Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 220 - 239)



  220. One of the reasons refinancing has been successful is for this same reason, that in building a prison or a hospital the risk is in the early period and therefore you borrow at higher rates and short, and then you refinance at lower rates once you have got on to a steady income stream minus the problem.
  (Sir Andrew Turnbull) Yes.

  221. But that still has not solved the problem as far as the customer, the public, is concerned. Let us say 25 years down the line, just so you can tell me how it is covered—what I am getting at is how strong is your contract and is there a system of penalties and so on—something happened and half the building had to be closed down for six months. What is the public protection?
  (Sir Andrew Turnbull) We would not pay the rent.

  222. That is not much good, you have not got anywhere to live, have you? That is not much of a protection. There should be a penalty. This is what happened with the Passport Agency. What happened there was that they thought they had the risk covered, and this came out clearly in the hearing, but in fact all they had covered was the extra cost to the Government of taking on the staff, there was no penalty for the inconvenience or loss to the public, so when there was a loss of 12.5 million the contract was not even strong enough to stand up to that in court, and it ended up with the Government paying £10 million of it and the financier only paying £2.5 million, and he only agreed that two weeks before he came here because he did not want to come here saying he had not paid anything. How are you covered? I am not talking about not paying rent, what protection have we got for things which go wrong which make a significant difference?
  (Sir Andrew Turnbull) It depends how seriously they go wrong. If there is a requirement to maintain the temperature to at least 22º and over a period they fail to do that, there is a schedule which says what is knocked off if various standards like that are not met. You are saying, what happens if the thing becomes unhabitable. I think the answer is that we can terminate this contract meaning that the future payments we would have made we do not make.

  223. But then you have an unusable building for a while.
  (Sir Andrew Turnbull) Yes, but we also have all that future rent which we are not going to pay.

  224. But there is no penalty clause as such?
  (Sir Andrew Turnbull) It is a pretty severe penalty to them if they have invested in it. They still have the bonds to service. If we say after 25 years, "Sorry, this is so unsatisfactory, we are terminating this", that is a pretty severe penalty.

  225. Our problem has been that we have run up against several risk problems where the public has lost out, and it is where we are most concerned—and I think you can pick up the pattern of the questioning—whether risk transference has been as real as you genuinely, obviously, feel it is. This is a new system, who came up with the idea? Whose idea was it? Was it yours?
  (Sir Andrew Turnbull) To separate out the funding element?

  226. Yes.
  (Sir Andrew Turnbull) That was developed in the Treasury Taskforce which was set up after May 1997. Adrian Montagu was the guy leading that and Dougie Sutherland. This was a set of ideas they worked on.

  227. It is very ingenious, I am impressed by it as a concept, but I do not impress my colleagues by saying that. Can I then take up one final question and go back to Mr Stewart. I see from your CV that your responsibilities include the origination and execution of PPP transactions in Europe and the rest of Europe. Are the rest of Europe ahead of us in any way in the development of this kind of contract and, if so, in what way?
  (Mr Stewart) There is not a simple answer to that. The rest of the world and Europe are catching on to this concept. Some countries are further ahead than others. Probably the furthest advanced in Europe are the Dutch and the Irish, who have established a taskforce like the Treasury Taskforce as a centre of excellence and they are pursing projects. One of the key differences between the European market and the UK market is that the European markets tend to be much smaller so that those countries are focusing on a smaller number of projects which, if you go back, is probably the case in the UK.

  228. Are there any notable lessons we could learn on project development and safeguards and so on?
  (Mr Stewart) They certainly come and talk to a lot of people in the UK to learn lessons from here and I think there are lessons for the UK to learn from them. So there is a constant dialogue going on.

  229. Which country would you go to if you wanted to learn from them?
  (Mr Stewart) I would talk to the Irish, who I think have some interesting ideas. They, for instance, have made great efforts to involve all the stakeholders—unions and so on—in the process from day one. The jury is still out on whether it is going to work. I would also talk to the Australians, right on the other side of the world, who have extensive experience of these projects and a slightly different approach.

  Mr Williams: I think the Public Accounts Committee had better reconsider its decision not to go to Australia, in that case. Thank you very much.

