Examination of Witnesses (Questions 160
WEDNESDAY 21 NOVEMBER 2001
TURNBULL KCB, CVO, MR
CBE, MR JAMES
160. On the question of the advisers which cost
£2.6 million for the Treasury in all of this, how much cost
would it have been had it just been a normal Government procurement?
What I was not clear about was whether or not this was an additional
cost or the total cost.
(Sir Andrew Turnbull) I do not know that figure but
I think I would have said we would have spent too little on advisers
and probably would not have done it well. That has been the historical
161. That is not quite as precise as I was looking
(Sir Andrew Turnbull) I have not costed an option
we did not follow.
162. No, but I am genuinely unclear as to whether
or not you would have normally spent 100,000 or 2.5 million on
a normal procurement and therefore how much of a difference there
is in all this in terms of the advisers.
(Sir Andrew Turnbull) I may be able to find a figure.
It certainly would not have been as little as £100,000.
163. It would have been as much as 2.5 million?
(Sir Andrew Turnbull) Probably not because the £2.6
million included the
164. You can understand why I am keen to explore
this because much has been made of the advantages of PFI and so
on, and 2.6 million for advisers does seem a lot but I am not
quite clear what the costs were anyway.
(Sir Andrew Turnbull) I am not either. All I know
is, this is not very much money compared with the project going
10, 15, 20 per cent over budget.
165. I understand that. Why, in that case, would
you not normally spend enough money on these things?
(Sir Andrew Turnbull) Because we are also bringing
in not just our critical scrutiny of the project but what we have
been talking about, the due diligence of the funders, which is
also raising the questions.
166. I do understand that, but you said earlier
on, when I asked about how much you would spend on that, not enough,
and that would seem to display a lack of due diligence simply
by yourselves, would it not?
(Sir Andrew Turnbull) There is an OGC chart which
shows where projects go wrong, and the answer is, they go wrong
very early on. The message which is now being given to departments
is, whether you are procuring this by PFI or conventional means,
invest heavily in getting the project right, specified right,
in its early days.
167. I accept and understand that, but I am
slightly puzzled by this. One of the great advantages you have
been telling us and others have been telling us with PFI is the
due diligence and expertise it brings in and so on. Yet, when
I was asking about an alternative route, you admitted you would
not have spent enough money on it. That seems to be a circular
argument and it seems to be a rigging of the ballot in favour
of the PFI route, if by definition you are geared to make mistakes
had you done it the other way.
(Sir Andrew Turnbull) This is the argument which says
that all this risk transfer, contract performance, we could have
got anyway without involving the F bit of PFI. The only thing
is that the experience is completely against it.
168. Can I clarify the bond issue? Could you
explain to me in words of one syllable why, if it is such a great
idea for this, it is not a good idea for London Underground?
(Sir Andrew Turnbull) That is a process which is going
on at the moment. There were originally three projects, now down
to two because two merged, and it could well have a very large
bond element in it.
169. I do not quite understand the point you
have been making in response to some of my colleagues about the
question of funding it yourself, providing it by gilts rather
than a commercially-obtained bond. It seems to me if you were
agreeing you were going to have somebody managing the money as
well as managing the project, and they were operating the bond
and you gave them the money, not only would you have gained in
the interest rates, you would also have a gain presumably on the
bond arrangement fee since there would be no risk, and you would
also have removed completely the risk of not having raised the
money at all, but you could still have the bond financier holding
the money as it were and using their expertise to lay off the
money they were not using at any particular time. Would that not
have been an entirely reasonable way of combining the best of
(Sir Andrew Turnbull) That is assuming that the public
sector could develop as good a credit inspection, as good a due
170. The private sector could do all that. There
comes a point, as I understand it, in bond raising when you actually
go out and say to people, "Give us your money", and
they come in with bags over their shoulders, put it on the counter
and then it goes
(Sir Andrew Turnbull) What does that then do to the
performance of the contractor? The contractor has a relationship
direct with the market place, and that is incentivising them
171. No, I would not change that. I would have
you as the Treasury representatives on earth taking the money
along and giving it to the banks
(Sir Andrew Turnbull) We give the money in your scheme
to Ambac and they manage it.
