Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 240 - 248)



Jon Trickett

  240. I do not feel satisfied we have got to the bottom of all this but I want to come to the indexation of this £14-odd million. Earlier you said it was RPI, is that right?
  (Sir Andrew Turnbull) Yes.

  241. It is just that costs vary around RPI, do they not? For instance, building costs do not increase at the same rate as retail prices, nor do wages costs and nor do interest costs either, and they seem to be the three elements. There are building costs, labour costs of the people maintaining the building, and interest rates.
  (Sir Andrew Turnbull) Yes.

  242. Why did we settle on RPI rather than some other complex index?
  (Sir Andrew Turnbull) That was a product of the negotiation. I think we said RPI minus X, and it turned out X was nought. In the negotiation we could have ended up negotiating a different figure but that was the figure.

  243. Some of this RPI index goes to the funding institutions and some of it goes to Exchequer. It seems to me the increasing cost year on year falling upon the contractor and then the people providing the money will shift, will it not? It will never be, unless there is a coincidence, RPI, it will vary around RPI, sometimes higher, sometimes lower, according to interest rates, labour costs and other building costs.
  (Sir Andrew Turnbull) Yes.

  244. Is there any claw-back? Have you negotiated a claw-back supposing there is movement favourable towards the contractor, leading to, not a super profit exactly, but you could envisage large amounts of money coming back to the contractor if for several years the index of RPI is substantially less than the additional cost which the contractor is facing?
  (Sir Andrew Turnbull) The cost of their capital is also indexed to RPI. You are then assuming that there is some major break in the historical relationship between all the other costs, and that we would then say, "The wages, the services you buy, the suppliers you need, electricity, would be substantially different from the RPI." Given there is quite a wide basket of goods going in to service the building, we would not expect it to diverge very much.

  245. I am not sure that is an accurate assumption. I was in the building trade and I used to price jobs and I know that building prices are calculated by different indices, and I also know that wage inflation is different from retail goods inflation. I wondered whether that calculation had ever been done.
  (Sir Andrew Turnbull) We have kind of fixed this price. You can always say, "I would have done better if I had picked and chosen and then renegotiated after 5 or 2 years", but if it turns out these costs went up faster than RPI then you lose out. We have the benefit of fixing those costs so we, as the Treasury, know that is a major element of risk in our forward budgeting which we have eliminated.

Mr Gibb

  246. Of the 9 million, presumably an element of that is rental for the property. Will an element of that continue to be paid in addition to the 14 million in the future? If so, how much?
  (Sir Andrew Turnbull) It may include these things called CILOR contribution including rent, but I would have to look at that.

  247. Can that be in your note?
  (Sir Andrew Turnbull) The note will be what is in the £9 million and what is maybe in the £9 million which would nevertheless still continue, because it is probably a cost we bear and continue to bear—

  248. For the freehold bit of the building which is already there?
  (Sir Andrew Turnbull) Yes, there may be things which we are paying now which we will continue to pay. We will look at that.

  Chairman: May I thank you, Sir Andrew, and your colleagues for spending the best part of three hours with us. I think this is an important issue. Although we are only talking about one building it has major implications for future PFI projects. As Barry Gardiner says, may I congratulate you on the first line of the contents, which says, "The Treasury competition was a success." Thank you very much.

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