Mr Bacon

  230. May I first, Sir Andrew, ask you a question on behalf of Mr Gardiner who had to leave and it is concerning bank versus bond finance. He asks, "James Stewart just agreed that because the term was 37 years it was longer than the banks' longest lending period and therefore the banks could not compete." He goes on to say, "Earlier you had said there was no factor which precluded the bank from bidding successfully, in particular you said you had not set out it must be done by bond finance, yet in fact the time period meant it had to be done by bond finance, so effectively the banks were excluded."
  (Sir Andrew Turnbull) The banks did not take that view, otherwise why did they bid. They thought, despite this natural disadvantage, nevertheless they could come up with something competitive.

  231. That was Mr Gardiner's question, perhaps I can now come on to my own. I would like to return to the question of the cost of running the Treasury building. You said they would do the maintenance, the running costs of the building, for £9 million a year, and then I think you sought to correct yourself. First, I would like to take up something you mentioned earlier in answer to another question about serviced accommodation. You said you are buying serviced accommodation which is why you are paying a different rate. Would I be right in thinking that the services you are buying are including things like cleaning, window cleaning, maintenance, security, that sort of thing?
  (Sir Andrew Turnbull) All those things.

  232. So would it be a correct analogy then if I borrowed the money to buy a house on a mortgage and Barrett said to me, "Not only will you get this house for the money you are giving us but you will get a cleaning lady once a week", essentially that is a correct analogy is it not? I would not be paying any extra on top of my mortgage payments, I would be getting the cleaning lady, it says in the Barrett contract, included—
  (Sir Andrew Turnbull) I would not expect it to be for exactly the same price.

  233. I am not suggesting for one moment it would be, but I am asking is the analogy correct.
  (Sir Andrew Turnbull) The analogy is correct up to a point.

  234. So if you say you are buying serviced accommodation, you are paying interest payments on the serviced accommodation. It is equivalent to my borrowing the money over 25 years, or in your case 35 years, to pay my cleaning lady, is it not?
  (Sir Andrew Turnbull) No, we are not borrowing the money, they are borrowing the money and then charging us, to pay for the capital cost. They are also having a current cost—and I think the figure given was split between £10.6 million as the capital cost and £3.4 million as the services.
  (Mr Gershon) Can I just add that it is not directly equivalent because when you buy the house from Barrett, first, you only get a warranty against defects for ten years, not for the whole life you are going to live in the house, you get no warranty from Barrett about keeping up the quality of the interior decoration, the quality of maintaining the external fabric. It is different.

  235. Yes, I see that. Nonetheless, you are paying interest payments on it effectively over a 35 year period?
  (Sir Andrew Turnbull) No, I do not think we are. We are paying interest on the money they have had to borrow up-front to do the work. The £14 million covers the £3.4 million for services, leaving £10.6 million to pay back the capital. I do not think we are paying interest—

  236. The point I was trying to get to earlier was this, if I have a rubbishy building and it is costing me, as you said, £9 million a year to keep it going, plainly one of the reasons it is costing so much money is because it is falling down, I have to spend a lot on maintenance and so on, and you yourself said you would have had to spend £50 or £60 million quite shortly. I would expect, if I spent a sum of money on doing a building up, that my annual running costs would go down, not up, because I am then in a position where I have a brand new, spanking new building which actually does not fall down. In fact, if it had been cleverly designed like some modern buildings are, the body heat of the people inside means the net energy cost of running the building is zero.
  (Sir Andrew Turnbull) This would be a BREEAM, a `very good' rating at least,[5] so it is designed to be an efficient, low cost building.

  237. Can you go back to this question of £9 million, what actually is the running cost per year of the Treasury building?
  (Sir Andrew Turnbull) That was the figure I said I did not know and I would provide. The £9 million is equivalent to the £14, not to the £3.4.

  238. The point I am trying to get to is this, Chairman. If you are spreading the cost of this over 35 years, including the capital cost—I take it the £14 million is index linked so it is actually going to be more than £14 million when it comes down to it. That is right, is it not?
  (Sir Andrew Turnbull) Yes.

  239. My concern is, at the end of the day you are going to pay a lot more than if you had just gone to a contractor and said, "Do this building up for us and then we will have a series of annual maintenance running cost payments which will be lower because we have a brand new building which is not falling down."
  (Sir Andrew Turnbull) The two things are not comparable. We would have had the risk of maintaining those standards ourselves. What we have done is we have a pre-commitment to maintain those standards, that is written down in the contract, for 35 years. We have no guarantee, as I said to some hilarity, that we would actually get the money to do the maintenance. This time we are sure we have.

5   Note by witness: It has now been assessed with an "Excellent" rating. Back

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