Examination of Witnesses (Questions 60
WEDNESDAY 21 NOVEMBER 2001
TURNBULL KCB, CVO, MR
CBE, MR JAMES
60. Could you talk about the question of risk?
What are the risks associated with the project?
(Sir Andrew Turnbull) One of the risks that we have
is if it exceeds it costs. That makes no difference to us. We
still pay 14 million. If they are late, they do not start getting
the 14 million until we move in. Next are latent defects. EP and
its architects surveyed this building extensively. If it turned
out once they started knocking it apart that it was a lot more
difficult to deal with or there was a lot more asbestos, for example,
and they had to spend more money correcting that and it took them
longer to correct that, that was their risk. There was a risk
of listing and planning consents. There was broad agreement on
the nature of the refurbishment with the planning authority, Westminister,
but if it turned out that English Heritage were more fussy about
this piece of stucco and that bit of panelling, that was EP's
risk. There is the tenancy risk at the other end of the building.
If there is a delay in finding a tenant, that is a risk that is
transferred. They have to provide a set of facilities and management
services to a particular standard. They have made an estimate
as to how much it is going to cost them. If it turns out that
it cost them a lot more than they estimate, that is again their
risk. A risk that we have transferred is a pre-committed level
of maintenance. As the tenant, we know that we will get this building
maintained. We are not at risk of another part of the Treasury
denying us the money in some future spending round to maintain
it. That is a very comfortable position to be in. In the process,
we have protected the residual value of this building. Summing
that up, basically we only pay for what we get. There is quite
an extensive risk transfer going on.
61. It says on the Office of Government Commerce
website that the net present cost should include an estimate of
the risk that would be retained by the public sector compared
to the PFI option. Is there a number for that and if so what is
(Sir Andrew Turnbull) I do not have a number in my
head for that.
62. You do not know how much risk would have
been retained by the public sector? How can you begin to make
a decision about whether to do this or not if you do not have
a figure in your head?
(Sir Andrew Turnbull) In doing the public sector comparator,
we made allowances for some of these risks, latent defects, cost
over-runs and so on, and they were factored into that alternative
63. How much risk overall is retained by the
public sector compared to the PFI option? That is one of the key
things we need to know in order to decide to go the PFI route
or not, is it not?
Am I wrong?
(Sir Andrew Turnbull) The risks we retain are probably
common to both.
64. This is the definition of net present cost:
"This is the net cost (taking into account any project revenues)
estimated by the public sector of undertaking a project itself
and producing the same or similar outputs under conventional procurement.
The NPC should include an estimate of the risk that would be retained
by the public sector compared to the PFI option . . ."
(Sir Andrew Turnbull) This is telling
you what you should put into the public sector comparator. We
did put an element of risk into the public sector comparator.
We assumed, for example, that the cost over-run could be one of
three figures, 10 per cent, 15 per cent or 20 per cent.
65. Forgetting the refurbishment costs for the
moment, is the building going to cost less to run and maintain
in the future than it does now?
(Sir Andrew Turnbull) It will cost more. That is because
it is a hell of a sight better building. The relevant comparison
is will it cost more or less than what we would otherwise have
been forced to do with it.
66. £9 million a year sounds quite a lot
of money for one building. Over 35 years, that is £315 million.
If you add on 125 million, the cost of the refurbishment, that
comes to 440.
(Sir Andrew Turnbull) What is not in that nine million
is the 50 or 60 million that we would have to spend in the next
three or four years to rectify the serious defects in this building.
67. Are you saying that the 50 or 60 and the
125 are separate numbers?
(Sir Andrew Turnbull) The £125 million was my
ball park figure for the value of the bond. Actually, it was £127.8
million. There is then the mezzanine debt and the equity making
the capital cost £141 million.
68. It is still only 16 million more than 125?
(Sir Andrew Turnbull) Yes.
69. The 60 million that you have talked about
that you would have had to spend in the next three or four years
and the 141 are completely separate figures?
(Sir Andrew Turnbull) One is the cost of patching
up: the other the cost of a major refurbishment.
