Examination of Witnesses (Questions 120
WEDNESDAY 21 NOVEMBER 2001
TURNBULL KCB, CVO, MR
CBE, MR JAMES
120. And the service fee is the maintenance
of the building?
(Sir Andrew Turnbull) Security, maintenance, cleaning,
all the rest.
121. So that £3.433 million is a considerable
drop from the £9 million?
(Sir Andrew Turnbull) The £9 million was the
total cost of what we are paying at present, some of which included
the rental equivalent. Someone asked me, did I have in my head
the figure for the facilities management bit of this, and I said
I did not but I can
122. So the £9 million is not the facilities
(Sir Andrew Turnbull) No.
123. That really undermines the answer.
(Sir Andrew Turnbull) The £9 million is equivalent
to the £14 million. That was clear between us. I do not have
a figure for what is the equivalent of the £3.433.
124. Will the £14 million increase over
(Sir Andrew Turnbull) The increase will be in line
125. So it will go up with inflation every year,
the £14 million?
(Sir Andrew Turnbull) Yes.
126. When you calculated the net present value
of £170 million, did you take that
(Sir Andrew Turnbull) I did that in real terms.
127. What assumption for inflation did you use?
(Sir Andrew Turnbull) It was done in real terms.
128. So you used a basis of 6 per cent?
(Sir Andrew Turnbull) That is the discount rate. All
these Green Book evaluation projects are done in real terms.
129. But the 6 per cent return includes an inflationary
(Sir Andrew Turnbull) No, it does not.
130. That is real?
(Sir Andrew Turnbull) It is 6 per cent real plus risk
plus cost of raising the money, so it is a composite.
131. I do not know that I follow that. Maybe
there are clever people here who can.
(Sir Andrew Turnbull) 6 per cent is not meant to be
a nominal rate.
132. So is that the real rate then, the 6 per
(Sir Andrew Turnbull) It is the rate which is used
to evaluate public sector projects.
133. Yes, but
(Sir Andrew Turnbull) All of which are done at the
134. The Bank of England lending rate at the
moment is 4 or 5 per cent, but that assumes there is a certain
amount of inflation in the system. When I borrow a mortgage at
6 per cent, that assumes there will be a level of inflation.
(Sir Andrew Turnbull) If you are borrowing at 6 per
cent, that is not the same 6 per cent as this 6 per cent.
Chairman: I do not think we are shedding a lot
of light on this.
135. I do think that certainly there is some
rigour and some ingenuity in this scheme as revealed in this paper,
but I also think there are some flawed judgments, or at least
judgments which appear to be flawed in it, and I think we have
revealed some of them or hinted at some of them already. I want
to return to risk. When you were originally asked about risk you
referred to the risk inherent in the building contract. I agree,
the risk inherent in the building contract to some extent affects
the risk inherent in the financing but the two are conceptually
separate. You did not, and have not in fact, indicated any risk
involved in the financing part of the competition. It would be
hard to say there was any risk since effectively you are exchanging
financing for annual payments of several £14 million a year
coming from the Treasury, so it is hardly a great risk to any
funding institution. The only risk is whether the building contract
is produced in line with the original estimates. I want to separate
the two sets of risks out. I want first of all to ask about Exchequer
Partnerships and the fact they were appointed on a bid which came
sometime before it was finally accepted. Why did you not go back
out to tender?
(Sir Andrew Turnbull) We had to have a project, because
we knew otherwise we would have incurred this wasted payment.
The first was time, and time in this case was moneyeach
year which went by we would be doing more and more maintenance.
Secondly, we had a bid and we were advised within the framework
of that bid we could reopen it, negotiate the changes which we
and Ministers wanted. It was not without risk to us if we had
re-opened. We could have found the new competition was not actually
as favourable as the original one. In the same way, EP had invested
a lot of time in understanding the building, what its problems
where, how it could be used, so too had the Treasury team, so
we knew a lot about this. So we thought the best thing to do was
to seek the changes we wanted within the original contract but
to have various safeguards, the principal one being what we are
talking about today, the fact we were
Jon Trickett: I am going to come to that in
a second. Not only conceptually but in reality, there were two
separate sets of competitions, and in fact there were two separate
sets of risks really. One is to do with financing and one is to
do with the building contract. If we can just stay on the building
contract for a second, because it impacts on the way in which
the financing competition was run, it may be that you may have
taken a risk to go out to tender, that you may have ended up with
a higher price, but there is no certainty of that. The rest of
Government operates on the basis of open tender, does it not,
and years had elapsed, the building industry changes, each contractor
in the market has more or less extensive workloads at the time
at which they make a bid, and sometimes they go out and find work.
I put it to you that you cannot say to me or to this Committee
that you got the best price from Exchequer Partnerships for the
building contract. You cannot demonstrate that.
Chairman: Can I interrupt for a moment. To be
fair to Sir Andrew, we are just dealing with the finance at the
moment, we are going to come back to the wider issue.
Jon Trickett: I accept that but the two relate.
I do not want to disagree with you, Chairman, but Sir Andrew himself
talks about all the risks being inherent in the building contract.
Would you mind if we got an answer to that question and then I
will move on?
Chairman: Go ahead.
(Sir Andrew Turnbull) This was a judgment we made.
You can always say, had we done it the other way it would have
been better, but what we know is that that price, when you take
account of the movement in market interest rates generally and
the specification change we made, is a better price than we had
before, and the indications are that we are going to get into
this building next summer.
136. Speed was one of the points you made.
(Sir Andrew Turnbull) It may be that it might have
gone better the other way. Hindsight will tell you that. We have
so far had no reason to regret the judgment we made.
137. I think you have accepted the point I was
making and the Chairman wants me to move on. The reason I raised
the building contract was it does seem to me it is inextricably
linked to the way in which the matter was financed, and the issue
of risk boils down it seems to me to due diligence. This paper
is quite clear that the contractors and funders actually minimised
the risk by the process of due diligence, presumably using professional
insurances and various other methods to draw in other professions
to say the building contract was properly constructed. Is my understanding
right in terms of the due diligence process?
(Sir Andrew Turnbull) I think so, yes.
138. The due diligence process is used by the
financiers, the funders, to determine whether or not the building
project is a secure thing to lend money against, and you said
that the risk which you were offloading from the Treasury was
to do with the building contract, but the truth is you offloaded
the risk by the process of due diligence and so did the funders;
the process of due diligence was used.
(Sir Andrew Turnbull) No, we transferred risk and
then the funders had to assess whether the risks they were taking
on were ones they were prepared to fund, and EP were an organisation
they believed was competent to manage those risks.
139. The fact of the matter is that this contractor
here was really the Treasury by any other name. They were doing
what you wanted and this document is an advocacy document for
the processes you adopted, and this document quite clearly states
that the funders utilised the process of due diligence, in other
words finding professionals and all their insurances and associated
techniques which they used, to determine whether or not to lend
money against a building price which the building contractors
have established. That being the case, there are several questions
which come from that. The first is this: why did the due diligence
process not operate at the time of the first tender? The first
tender, which was £13 million incorrect, not to the advantage
of yourselves, must have used due diligence.
(Sir Andrew Turnbull) Not to the advantage of