Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 40 - 59)



  40. 125, excluding the facilities, management and the ongoing costs over the years ahead. Is it right to say that £125 million is the cost of refurbishing the building?
  (Sir Andrew Turnbull) Yes, more or less.[1]

  41. You are paying out £14 million per year for the next 35 years?
  (Sir Andrew Turnbull) Yes.

  42. Which adds up to 490 million?
  (Sir Andrew Turnbull) With a net present value of £169 million.

  43. Could you explain in layman's terms the sentence: "The total net present cost of the unitary payments is £170 million"?
  (Sir Andrew Turnbull) If you take £14 million and, for 35 years, discount back at six per cent I think you get to £169 million.

  44. Nonetheless, it is cash out of the door. You are paying 14 million a year?
  (Sir Andrew Turnbull) Yes.

  45. You are, cash out the door, paying £490 million over those 35 years?
  (Sir Andrew Turnbull) Yes. You have to compare it with what we would have been paying had we done nothing.

  46. Forgetting construction costs, what are now the annual maintenance costs of the Treasury building and the running costs, including maintenance where necessary.
  (Sir Andrew Turnbull) We are paying something like nine but some of that includes a property charge. For the facilities bit, I am not sure I know the figure.

  47. £9 million a year?
  (Sir Andrew Turnbull) Yes.


  That is in its 'undone-up' state?
  (Sir Andrew Turnbull) We pay £9 million for an old slum and we will pay £14 million for a nice, new building.

  49. You say you have a discount rate of six per cent. What were real interest rates when you came up with the six per cent?
  (Sir Andrew Turnbull) Probably about three to three and a half.

  50. Do you think it is a fair figure or is it too high?
  (Sir Andrew Turnbull) It is an issue we have to look at.

  51. Does that not fundamentally affect the project, the discount rate that you use?
  (Sir Andrew Turnbull) It could do.

  52. Are you saying that there are circumstances in which the discount rate that you use would not fundamentally affect the viability of the project?
  (Sir Andrew Turnbull) The discount rate would apply both to this project and to the public sector comparator.

  53. The discount rate is always going to be important, is it not?
  (Sir Andrew Turnbull) Yes.

  54. It is always going to determine whether it is viable and whether it makes sense to do it.
  (Sir Andrew Turnbull) Yes. What I do not have in my head is whether we would have concluded that we would not have done it because this was a project that we had to do. The one thing we were absolutely sure of was that spending about 50 or 60 million simply to stop the water ingress into the basement, to stop lorries falling through the pavement into the basement, cabling maintenance—we were beginning to get a number of cable fires—and ending up with a building no better than what we have at present was an extraordinarily bad deal.

  The Committee suspended from 4.35pm to 4.45pm for a division in the House.

  55. Returning to the discount rate, you said you did not have it in your head whether it would have made much of a difference because you would have had to do something anyway. I

  paraphrase. I am right, am I not, that real interest rates were quite a lot higher than when you came up with the six per cent discount rate than real interest rates are now?
  (Sir Andrew Turnbull) The six per cent is not—

  56. That was not my question. Are real interest rates now a lot lower than they were when you originally came up with the six per cent discount rate? Yes or no?
  (Sir Andrew Turnbull) Yes.

  57. If you were to do it now, you would come up with a discount rate quite a lot lower, would you not?
  (Sir Andrew Turnbull) Not necessarily because the discount rate is encapsulating probably three different functions.

  58. Including risk?
  (Sir Andrew Turnbull) It is encapsulating the pure time preference, risk and the fact that, when you raise money for a project, you have to do it through taxation and there is a welfare cost.

  59. Nonetheless, are you looking for future projects at having a lower discount rate?
  (Sir Andrew Turnbull) We are looking at the Green Book but there are no decisions or proposals as yet to change it.

1   Note by witness: The total sum raised for the refurbishment was £140.985 million, comprising £127.790 from the indexed bond, £6.925 million of equity and £6.25 million of mezzanine debt. Ref answer to Q186. Back

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