Examination of Witnesses (Questions 20
WEDNESDAY 21 NOVEMBER 2001
TURNBULL KCB, CVO, MR
CBE, MR JAMES
20. One of the objectives for the competition
was to get the standard terms and conditions accepted by the finance
markets. What you are telling us is that there were no problems
with those standard terms and conditions. Is that right?
(Sir Andrew Turnbull) I do not think there were. They
have gone on to become the standard terms.
21. Mr Lewis, funders usually undertake their
own due diligence to examine the risk that they are looking at.
Paragraph 1.15 tells us that this did not happen in this case.
There was a company that was taken on to provide that facility
for all the bidders. Tell us if that worked successfully and why,
in your view.
(Mr Lewis) I think it did work successfully. The fact
that the Treasury Task Force was trying to use a standardised
guidance and that we were asking bidders to bid on standard terms
meant that the whole process of running the competition was a
smoother one from issuing bids to the financial close. Comparison
between one bidder and the other could be done in a much more
22. The costs of that were met by which party?
(Mr Lewis) The preferred bidder, us, in this case.
23. You met the costs?
(Mr Lewis) Yes.
24. Despite the fact that normally the bidding
parties would do their own due diligence work and here you have
a number of bidding parties, all of whom would have incorporated
those costs into their own ultimate price, here the Treasury ended
up picking up the tab for this?
(Mr Lewis) I am not sure on that point.
(Mr Stewart) The primary reason for doing this was
to save time in that the due diligence work could be carried out
in parallel with the bidding process such that it would be made
available to all bidders and indeed the preferred bidder. To answer
your specific question on the costs, normally what would happen
is that the banks and the preferred bidder would delay the due
diligence process precisely for the reason that you are alluding
to, which is that none of the banks will want to take risks on
those sorts of costs. Normally, the cost of that is passed on
via a unitary charge to the public sector body entering into the
contract. I do not think this was any different in terms of the
end result to the normal situation.
25. Except that a lot of companies ended up
not being successful bidders ended up not bearing the costs of
due diligence that they would have normally borne for not being
(Mr Stewart) That is true to the extent that they
would enter into an extensive due diligence process. Normally,
you would not have got multiple banks to incur the due diligence
costs while they were still in competition. There would have been
26. In terms of the advisers that we had, Kleinwort
Benson and Societe Generale, what was the cost of those?
(Sir Andrew Turnbull) Right from 1996 through to the
conclusion, I think it was £2.6 million. That is for all
27. Paragraph 1.42 says that the bond to finance
the Treasury building cost 163 basis points above gilts. Can you
explain why that was good value for money and why it would not
have been cheaper to finance the project with gilts?
(Sir Andrew Turnbull) I go back to why this 163 basis
points existed. Principally, because there was risk in the project
and if we had lent money at gilts rate we would have been lending
into a risky project but making no charge for the risk, which
is a mistake the government has made too often. Another point
is whether lending at that rate was a state aid possibly. The
main reason is that that 163 was there for a purpose. It was an
acknowledgement of the risk of the project.
28. The report does state that it was deemed
to be good value for money.
(Sir Andrew Turnbull) That was by looking at comparisons
with other deals going on at the time.
29. Referring to box one on page 12, where you
have what in my view is an extremely helpful summary of the different
financing characteristics of bank as opposed to bond financing,
would it not have been possible to have got parity between bank
and bond financing on the project and therefore open up the project
to the possibility of getting the banks on board?
(Sir Andrew Turnbull) We invited 28 people to bid,
of whom 19 responded. A lot of them were banks. In other words,
they were not thinking, "This is hopeless. There is no point
in my bidding here." They thought that they could come up
with a product which could compete. In the end, it did not work
out that way as the bond, and the indexed version of it, and in
turn the wrapped, insured version of it won out. It was not the
case that people said, "You have set this thing up in a way
which means that only someone offering an indexed bond has any
chance here", because if that was the case they would not
have bid. Quite a number of them did bid and quite a number of
them got through to the short list.
30. On this question of paragraph 1.42, you
referred to how it could have been seen as a state aid if you
had financed it through gilts. I take it you are saying it could
have been seen as a state aid under EU rules, given that you had
this Exchequer Partnership project?
(Sir Andrew Turnbull) We would be lending to a private
sector body at something other than the normal cost of capital.
31. Nonetheless, this is a Treasury building.
The thing that interests me about paragraph 1.42 is there is a
spread of 163 basis points over gilts to accommodate the risks
inherent in the project but why could not the Treasury have financed
the development and refurbishment of its own building, which was
a state building, using gilts?
(Sir Andrew Turnbull) This is the first time this
has been done in 90 to 100 years. The Treasury has never engaged
in a major property transaction before. The idea of becoming our
own developer would have taken us into completely new territory,
asking us to do something we have never done before and probably
will never do again.
32. Who built the Treasury building in the first
(Sir Andrew Turnbull) Probably the Ministry of Public
Building and Works.
33. Are you saying there was 100 years ago but
there is not now expertise within government on managing this
sort of project?
(Sir Andrew Turnbull) The responsibility for buildings
is devolved to departments. The legacy of that was Property Holdings
which disappeared some years ago. That is the route that produces
the Marsham Street building, if you do it yourself.
34. There is quite a lot in the report on pages
16 and 17 about the bonds and issue of the bonds. Can you say
how much money was raised by issuing the bond?
(Sir Andrew Turnbull) £125 million.
35. Was the 2.6 million for advisers' fees on
top of that or were your net proceeds 122.4?
(Sir Andrew Turnbull) The £2.6 million includes
lawyers, quantity surveyors and so on.
36. On top of?
(Sir Andrew Turnbull) Yes.
37. Was it 127.6 or was it 122.4?
(Sir Andrew Turnbull) I think the £2.6 million
is what the Treasury has incurred for itself.
38. Is it not normal that if a company is trying
to raise money it issues a bond and all the fees associated with
raising the money are slapped on the bond?
(Sir Andrew Turnbull) All the fees on the EP side
would have been, yes.
39. You raised 125 million.
(Sir Andrew Turnbull) We did not. EP raised it.