Examination of Witnesses (Questions 80
WEDNESDAY 21 NOVEMBER 2001
TURNBULL KCB, CVO, MR
CBE, MR JAMES
80. Can I ask the Treasury for their view on
that? Is it correct that there were not any index linked bonds
around a few years earlier that could have been used in this way?
(Sir Andrew Turnbull) This is a question relating
to corporate index linked bonds. This was a market which was developing.
(Mr Stewart) There were a number of small index linked
bonds. There was no real liquidity in the market. There was great
uncertainty as to their deliverability. When the funding competition
was launched, there was much more liquidity in the index linked
bond market and banks were looking at offering an index linked
product as well, although they were struggling to do so. The market
had moved on between the time when the original bid was put together
and when the funding competition was run.
81. Had we gone ahead in 1997, as we would have
done if there had not been a government change, the whole project
would in practice have cost £13 million more because the
option which was finally chosen was simply not available because
companies were not producing index linked bonds.
(Mr Stewart) It undoubtedly would have cost more.
The Treasury were seen to have influence in the negotiating power
and the power of the Treasury generally had an effect on the market
at that time. You have to compare a competition that was run by
Exchequer Partnership but in close consultation with the Treasury
with a competition which was run in isolation within Exchequer
82. Mr Gershon, paragraph 1.14. The compensation
being offered to Societe Generale if they did not come in with
part of the fundingwhy exactly was that done in the sense
that I would have thought it would be more logical to wrap that
up in whatever price was being paid to Societe Generale anyway.
(Sir Andrew Turnbull) That is probably for James or
I. You have to separate their role as an adviser. We would not
want to wrap up their role as a provider of funds with their role
as a provider of advice. The explanation for this is that they
had, in the original bid, offered to provide this mezzanine level
of debt. We wanted to have a competition for that. We wanted to
compete that as well as the senior debt, but we were also advised
that it was quite difficult just to have a separate competition
for that one tranche. We wanted to hope that the people providing
the senior debt would also offer this mezzanine debt. There was
some doubt as to whether people would do that so you could have
got a situation where you had one bidder who provided the senior
debt and the mezzanine debt and another bidder who only provided
the senior debt. Therefore, you would not have a competition.
We arranged with SocGen that they would maintain their offer to
provide this, which might get taken up and it might not. In effect,
we bought an option with them. What it means was that when we
had these two bids came in, we had the Ambac bid which was for
both the senior and the mezzanine debt and the FSA bid which was
only for the senior debt. We were then able to combine that with
the SocGen offer which had been maintained and kept on the table
since 1996 and effectively we were able to then have two competing
proposals. This was an offer which we think is entirely vindicated
because if we had not done it we would have had a problem with
this competition. It was worth paying that fee to maintain that
83. Can I come back to paragraph 1.25, which
talks about the number of institutions originally invited and
the number that declined? You said that the need to agree the
standard terms was not one of the reasons why any of the nine
declined. We are told in the report that the reasons were, ."..
mainly because they did not feel that they would be able to offer
a competitive bid and did not want to commit resources to the
competition." I am quite surprised that there were so many
that you did not have some pretty good idea in advance that they
would not be able to provide competition or the funds.
(Sir Andrew Turnbull) We did not know how many other
fish they were chasing at the same time. Some of them said, "We
do not want to go in for this because we are making an effort
somewhere else", which was a perfectly reasonable, competitive
business decision for banks to make.
84. It seems quite a lot to me, that about a
third of the total refused to bid at all. Is that usual?
(Mr Stewart) A lot of people often prequalify for
these things to find out what is going on, purely to get the information
into their hands and the documentation. What the banking market
at the time was having to assess was whether they would have a
chance of winning. The term of this deal, which is 35 years, means
that any bank that was going to be competitive would have to lend
extremely long term. At this time, the building societies were
entering the fray and pushing out the term of debt available in
the banking market. To be honest, people looked at the competition,
at the Abbey Nationals and the Halifaxes of this world and, because
they were beginning to be very competitive, they took the view
that it was not really worth the effort of continuing.
85. Or even prequalifying?
(Mr Stewart) There were 28 expressions of interest
which were trying to get hold of the initial information and I
think the surprising thing is that 19 submitted term sheets.
86. You said 28 expressed interest. I thought
it was 28 invited by the Treasury to express interest.
(Mr Stewart) You are right. 28 were invited, received
a bit of preliminary information and 19 submitted term sheets
of which they short listed down to the six financial institutions
and the two bond arrangements. I think 19 is the more surprising
87. We are told " mainly" because
of these two reasons. Do you know what the other reasons were?
Presumably some of these nine dropped out not for those reasons
but for other reasons.
(Mr Stewart) Primarily, it was the fact that they
were not going to win. They could not compete on the term or the
period of the debt that they were being asked to offer.
88. The fact that they would not be able to
offer a competitive bid is listed here as one of the reasons but
I am wondering what other reasons there are.
(Mr Colman) It is up to the banks to decide at the
time whether they want to proceed and there can be any number
of reasons for a particular bank to be unenthusiastic about proceeding.
