.25, you have to negotiate a contract that was commercially viable and bankable. In this case we were fairly sure that the project we had got was not going to change in any substantial way and that the lenders would fund it. What is going on in London Underground, which you raised before, is a much more complicated thing. You cannot simply define the engineering characteristics of that and then go and fund it and be sure that the funders will not take the thing back, you have to have iteration, and that is where having a competition where everybody has to put in a certain time is much more difficult to do.


 
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