Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 200 - 219)



  200. Come on! Come on! Answer the question. "It depends how you pay it back" is not a sensible answer. If I borrow £50,000 over 35 years but then pay it back over 25 years I pay it back for a lot less than if I had taken 35 years.
  (Sir Andrew Turnbull) In cash terms, yes, but not—

  201. I am talking about cash.
  (Sir Andrew Turnbull) We are doing this on a discounted—

  202. What we are here for is to see if the taxpayer gets a good deal, and the taxpayer could get a much better deal than I think this has given them. We could save money for the taxpayer. We could save them millions of pounds.
  (Sir Andrew Turnbull) I am not going to agree with you.

  203. We could not save them money?
  (Sir Andrew Turnbull) We have compared a refurbishment which gave us a right of occupation for 35 years—and we assume there will be a Treasury in 35 years—and what that cost us by this route compared to if we had done it as a public sector project.

  204. As I say, everybody seems to have a good deal except the taxpayers. Let's go on to paragraph 1.14, this has been mentioned before, and I picked this out and so has everybody else. Societe Generale was appointed by the partnership to run the funding competition. Mr Stewart used to work for them, did he not?
  (Mr Stewart) I did.

  205. They got a hell of a good deal as well. They got a £100,000 sum in compensation if somebody got a better deal than them. That is great, is it not?
  (Sir Andrew Turnbull) I have explained that twice already.

  206. You have but at the end of the day try giving a justification. Justify it, because I do not think you have justified it. Here is a deal where you say, "If somebody can come up with a better deal than that, we will give you £100,000 in compensation." Did you declare an interest at the time, Mr Stewart?
  (Sir Andrew Turnbull) What we got was the assurance that there would be in place at least one mezzanine level debt provider against the possibility that the senior debt providers did not want to provide the mezzanine level debt as well.

  207. Nobody is liable here. They are all doing very well. Paragraph 2.29 on page 23, I was surprised when I read this particular paragraph and I will quote it here. It .".. should include all forms of financing to ensure that the best type of funding is being considered by contractors and their financiers." That implies that is not already done and I would have thought it should automatically be done. It does not matter what deal is being done, it should not just be thought about now.
  (Sir Andrew Turnbull) I do not think it is doing that. It is a statement of good and best practice. I do not think it is implying it has never been done and people have not cared at all what the funding cost was and how it was—

  208. So why does the report say that? Why does the report suggest that it has not been done? I got the impression it would not be said in the report if the—
  (Sir Andrew Turnbull) It is suggesting (a) you should do it but (b) with a degree of rigour and how you can do it better. I do not think it is suggesting no one has ever done this in the past.

  Mr Steinberg: Okay. Thank you.

Mr Williams

  209. Sir Andrew, like Mr Steinberg, I think virtually everything has been covered and I do not want to re-cover the same ground but just a couple of points, jumping around the place. In answer to Mr Davidson you made two points. You said you did not know the cost of a conventional public sector contract for this project and you also said subsequently, and this may have been a statement of conviction, that the public sector if they had taken it on would not have spent enough. Do you remember saying that? That is what you said because I wrote it down at the time. The only question which occurs to me is, and I am sure there is an obvious answer to it, in that case if you do not know the cost of a public sector contract and if you recognise it would not have been enough, how can you say the public sector comparator is £20 million more?
  (Sir Andrew Turnbull) There was a calculation by a team which was different from the one working on this project of what the public sector comparator would cost. The reference to not investing enough in terms of examination advice was a remark about public sector construction contracts in general, and that was a finding which has been made in numerous Government reports on public sector construction projects.

  210. If your public sector comparator were a genuine comparator, the point you made would not have applied. May I say I found this a very interesting project, I am not knocking the project, I am just interested. We have had problems before in public sector comparators where we have found them as low as £1 million higher, and we have the feeling the books get cooked a bit in the comparator process. I am interested to know how you reconcile the £20 million plus with the fact you would not have spent as much and you do not know the cost of a public sector contract.
  (Sir Andrew Turnbull) I think the way you reconcile the two is that not being rigorous enough in the definition of a project in its early stages is reflected in the historic performance of public sector contracts, and an allowance was made for that in the calculation of the public sector comparator.