89. We are told most of the nine dropped out
because they could not offer a competitive bid or because they
did not have the resources but presumably because it is "mainly"
there were some other reasons as well. I am trying to chase up
what the other reasons were.
(Mr Colman) We have been told while we were doing
this work that some of the banks did not like the standard terms
and they were not supposed to like them because the Treasury was
wishing to achieve something with the standard terms which might
not please all banks. That may have been a factor.
90. We were told by Sir Andrew earlier in answer
to Mr Gardiner that that was not one of the reasons.
(Sir Andrew Turnbull) We eventually had a field of
19 bidders to play with. We did not curtail this field to something
that was a problem to us.
(Mr Stewart) I have a whisper in my ear that no reasons
were expressed by some of the bidders.
91. One of my colleagues asked a question with
regard to funding it by gilts and you said it was inappropriate
because of state aid rules. If I have a subcontractor and they
are the preferred bidder, where does the resource cross the state
aid line? If I am giving them special advice, if I am doing the
risk assessment and all that has been funded by the Treasury,
where does the other resource, the cash, cross the state aid line?
(Sir Andrew Turnbull) We are paying for some of our
own costs, to have our own advisory team. If we then make available
money to a private sector organisation which does not reflect
the current costs of capital in the market, that is something
on which you can frequently find yourself being challenged.
92. There must be a distinct dividing line that
says, "This is state aid. If used inappropriately and if
I allocate resources of one sort or another to a company in the
private sector which may not be able to purchase those resources
or gain those resources in the market place such as the risk assessment,
such as the special advisers", where does that not transgress
the state aid rule; whereas providing the cash from another resource
does? It is both money at the end of the day, is it not?
(Sir Andrew Turnbull) If we just bought it, we would
be just back to a conventional construction project. In this case,
we are lending money to a private sector organisation which then
has access to that capital which is not available generally. It
does not reflect what other property companies will have access
93. But this is the preferred bidder. This is
your contractor. All you are doing is supplying a resource, the
(Sir Andrew Turnbull) They still have that piece of
business. In the competition, we had never hinted that we would
do it this way. There is a change of terms where we say, "One
of the things you will get if you take this contract is this money
at the gilt rate." All the people who did not bid or dropped
out earlier would think, "Wow, I would have come in if it
was on that basis."
94. You have still confused me here. If I had
two different companies they are not going to get any more out
of allocated funding. That has all been taken as part of the price
of the total contract, the package. This competition does not
mean that Exchequer Partnerships are going to get any more money,
(Sir Andrew Turnbull) I interpreted funding by gilts
as meaning we borrow the money and on-lend that money to our contractor.
95. You are saying that contravenes state aid
(Sir Andrew Turnbull) I am saying it could do.
96. The truth is it was not even checked?
(Sir Andrew Turnbull) We did not want to do it this
way because this is the argument which says the government can
borrow cheaper; therefore, anything that it buys from anyone,
if anyone selling to us is borrowing in order to fund its activities,
it would be much cheaper if we lent them the money. Down the end
of that road, you say to the window cleaner, "Do not buy
your own ladder. We will lend you the money." The difficulty
with that is that the terms on which people are borrowing in order
to equip themselves to provide services to us reflect the risk
they are undertaking. It is a distortion for us to lend to people
at the risk free rate so we would have to set up a proper banking
arrangement so that when we were raising money we were then assessing
what were the risks of the project. What is the creditworthiness
of the people to whom we are lending money. We do not have an
apparatus like that in government. By and large, the state does
not want to be in a position where it is the all purpose lender
97. I did not think I said that. I just said
if I have a contractormy window cleaner is a good exampleand
if he was coming round to do my 2,000 windows every week and I
said, "I want to employ you on a labour only contract and
I will provide the materials", it is quite common in business,
is it not?
(Sir Andrew Turnbull) It would be probably wise to
do it on commercial terms. If you happen to have some privileged
source of finance, you would not necessarily assume that because
you could borrow at that rate you could lend it to him at that
98. If he is working for me I see no reason
why, if I can get the price down by doing that. I would be stupid
not to do it.
(Sir Andrew Turnbull) In the calculation you have
made in getting the price down, you have to take the risk into
account, and you probably have not.
Mr Jenkins: Yes, I would have done, believe
me. I would not fund him up-front, I would make sure he got paid
on a weekly basis.
Chairman: Can we get back from window cleaners.
99. I want to bring it down to the basics, Chairman,
because it is a basic, everyday requirement, raising cash. I have
read this report and read about the funding in the city and how
effectively it is working and it is a simple way of raising cash
to fund this project, but I am more interested in assessing the
risks of this project because I think most funders would know
what the risks were and would have done it themselves, but we
have done it on their behalf. How much risk does that entail,
doing the risk assessment for them and then handing the package
over to them?
(Sir Andrew Turnbull) We have not done that; they
have assessed the risk of all the things I listed in earlier questions.
We have not duplicated EP's assessment of risk. What we have assessed
is what are the risks we no longer have to provide for, and in
the calculation we then put those risks into our comparison of
doing it as a public sector project.