Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 140 - 159)



  140. To the advantage of their chosen funders.
  (Sir Andrew Turnbull) We would be paying to the—

  141. Had the due diligence process been done twice then? Had it been done in the original tender and then again by yourselves?
  (Sir Andrew Turnbull) I think it must have been.

  142. That is interesting, is it not?
  (Mr Stewart) Can I just clarify what due diligence is?

  143. Yes.
  (Mr Stewart) Due diligence is a firm of technical advisers, a professional firm, writing a report on behalf of the funders, giving their view of the risks of the project and inherent deliverability. There is no insurance or anything else. There is no risk-taking in that due diligence process, it is just a statement of the factual position.

  144. Paragraph 1.16 refers to the insurances and it would be interesting to get a note sometime, if that was possible, Chairman, on what the insurances actually were. Due diligence, nevertheless, is the process the funders used in order to determine whether or not to lend money against particular builders' estimates. That is the truth of the matter. I am interested to discover due diligence was done twice, once erroneously to the advantage of the funders, according to this paper and according to what you have just told me, and a second time resulting in a £13 million less estimate. Am I understanding it right now?
  (Sir Andrew Turnbull) What happened between 1996 and the end of 1997, I would have to check up exactly what due diligence process took place.

  145. I only have a limited amount of time and I think I have made my point but it would be interesting if you could come up with that.
  (Sir Andrew Turnbull) Your question is, was there a previous round of due diligence? Okay.[4]

  146. This due diligence process is a fascinating one. I take the view of Mr Gibb, to my left, but for reasons not to do with my favourable attitude towards capitalism, rather the reverse. If due diligence is good enough for the banks, and it clearly was, and you participated in the selection of the professionals, how is it that the Treasury does not use due diligence processes itself in building contracts which it is letting? Is that not a way actually of giving you some certainty about building contracts in the future, something which the private sector have invented which we might use to our advantage?
  (Sir Andrew Turnbull) The experience is over the years a poor one.

  147. Have we used due diligence processes like this one?
  (Sir Andrew Turnbull) We would probably call it project appraisal at that time, examining the project, examining the risks, we would also be looking at the good standing of the potential contractor. All that was done or is done under a conventional procurement, but nevertheless the history is that this has not been done as well and that the intensity of the process, in my experience, is a lot greater when it is the private sector lending in relation to a particular project, rather than simply lending to HMG. They do not have to do much due diligence when they lend to HMG.

  148. I would like, if it is possible, Chairman, to see where we used the same rigorous process of due diligence where it failed in relation to Treasury funding, direct public sector funding, relative to private sector funding. When it comes to public sector comparators, it seems to me that if you were to have provided the money yourselves rather than going to the private sector, the money would have been cheaper.
  (Sir Andrew Turnbull) The money would have been cheaper but the assessment of the risk may have been faulty.

  149. That precisely boils down to the issue of due diligence. It precisely boils down to the question of due diligence.
  (Sir Andrew Turnbull) It was that prospect which lead in the construction of the public sector comparator, drawing on a series of reports from the Efficiency Unit, the Central Unit of Procurement—the history of cost overruns in the public sector—to the inclusion of an allowance for cost overruns.

  150. I think you have made your point and I have made mine. I want to move on to a judgment made about bonds as opposed to bank financing. A judgment was made at some point that we were going to go down the route of bonds, and I am not sure if I have understood this paper correctly or not but it seemed as if the bonds were lending over a five year period longer than the banks and therefore the annualised payments were less, and that was a prime motivator for you deciding to go down the bond route. Have I misunderstood that entirely?
  (Sir Andrew Turnbull) That was one of the features which made bonds attractive.

  151. My memory tells me that is what this paragraph says. How was the balance struck between the aggregate cost in total and the annualised costs? What balance was struck between the two, since borrowing over 35 years probably reduces the annual payments but may increase the aggregate cost of the scheme as a whole?
  (Sir Andrew Turnbull) The project itself was for 35 years, which is why it made sense to relate the borrowing to 35 years.

  152. I understand that, but the paper says that the annualised costs were reduced by borrowing over a longer period, and that makes sense, since we all know that is how our mortgages work as well. What I want to know from you is, has the aggregate cost increased as a result of the fact we are borrowing it over 35 years rather than 30 years? Is it costing the taxpayer more in the aggregate?
  (Sir Andrew Turnbull) It is costing us less.

  153. In the aggregate?
  (Sir Andrew Turnbull) On a discounted basis.

  Jon Trickett: I would be interested in that calculation. No doubt the C&AG, if he is still looking at the scheme, will be looking at that. Thank you, Chairman.

Mr Davidson

  154. Would I be right in thinking, Sir Andrew, that to a great extent this project is going to be a flagship for PFI, and that if this went wrong effectively you would be a dead man? That is a technical expression!
  (Sir Andrew Turnbull) Let me say yes to the first half and I will pass on the second half. There was no doubt that the Treasury has an overall responsibility for PPP/PFI and in its own project it is very important that it makes a success of it.

  155. What difference did that pressure make to the running of the project?
  (Sir Andrew Turnbull) We put a lot of resources in it and we had the resources of the Treasury Taskforce who worked very extensively on this project.

  156. What does that mean in practice?
  (Sir Andrew Turnbull) Some quite senior and experienced people were deployed from the Taskforce to work on this project.

  157. Would the quality of advice and the level of seniority then not be available to the normal run-of-the-mill departments who do this sort of work?
  (Sir Andrew Turnbull) That is why we have set up PUK to make sure it is, but it may not have always been in the past.

  158. That is what I wanted to clarify. Is there anything that is comparable to this in the way in which the financing of PFI has been undertaken? I am trying to clarify just how unique this is.
  (Sir Andrew Turnbull) It was a first. There is one other project currently going down this track, an MoD barracks refurbishment. There have not been all that many projects which it is suitable for. The MoD project was signed slightly before this but the interesting thing about this report is it will change perceptions and what will then be the response to the consultation document.

  159. Is this the way things will be in the future?
  (Sir Andrew Turnbull) I think the Chairman was trying to manoeuvre us into the position of saying this was going to be a minority taste. I do not know I want to accept that it is for just a few projects here and there. It could become the norm for large projects which are not too complicated , as discussed somewhere in Chapter 2.

4   Note by witness: There was no due diligence process between 1996 and July 1997 (when negotiations on the first deal were halted). Although commerical heads of terms had been agreed, arrangements for funding had not and were some way off. It is not until potential funders are engaged that the question of undertaking a due diligence process arises. Back

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