  211. So what do you do, think what it would have worked out at if it was done in a conventional way and then add an X on top to get the comparator? Where does the comparator come from on the basis of what you said to Mr Davidson?
  (Sir Andrew Turnbull) If the thing overran in the private sector version, we would not pay for it. If the standards of the service which are provided during the life time of this contract do not meet the contract, we do not pay for them in the private sector contracts, so we are not at risk of under-performance of delivery. These are important risks which we have transferred off. In order to make the relevant comparison, you have to allow for those in establishing what you think would have happened in the public sector case.

  212. In fairness, you did say very early on and repeated subsequently referring to Mr Gershon's organisation's chart that most risks occur when opening the building up, at the early stage of the project in other words. When you arrived at your 189, and you threw out that figure, you said, "That is 189 million allowing for risk." What did you allow for risk?
  (Sir Andrew Turnbull) That allows an overrun of about 15 per cent. It also made an allowance of about one point something for latent defects and allowed for the fact that the cost of the services provided would rise by half a per cent more than the rate of inflation.

  213. Mr Stewart, you assessed risk at the same time. In their allowance for risk in their comparator they arrived at £189 million, how did your assessment for risk differ from their assessment for risk and why?
  (Mr Stewart) I do not work for Exchequer Partnership.

  214. I do not mind who answers it. My apologies if I went to the wrong person.
  (Mr Lewis) When we analysed the project and looked at the work which would be required to satisfy the requirements of the project, certain risks had to be taken on. We had to assess commercially how we approached those risks, how we might dispel them during the course of the job, and how to price them, bearing in mind we were in a competitive position and had to make sure it was the right price for the job.

  215. But if they were right and you were wrong, you would have been £20 million out and you would not be here now as a witness, putting it bluntly. Why were you able to get it so right and why did they get it so wrong in assessing the risk?
  (Mr Lewis) I am not suggesting Sir Andrew's team got it wrong.

  216. They got it different?
  (Mr Lewis) I am not suggesting we got it right yet either. We have several months to go before the construction element of the job is completed, so we are not yet sure but we had to make certain assessments. Bearing in mind the private sector expertise and the advisers we had on our side and in our consultancy team, we believe we assessed those risks properly and priced them properly.

  217. You, I assume, would have to get external expertise to advise you on the early stage risk, why did you go where you got the risk and why did you not go where they went to get the risk?
  (Sir Andrew Turnbull) I am not sure I understand. They are making an assessment of the risks they face and we are making an assessment of the risks we think we would have assumed compared with giving the job to them. We were not making an assessment of their risks; that was for them and then the people backing them financially.

  218. You did make the point when you were refuting the odd balance sheet argument that the main reason for PFI, which we understand—we hear it constantly, it just never arises in performance up until now—is to transfer risk. We have had a whole series of glowing examples like the passport computer, the immigration computer and various other things where the risk was passed but the public still ended up paying when things went wrong. How sure are you that you have transferred the risk?
  (Sir Andrew Turnbull) In this case I am quite confident we have transferred risk.

  219. Tell us why.
  (Sir Andrew Turnbull) Where people have reopened the thing and come back, first of all, they have only done so after they and their equity have probably been used up and possibly some of their banking borrowings have been forfeited, so there has been some loss, but when it gets too great they say, "Sorry, we would rather hand you the keys back than continue with this project" and we have renegotiated it. That has happened in a number of IT projects and you have examined a number of those. This is a building refurbishment. Now there are risks in that but we are past the point where if something was going to go wrong it would have gone wrong, but there are still nevertheless some risks left although I would be very surprised if it turns out they were such that the contractors came along to us and say, "We would rather forfeit all these payments than carry on with it."

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