Examination of Witnesses (Questions 180
WEDNESDAY 21 NOVEMBER 2001
TURNBULL KCB, CVO, MR
CBE, MR JAMES
180. I understand it is much more difficult
to do but it seems to me that the iterative process is one that
has an enormous amount to contribute to the public sector, in
the sense you are then able to gain all the benefits of the expertise
out there. It is undoubtedly more complex, because the nature
of the projects for which it would be unsuitable by definition
are the ones potentially where there is the greatest gain from
it if it works. Is that not something you would want to gradually
(Sir Andrew Turnbull) If you are saying, in big complex
projects you simply allow the funding to take its course and do
not take an active interest in it, no, obviously not. We take
a very active interest in that kind of funding, but we would not
do it on a straight forward competition which assumes that the
terms of the competition are known, people enter it and then there
is a result, because you get a lot of bids back saying, "I
would bid this if it were that and something else if it was something
else." You would not be able to have a competition and judge
Chairman: There is a division in the House so
the sitting is suspended for ten minutes before your final two
The Committee suspended from 6.01 pm to 6.09
pm for a division in the House
181. I am delighted to say that all the questions
have been asked because, I have to be quite honest with you, I
do not know whether it is a good deal or a bad deal, I could not
understand it. I looked at page 16 and paragraph 1.42 and that
graph there, and when I got to that I gave up! .".. it is
therefore possible to suggest that the Treasury building bond
was priced at LIBOR plus 30 basis points", what the hell
does that mean? It is double Dutch!
182. Sir Andrew, you can answer that question
if you want. You have not got to where you are now without being
able to answer that!
(Sir Andrew Turnbull) You are looking at Table 6,
is that right?
183. It is very clear. "Margin movement
(deviation from base case bp) LLCR = 1.270x."
(Sir Andrew Turnbull) This relates to Appendix 3,
which is effectively the working where the NAO are displaying
to you and the market and the technicians their working documents.
I have drawn the conclusions from thisbut I have not gone
absolutely to the depths of it. That is what they used in drawing
up this report. I looked at the conclusions they drew, so I share
184. Somebody said they were a capitalist, I
am glad I am a socialist because I could not understand that.
It seems to be simpler being a socialist than a capitalist! When
I first read the report and listened to the debate and the National
Audit Office were saying it was a good deal, I thought it must
be, but having listened to you this afternoon I think it is not
that good. It is a gimmick. It is nothing but a gimmick we have
here. And it is a gimmick at a cost to the taxpayer. The poor
old taxpayer. Everybody is making a fortune out of this except
the poor old taxpayer. Money is raised, you have 35 years to pay
it back, there is no risk to anybody, but at the end of the day
it is going to cost a lot more than if it was done in the public
(Sir Andrew Turnbull) The report does not say that.
185. You have just said it.
(Sir Andrew Turnbull) The report says that the funding
competition, which is the comparison between the private version
by one method and the private version by another, saved £974,000
on the annual payment or £13 million in net present value
terms, so that is the saving achieved through the funding competition
process. The net present value compared with the public sector
comparator is £20 million less.
186. I went out to make a phone call at one
stage so I might have missed this, but what is the total cost
of the refurbishment?
(Sir Andrew Turnbull) The total cost, that was a figure
of £128 million of bond, £6 million of this mezzanine
debt and about another £7 million of equity, so £141
187. We are going to pay back £14 million
a year, which is index linked, over 35 years. I am not very good
at sums but that seems to me to come to something like £490
million over 35 years.
(Sir Andrew Turnbull) You are not making a relevant
comparison. The relevant comparison is the net present cost of
this thing is £169 million, that is when you discount these
payments, some of which are going to be made 35 years hence.
188. But the Treasury has borrowed money to
give to itself, when it could have borrowed £150 million
and done the refurbishment.
(Sir Andrew Turnbull) Yes, but we would have gone
on paying the interest on that debt for 35 years, that has to
come into the calculation.
189. But the interest is not going to be £14
million a year, is it? You were not going to pay back £490
million, were you?
(Sir Andrew Turnbull) We believed the cost of the
project would have been higher had we done it as a public sector
190. I took a little exception to you when you
said that the public sector had failed and the proof of the pudding
was in the eating at Marsham Street. That is in the design of
the building, that is nothing to do with the financial arrangements.
That was some architect who had not been given the correct instructions
by Prince Charles and that was the development we got. That is
not the fault of the financial deal.
(Sir Andrew Turnbull) The whole thing was a disaster
in every sense, the design of it, the way the project was managed
191. But that is nothing to do with PFI.
(Sir Andrew Turnbull) PFI is trying to produce a better
method of procurement against a background in which the public
sector has had a poor record in delivering construction contracts.
192. Is the taxpayer any better off?
(Sir Andrew Turnbull) We believe the taxpayer is better
193. So you reckon after 35 years the taxpayer
will have a better deal than if it was done in the public sector?
(Sir Andrew Turnbull) Yes.
194. Well, we will come back in 35 years and
find out hopefully. I am not the only one who thinks it was not
a good deal. Listening to you there is no risk to anybody, no
risk to the Treasury, certainly no risk to those gentlemen sitting
there, they will make a nice profit out of it at no risk to them
(Sir Andrew Turnbull) There is a risk
Mr Steinberg: It was very lucrative for the
19 bidders because having sat here over a number of years on most
PFI contracts they have been lucky to get two or three bidders,
but here we have 19 who were very keen to get their paws on the
deal, were they not? So they must have seen it as very lucrative.
Chairman: A very interesting question but unfortunately
there is another division in the House. We will come back as quickly
as possible. I apologise, Sir Andrew.
The Committee suspended from 6.16 pm to 6.22
pm for a division in the House
195. As I was saying, everybody seems to be
wanting to get their fingers into this very lucrative deal because
19 bidders were very interested. If it was not such a good deal
for them, why were they interested in it?
(Sir Andrew Turnbull) There was a lot of interest
in it, the result of which the unitary payment as a result of
this competition reduced by £974,000. That is how we exploited
their interest in this deal.
196. One point which springs to mind, and I
have just been talking to Mr Bacon on the way back from voting,
is this 35 year pay-back period. I do not know whether it is against
the law, perhaps it is, I do not know, but presumably the Treasury
are the best people in the world to be in a position to pay back
this very quickly. Why does it have to be over 35 years? If you
do public sector work, why does it take 35 years to pay it back?
(Sir Andrew Turnbull) Because what we were buying
was serviced accommodation, we wanted to know we had a place to
197. Why not pay it back more quickly?
(Sir Andrew Turnbull) Why should we pay it back more
198. Because it costs less.
(Sir Andrew Turnbull) I am not sure it would if you
pay it back quickly.
199. If I have a mortgage and take it out over
25 or 30 years and then pay it off in 20 years, I pay a lot less
than if I paid it off over 35 years.
(Sir Andrew Turnbull) It depends how you pay it back.
Here you have a project