Examination of Witnesses (Questions 240
- 248)
WEDNESDAY 21 NOVEMBER 2001
SIR ANDREW
TURNBULL KCB, CVO, MR
PETER GERSHON
CBE, MR JAMES
STEWART AND
MR PAUL
LEWIS
Jon Trickett
240. I do not feel satisfied we have got to
the bottom of all this but I want to come to the indexation of
this £14-odd million. Earlier you said it was RPI, is that
right?
(Sir Andrew Turnbull) Yes.
241. It is just that costs vary around RPI,
do they not? For instance, building costs do not increase at the
same rate as retail prices, nor do wages costs and nor do interest
costs either, and they seem to be the three elements. There are
building costs, labour costs of the people maintaining the building,
and interest rates.
(Sir Andrew Turnbull) Yes.
242. Why did we settle on RPI rather than some
other complex index?
(Sir Andrew Turnbull) That was a product of the negotiation.
I think we said RPI minus X, and it turned out X was nought. In
the negotiation we could have ended up negotiating a different
figure but that was the figure.
243. Some of this RPI index goes to the funding
institutions and some of it goes to Exchequer. It seems to me
the increasing cost year on year falling upon the contractor and
then the people providing the money will shift, will it not? It
will never be, unless there is a coincidence, RPI, it will vary
around RPI, sometimes higher, sometimes lower, according to interest
rates, labour costs and other building costs.
(Sir Andrew Turnbull) Yes.
244. Is there any claw-back? Have you negotiated
a claw-back supposing there is movement favourable towards the
contractor, leading to, not a super profit exactly, but you could
envisage large amounts of money coming back to the contractor
if for several years the index of RPI is substantially less than
the additional cost which the contractor is facing?
(Sir Andrew Turnbull) The cost of their capital is
also indexed to RPI. You are then assuming that there is some
major break in the historical relationship between all the other
costs, and that we would then say, "The wages, the services
you buy, the suppliers you need, electricity, would be substantially
different from the RPI." Given there is quite a wide basket
of goods going in to service the building, we would not expect
it to diverge very much.
245. I am not sure that is an accurate assumption.
I was in the building trade and I used to price jobs and I know
that building prices are calculated by different indices, and
I also know that wage inflation is different from retail goods
inflation. I wondered whether that calculation had ever been done.
(Sir Andrew Turnbull) We have kind of fixed this price.
You can always say, "I would have done better if I had picked
and chosen and then renegotiated after 5 or 2 years", but
if it turns out these costs went up faster than RPI then you lose
out. We have the benefit of fixing those costs so we, as the Treasury,
know that is a major element of risk in our forward budgeting
which we have eliminated.
Mr Gibb
246. Of the 9 million, presumably an element
of that is rental for the property. Will an element of that continue
to be paid in addition to the 14 million in the future? If so,
how much?
(Sir Andrew Turnbull) It may include these things
called CILOR contribution including rent, but I would have to
look at that.
247. Can that be in your note?
(Sir Andrew Turnbull) The note will be what is in
the £9 million and what is maybe in the £9 million which
would nevertheless still continue, because it is probably a cost
we bear and continue to bear—
248. For the freehold bit of the building which
is already there?
(Sir Andrew Turnbull) Yes, there may be things which
we are paying now which we will continue to pay. We will look
at that.
Chairman: May I thank you, Sir Andrew, and your
colleagues for spending the best part of three hours with us.
I think this is an important issue. Although we are only talking
about one building it has major implications for future PFI projects.
As Barry Gardiner says, may I congratulate you on the first line
of the contents, which says, "The Treasury competition was
a success." Thank you very much.
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