172. Yes. As I understand it, you are not buying
from the bond arrangers the money, you are buying the due diligence,
the expertise, the ability to make the best use of the money when
it is not being used and so on, and you would still access that
and have these other gains surely by supplying the money yourselves.
If you re-worded the terms so that was available to everybody,
so anybody who won a contract would get that, that would presumably
overcome the competition rules?
(Sir Andrew Turnbull) The money we had lent, if it
was properly risk-adjusted, would be lent with a risk premium
in it, so the price we would get it for at the end, the £14
million, would still be the same, because if we were lending this
money to a contractor and not making a proper allowance for risk,
we would be taking an unpriced risk.
173. I am not convinced by that but you have
managed to baffle me so I will move on to something else. Can
I ask you about the competition that took place not producing
any benefits in the price of the bond arrangers' fee. Does that
not suggest that there is no competition for this sort of work?
(Sir Andrew Turnbull) Actually what it says is that
three people came in with the same price. What it does not say
is that there were five others who came in with a different price.
174. That is in the report you agreed? Why did
you not raise that?
(Sir Andrew Turnbull) What is there is the fact that
the three best bidders offered the same fee which suggests there
is a standard fee for this work and the competition did not provide
any savings in this area. The reader is led to think there were
only three bidders and they all bid the same, but actually there
were eight of them.
175. This reader certainly thought that. The
reader who gave us the question thought that as well. You saw
that, why did you not correct that?
(Sir Andrew Turnbull) I confess I did not see that
until we were doing the homework for this hearing.
176. I was under the impression that part of
the homework was you actually checked the report.
(Sir Andrew Turnbull) We do. This is one of those
questions where, if it is true, you do not necessarily change
177. If I have not been able to catch you on
anything else, I have caught you on that one. Societe Generale
was going to be compensated 100,000 if they did not provide part
of the financing. Why was that compensation agreed?
(Sir Andrew Turnbull) I think I explained that about
an hour and a half ago.
178. Sorry, time flies when you are enjoying
(Sir Andrew Turnbull) This was an offer to provide
this level of financing which they made originally in 1996. We
did not know whether the people providing the senior debt would
also bid for this mezzanine type debt, so it could have ended
up with a situation where we had no competition for the mezzanine
debt at all, we only had someone doing the senior debt. What this
meant was that we at least had in our back pocket someone who
was prepared to offer at the terms originally agreed the funding
of this kind of debt, which meant we could wheel it out if we
got no other bid from someone for that debt. So that was an option
and therefore there was a commercial negotiation about what we
should pay for it, and that was the result.
179. That is pretty much similar to the answer
you gave us an hour and a half ago. Finally, can I ask what circumstances
are there that would make you want not to have a funding competition?
To reverse it slightly: if this had been successful, from now
on will we always have funding competitions?
(Sir Andrew Turnbull) Going to paragraph 2.7, "Relatively
simple projects in mature PFI sectors . . .." are likely
to be suitable; 2.8, "More complex projects . . ." raise
doubts, in particular where the allocation of risk, in the sense
at the commercial stage when you took it to the funders, the funders
might say, "We will lend against if it is constructed in
that way but not in precisely the way you have constructed it",
so you get an iteration backwards and forwards, and you end up
with paragraph 2.25, you have to negotiate a contract that was
commercially viable and bankable. In this case we were fairly
sure that the project we had got was not going to change in any
substantial way and that the lenders would fund it. What is going
on in London Underground, which you raised before, is a much more
complicated thing. You cannot simply define the engineering characteristics
of that and then go and fund it and be sure that the funders will
not take the thing back, you have to have iteration, and that
is where having a competition where everybody has to put in a
certain time is much more difficult to do.