Examination of Witnesses (Questions 40
- 59)
WEDNESDAY 21 NOVEMBER 2001
SIR ANDREW
TURNBULL KCB, CVO, MR
PETER GERSHON
CBE, MR JAMES
STEWART AND
MR PAUL
LEWIS
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.
48.
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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