Examination of Witnesses (Questions 200
WEDNESDAY 21 NOVEMBER 2001
TURNBULL KCB, CVO, MR
CBE, MR JAMES
200. Come on! Come on! Answer the question.
"It depends how you pay it back" is not a sensible answer.
If I borrow £50,000 over 35 years but then pay it back over
25 years I pay it back for a lot less than if I had taken 35 years.
(Sir Andrew Turnbull) In cash terms, yes, but not
201. I am talking about cash.
(Sir Andrew Turnbull) We are doing this on a discounted
202. What we are here for is to see if the taxpayer
gets a good deal, and the taxpayer could get a much better deal
than I think this has given them. We could save money for the
taxpayer. We could save them millions of pounds.
(Sir Andrew Turnbull) I am not going to agree with
203. We could not save them money?
(Sir Andrew Turnbull) We have compared a refurbishment
which gave us a right of occupation for 35 yearsand we
assume there will be a Treasury in 35 yearsand what that
cost us by this route compared to if we had done it as a public
204. As I say, everybody seems to have a good
deal except the taxpayers. Let's go on to paragraph 1.14, this
has been mentioned before, and I picked this out and so has everybody
else. Societe Generale was appointed by the partnership to run
the funding competition. Mr Stewart used to work for them, did
(Mr Stewart) I did.
205. They got a hell of a good deal as well.
They got a £100,000 sum in compensation if somebody got a
better deal than them. That is great, is it not?
(Sir Andrew Turnbull) I have explained that twice
206. You have but at the end of the day try
giving a justification. Justify it, because I do not think you
have justified it. Here is a deal where you say, "If somebody
can come up with a better deal than that, we will give you £100,000
in compensation." Did you declare an interest at the time,
(Sir Andrew Turnbull) What we got was the assurance
that there would be in place at least one mezzanine level debt
provider against the possibility that the senior debt providers
did not want to provide the mezzanine level debt as well.
207. Nobody is liable here. They are all doing
very well. Paragraph 2.29 on page 23, I was surprised when I read
this particular paragraph and I will quote it here. It ."..
should include all forms of financing to ensure that the best
type of funding is being considered by contractors and their financiers."
That implies that is not already done and I would have thought
it should automatically be done. It does not matter what deal
is being done, it should not just be thought about now.
(Sir Andrew Turnbull) I do not think it is doing that.
It is a statement of good and best practice. I do not think it
is implying it has never been done and people have not cared at
all what the funding cost was and how it was
208. So why does the report say that? Why does
the report suggest that it has not been done? I got the impression
it would not be said in the report if the
(Sir Andrew Turnbull) It is suggesting (a) you should
do it but (b) with a degree of rigour and how you can do it better.
I do not think it is suggesting no one has ever done this in the
Mr Steinberg: Okay. Thank you.
209. Sir Andrew, like Mr Steinberg, I think
virtually everything has been covered and I do not want to re-cover
the same ground but just a couple of points, jumping around the
place. In answer to Mr Davidson you made two points. You said
you did not know the cost of a conventional public sector contract
for this project and you also said subsequently, and this may
have been a statement of conviction, that the public sector if
they had taken it on would not have spent enough. Do you remember
saying that? That is what you said because I wrote it down at
the time. The only question which occurs to me is, and I am sure
there is an obvious answer to it, in that case if you do not know
the cost of a public sector contract and if you recognise it would
not have been enough, how can you say the public sector comparator
is £20 million more?
(Sir Andrew Turnbull) There was a calculation by a
team which was different from the one working on this project
of what the public sector comparator would cost. The reference
to not investing enough in terms of examination advice was a remark
about public sector construction contracts in general, and that
was a finding which has been made in numerous Government reports
on public sector construction projects.
210. If your public sector comparator were a
genuine comparator, the point you made would not have applied.
May I say I found this a very interesting project, I am not knocking
the project, I am just interested. We have had problems before
in public sector comparators where we have found them as low as
£1 million higher, and we have the feeling the books get
cooked a bit in the comparator process. I am interested to know
how you reconcile the £20 million plus with the fact you
would not have spent as much and you do not know the cost of a
public sector contract.