70. Which will mean that you do not have to
spend the 50 or 60 million. So I am right. Forget the 50 or 60
million. If you add the 141 and add the existing cost, nine million
a year, you come to 315 million, which is the current maintenance
cost over 35 years, plus 141. That comes to 456 but you are paying
out 490 over the 35 years, are you not?
(Sir Andrew Turnbull) We have done the calculation
The net present value of the public sector comparator, allowing
for the additional risk that would involve, would have been £189
million. The project we are going ahead with has a net present
cost of £169 million. In discounted terms, we think this
project is £20 million cheaper than going ahead with a similar
modernisation project carried out as a public sector project.
71. If the project had gone ahead in 1997 rather
than being put on hold because there was an election and a change
of government, would there then have been financing competition?
(Sir Andrew Turnbull) Probably not. This was an idea
that was developed by the Treasury Task Force which came into
existence in 1997. We have been lucky in that technical progress
in the financial world had moved on in that year and a half and
when we revived the project a technique was available to us that
we had not developed in 1996.
72. Somebodypresumably Exchequer Partnership
if they have been sensible enough to go ahead with finding the
best funding routewould have been left with an extra 13
(Sir Andrew Turnbull) Yes. It could have cost us more.
You could say this vindicates the decision to have another look
73. I am trying to find out whether somebody
lost 13 million.
(Sir Andrew Turnbull) I do not think anyone has lost
74. Or lost the opportunity to make an extra
13 million profit.
(Sir Andrew Turnbull) We have an indexed flow of payments
that we are making and we have come up with the idea of funding
that by indexed bond. We have managed to get a match between the
nature of the flow of payments and the nature of the finance raised.
When you do that, you knock some risk out of the system. There
has been a genuine saving to everyone. As it happens, we think
we have captured most of that for the Treasury.
75. As a result of going through this process
with the better methods that you have discovered and this brainwave
that you would go in for financing competition, you are happy
that in the second part of this report there are now criteria
laid out as to when you might want to do the same sort of thing
in the future?
(Sir Andrew Turnbull) Peter Gershon is consulting
on this at present and has set out the criteria, building on the
findings of this report. Some of it we may want to modify in the
light of the discussion and conclusions you eventually reach,
but we are trying to get agreement on the criteria throughout
Whitehall and the public sector on when is a good idea to go down
this route and when it is no and at least when you should ask
76. Are you happy that you have now got sufficient
controls in place to make sure that those criteria, when you have
decided what they are, will be used in the future and therefore
we will not in future have you or your successors before this
Committee to say, "Why on earth did you not use financing
competition because clearly you ought to have done?"
(Sir Andrew Turnbull) I cannot say we would never
get a project where we regretted not having it. The main sanction
is that if we go ahead and it turns out badly then we will have
to answer to you. We have quite a lot of influence through PUK
on the formative stage of projects, particularly large projects.
It is certainly a question we will be putting to any team putting
together a proposal.
77. Mr Lewis, from what we have just heard,
it looks as if your original proposals would have cost the Treasury
£13 million more than the final position. Why did you get
it £13 million wrong to start with?
(Mr Lewis) I would not say that we got it wrong. At
the time, we were making certain assumptions about the project.
Things had moved on from when we first priced the project and
we were going to make certain assumptions in terms of the funding
competition. It is possible we would have gone down the index
linked bond route. We were looking at different options at the
time and when the project was relaunched we had to look at it
in a commercial manner.
78. Are you saying that if it had gone ahead
in 1997 it would have cost the Treasury £13 million more
than it finally did and there is no way you could have avoided
(Mr Lewis) I cannot say that because we had not gone
into the depth of the funding competition that happened in the
79. Why not, given that presumably you could
have offered the Treasury a lower price and been more likely to
win the contract had you bothered to find out that there were
other ways of financing the project which might have cost as much
as £13 million less?
(Mr Lewis) In terms of the way the project was funded
eventually, at the time there were relatively few index link bonds.
From my point of view, things had moved on .The long concession
term was one of the issues which we would have had to look at
at the time.
2 Note by witness: The calculation by Mr Bacon
ignores the interest cost on the £141 million of capital
raised. Ref answer to Q188. Back