Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 180 - 199)



  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 move along?
  (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 it.

  Chairman: There is a division in the House so the sitting is suspended for ten minutes before your final two questioners.

  The Committee suspended from 6.01 pm to 6.09 pm for a division in the House

Mr Steinber

  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?

Mr Steinberg

  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 this—but 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 your problem.

  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 sector.
  (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 million.

  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 contract.

  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 off.

  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

Mr Steinberg

  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 live.

  197. Why not pay it back more quickly?
  (Sir Andrew Turnbull) Why should we pay it back more quickly?

  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—

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