Examination of Witnesses (Questions 100
WEDNESDAY 21 NOVEMBER 2001
TURNBULL KCB, CVO, MR
CBE, MR JAMES
100. So EP, being your preferred bidder, your
contractor, has looked at all the risks, where do they finish?
Where do you go over the line and say, "We now as the funder
recognise the risks we took on, for instance we understood the
construction costs, but it has gone awfully wrong, or the cost
of raising the money has gone awfully wrong, where is the loophole?"
Where do they come back and ask for more money?
(Sir Andrew Turnbull) If they come back and ask for
more money, which I do not think is going to be the case, the
first thing which would happenassuming there is a big catastropheis
that their equity would have been used up, the mezzanine debt
will have been used up, so some quite considerable risk transfer
would have taken place. You may get this argument which says that
the danger of some PFI projects is that you transfer risk and
you are kidding yourselves, because if eventually something serious
goes wrong you end up taking it back or renegotiating the contract.
We do not think this is that kind of project. That happened in
the IT world but this is a building refurbishment. We do not know
what the risks are; we need to wait another 35 years to know whether
the assessment of risk they made turns out to be correct. What
I will observe is that the most risky phase is when you open the
building up and start trying to do the construction. We are past
that phase now, so I would be very surprised if it turned out
to be one of these boomerang projects because I think we are past
the point where the most serious risks of this project have been
101. The standard terms and conditions were
accepted, and it was important we got these accepted by the bidders,
was it not? Very important. How much did it cost us, because some
bidders did not come in because they did not want to accept these
standard terms and conditions, how much did it cost us to get
(Sir Andrew Turnbull) I do not think we know. What
we know is that these standard terms have now become the standard
terms. The private finance market has continued. If anything it
probably has not cost us, it has probably saved money, both for
ourselves and for private finance contractors.
102. If no one had taken part in the competition,
who assessed the risk that was an outcome?
(Sir Andrew Turnbull) One of the criteria that the
C&AG has identified is when is it a good idea to have a competition,
and it is when you can be reasonably sure that you get the commercial
closeyou have the building, the engineering, identified,
and you can take that project and finance it. You are not going
to get into a position where you go to the financiers and the
funders and they say, "This is the kind of deal we do not
want to fund." We were pretty confident we would be able
to fund this deal. Obviously the terms on which we might fund
it could vary but it was not going to be one of those things where
people just said, "This is just not a bankable project."
Paragraph 2.25 says something like: "Using this technique
we can be reasonably sure you can settle the commercial characteristics
of the deal and then take it away and get it funded." That
is what we thought was the case with this project and it turned
out to be right. If we had seriously thought that the funders
were going to raise all sorts of questions and start unpicking
the commercial part of the deal, then that is the kind of project
which would not have been suitable, but we did not think that
was the case and it has not proved to be.
103. So there was no fall-back position? You
knew you could sell the deal?
(Sir Andrew Turnbull) We were confident we could,
104. Essentially this project is the Treasury
instructing a contractor to spend £125 million doing up the
Treasury and instead of paying the bill, the £125 million,
once the private sector had done everything which needed to be
done, you wanted it paid over 30 years in HP instalments of £10
million a year? Is that not essentially the difference? That is
where you get into this problem of this risk transfer.
(Sir Andrew Turnbull) This is the argument about why
are we doing PFI. There are lots of people who think that is what
PFI is all about, and they are wrong. You are kidding yourself
if you think you are saving money. If you do the true financial
calculation, instead of borrowing money and having it added to
the national debt and then having an asset, you have a liability
spreading out into the future. In terms of your true balance sheet,
those two things are equivalent and you should not get into the
PFI if that is your only motive. The main reason for getting into
this was we thought we could do it better, would get a better
project, we could transfer risk, we could get more innovation
and all the advantages I listed earlier.
105. I see that in terms of getting a private
contractor to do the work, to manage the work, to get a private
contractor to take care of the maintenance of the building, all
very good, but I do not understand why you need to have the funding
of this project done by the private sector.
(Sir Andrew Turnbull) The funding is what drives the
contractor. The due diligence of the funders is the thing which
is exerting pressure on them to do this thing well.
106. Why? I do not understand why that should
be. Why is it not just saying, "You can construct the contract
to do the repairs, to do the refurbishment, to do the servicing
on an annual basis"?