(Sir Andrew Turnbull) I think the way you reconcile
the two is that not being rigorous enough in the definition of
a project in its early stages is reflected in the historic performance
of public sector contracts, and an allowance was made for that
in the calculation of the public sector comparator.
211. So what do you do, think what it would
have worked out at if it was done in a conventional way and then
add an X on top to get the comparator? Where does the comparator
come from on the basis of what you said to Mr Davidson?
(Sir Andrew Turnbull) If the thing overran in the
private sector version, we would not pay for it. If the standards
of the service which are provided during the life time of this
contract do not meet the contract, we do not pay for them in the
private sector contracts, so we are not at risk of under-performance
of delivery. These are important risks which we have transferred
off. In order to make the relevant comparison, you have to allow
for those in establishing what you think would have happened in
the public sector case.
212. In fairness, you did say very early on
and repeated subsequently referring to Mr Gershon's organisation's
chart that most risks occur when opening the building up, at the
early stage of the project in other words. When you arrived at
your 189, and you threw out that figure, you said, "That
is 189 million allowing for risk." What did you allow for
(Sir Andrew Turnbull) That allows an overrun of about
15 per cent. It also made an allowance of about one point something
for latent defects and allowed for the fact that the cost of the
services provided would rise by half a per cent more than the
rate of inflation.
213. Mr Stewart, you assessed risk at the same
time. In their allowance for risk in their comparator they arrived
at £189 million, how did your assessment for risk differ
from their assessment for risk and why?
(Mr Stewart) I do not work for Exchequer Partnership.
214. I do not mind who answers it. My apologies
if I went to the wrong person.
(Mr Lewis) When we analysed the project and looked
at the work which would be required to satisfy the requirements
of the project, certain risks had to be taken on. We had to assess
commercially how we approached those risks, how we might dispel
them during the course of the job, and how to price them, bearing
in mind we were in a competitive position and had to make sure
it was the right price for the job.
215. But if they were right and you were wrong,
you would have been £20 million out and you would not be
here now as a witness, putting it bluntly. Why were you able to
get it so right and why did they get it so wrong in assessing
(Mr Lewis) I am not suggesting Sir Andrew's team got
216. They got it different?
(Mr Lewis) I am not suggesting we got it right yet
either. We have several months to go before the construction element
of the job is completed, so we are not yet sure but we had to
make certain assessments. Bearing in mind the private sector expertise
and the advisers we had on our side and in our consultancy team,
we believe we assessed those risks properly and priced them properly.
217. You, I assume, would have to get external
expertise to advise you on the early stage risk, why did you go
where you got the risk and why did you not go where they went
to get the risk?
(Sir Andrew Turnbull) I am not sure I understand.
They are making an assessment of the risks they face and we are
making an assessment of the risks we think we would have assumed
compared with giving the job to them. We were not making an assessment
of their risks; that was for them and then the people backing
218. You did make the point when you were refuting
the odd balance sheet argument that the main reason for PFI, which
we understandwe hear it constantly, it just never arises
in performance up until nowis to transfer risk. We have
had a whole series of glowing examples like the passport computer,
the immigration computer and various other things where the risk
was passed but the public still ended up paying when things went
wrong. How sure are you that you have transferred the risk?
(Sir Andrew Turnbull) In this case I am quite confident
we have transferred risk.
219. Tell us why.
(Sir Andrew Turnbull) Where people have reopened the
thing and come back, first of all, they have only done so after
they and their equity have probably been used up and possibly
some of their banking borrowings have been forfeited, so there
has been some loss, but when it gets too great they say, "Sorry,
we would rather hand you the keys back than continue with this
project" and we have renegotiated it. That has happened in
a number of IT projects and you have examined a number of those.
This is a building refurbishment. Now there are risks in that
but we are past the point where if something was going to go wrong
it would have gone wrong, but there are still nevertheless some
risks left although I would be very surprised if it turns out
they were such that the contractors came along to us and say,
"We would rather forfeit all these payments than carry on