(Sir Andrew Turnbull) We have 30 years of experience
of borrowing money and getting people to just build things for
107. That is when you have managed it yourself.
I am saying get the private sector to manage the project, get
the private sector to manage the servicing of the building, but
not get the private sector to raise the funds and fund it and
give you an HP arrangement, which is essentially a big part of
(Sir Andrew Turnbull) But the fact they have raised
the funds, they then are managing the risks and
108. The risks you have talked about today are
to do with the building projectthe asbestos, the design,
the listing problems. Is the Treasury a bad risk in terms of paying
(Sir Andrew Turnbull) We are not a bad risk.
109. So where is the risk in terms of the funding?
(Sir Andrew Turnbull) They have to manage this thing
efficiently, they have to make a decision at the start as to how
they build it relative to how they subsequently maintain it, and
then they have to take that proposition and get it funded.
110. Only because you want them to get it funded,
because that is how you want to pay for it. There is nothing inherent
in a construction project that it be funded in this way, is there?
You could quite easily pay for this up-front.
(Sir Andrew Turnbull) You are suggesting we have a
design build operation with no funding?
(Sir Andrew Turnbull) We believe that bringing the
funding in is what actually creates an additional pressure, because
people are then backing their judgment of the risks of this project
against the finance they themselves are raising.
112. I think it goes to the motive of the project.
I do not accept that at all. It does not make sense to me at all.
I am a Conservative member here, so I am not opposed to capitalism
and the free market. To go back to the original question, if the
motive was simply to get this thing off the Government's books,
that would be a wrong thing to do. I see the funding element of
this as precisely that. I do not understand where the credit risk
is in terms of this project. You are the Treasury, if you are
a credit risk, God help the country, frankly.
(Sir Andrew Turnbull) They are not lending money to
113. But is that not the way you have structured
it? Essentially, they are lending the money to you so you can
refurbish the Treasury, and the only reason you have constructed
it in this complicated way is so you do not have to include this
as gilt-edged debt.
(Sir Andrew Turnbull) No. We have constructed it in
this way because we think we would get a better performance out
of the people building the project and subsequently maintaining
it if the money they have raised is at risk.
114. I do not see that. You can transfer all
that risk to the private sector by just having a construct, design,
build contract and maintenance contract. You really can.
(Sir Andrew Turnbull) Experience is against you.
115. Where in the Government accounts then is
this liability or this long-term financial commitment?
(Sir Andrew Turnbull) In the Budget documents we report
the future service payments of PFI projects.
116. So it is all spelt out for the financial
markets to see. If I get the Red Book out or the PBR in November,
I will be able to see in that bookthe Green Book or the
Red Bookall the financial commitments the Government has
entered into in these kind of arrangements in the long-term on
an annual basis, is that right?
(Sir Andrew Turnbull) I am not sure whether it goes
right the way forward for 35 years, but certainly for the medium-term
117. Basically what you are trying to do is
shift off the Government's balance sheet significant amounts of
debt in the same way that companies in the 1980s shifted off balance
(Sir Andrew Turnbull) That is not our motivation.
118. It may not be your motivation but it concerns
me it is the state's motivation to get this stuff off balance
sheet, because I do not really see any other justification for
it. I do not see that you cannot get this risk transfer in other
ways. It can only be that the real motivation somewhere is to
get this stuff off balance sheet. My concern is, what is to stop
every government department loading itself up with these long-term
commitments, provided they can meet the annual payments in the
short-run, and then suddenly we discover in 10, 20 years' time
we have a state sector riddled with debt which we do not see any
sign of in terms of looking at the accounts now.
(Sir Andrew Turnbull) The resource accounts will include
these payments to departments, so they quickly get to the point
where the sum total of all the annual payments they are making
is actually a charge, is creating a pressure, on their departmental
119. Can I turn to page 30 in the report. The
annual payments are £14.037 million. Am I right in thinking
that is split between £10.6 million debt service and £3.433
million service fee? What is the difference between a debt service
and a service fee? Is debt service the interest plus capital repayments?
(Sir Andrew Turnbull) Yes.
3 Note by witness: Table C18 of the Red Book
2001 sets out the estimated payments under PFI contracts up to