Examination of Witnesses (Question Numbers
1-118)
Graham Beazley-Long, David Metter and Bill Doughty
15 June 2011
Q1 Chair: May
I welcome you to this evidence session? I do not know if it has
been explained to you, but the first session will be relatively
short—not a very long session with the three of you—then
we move into a session where we hold the accounting officers to
account on these issues. I am grateful to you for having come.
The way to best manage this will be: we will try and keep our
questions short, and if you can keep your answers very much to
the point, we will be able to get through more in the time that
we have available to us, so many thanks. I will start with the
one, which I might ask of you, Mr Metter: there was evidence submitted
to the Treasury Select Committee on a study done by the European
Services Strategy Unit, tracking the sales of equity in some individual
or group transactions. In the 63 transactions they tracked, they
showed that the total value of the equity was just over £1
billion, and the declared profit was over £0.5 billion.
How do you justify what appears to all of us to be ripping off
the taxpayer?
David Metter:
Can I just step back slightly first? The document you are talking
about has been prepared by Dexter Whitfield, who works a lot with
UNISON. They have a political objective, which is really to stop
the PFI, so the way that that document is framed is not to be
positive or balanced.
Q2 Chair: Just
to get into it, perhaps you could tell us what your profit share
is on the transactions that you have made.
David Metter:
Can I just get back to this report? He talks of a 50% or 60%
profit; that is treated as something that is very high, but what
is left out of that report is that when investors look at profits,
we look at profits per annum. If you commit £100 to a PFI
project in the equity, and six years later you manage to sell
that and you make a 50% profit, your annual return on your investment
would be 7%. That is how we look at these returns; they have
to be set in time, and he does not do that, he is just looking
at big numbers. That is one of the problems we find in PFIs,
a lot of voodoo mathematics goes on, where people construct numbers
that are self-serving. He also then compares the numbers to—
Q3 Chair: To
interrupt you, that is the capital return. All through the life
of the PFI you are also getting a revenue stream, so it is not
your only income out of your investment. Your investment brings
you a revenue stream.
David Metter: If
you commit money into a PFI project then during the during the
construction period you are not going to receive very much money;
very often in the early period of commissioning you also will
not.
Q4 Chair: Your
company does not take them over. You tend to buy them and bundle
them up after they have been constructed.
David Metter:
We do not. 50 of the 57 projects that Innisfree now manages and
owns we have bid for and won in competition at the primary stage.
We have in the last 10 years acquired another 43 equity investments
in PFI projects, so we are a major holder of PFI investments.
We sold very little. We sold three investments which totalled
£7.5 million. We are not part of that discussion, which
is that we are making loads of money selling PFI projects for
a profit. I just would like to say that that report does not
deal with annual returns, and it also compares those returns to
construction profit margins, which is like comparing apples with
oranges. Investing in assets and building big projects as a construction
contractor are very different businesses, and you would expect
contractors to make quite small margins, which they do: 2% or
3%. To compare that to a 50% profit that some PFI equity investors
make—that is not even reduced to a time value—shows
that this document is very politically driven; it is not trying
to set out a framework for one to decide whether PFI investors
are making too much money, which is where you want to go with
this.
If I can go into that part of the question, at the
early stages of a PFI project, when the project is financed, what
we attempt to do is achieve the lowest weighted average cost of
capital. That is, the cost of capital of the debt and the equity
combined. Because debt is much cheaper than equity, you will
find that in all PFI projects we try and maximise the amount of
debt in the project. We put as much debt in as possible, because
it is cheaper. We are constrained in doing that, because the
debt service needs a cushion, and that cushion is the equity.
That, at the outset, is the recipe for how we work out a capital
structure, and typically the debt is 90% and the equity is about
10%.
If we look at projects that are pre2008, the
weighted average cost of capital of those projects, which we can
extend to the entire PFI marketplace, we consider, is around 5.7%.
That is the cost of the capital for these projects. When you
compare that against the long-term gilt, which is what the Government
could borrow if it did it all itself, the Government gilt would
have been about 3.5%. The extra cost of capital for doing these
projects using PFI is about 2.2%.
Q5 Chair: That
was pre2008, and clearly now costs have increased, because
the costs of borrowing have massively increased. The figure we
have got from the NAO is somewhere between 6% and 7%. David Finlay
will correct me if I'm wrong. The extra cost of borrowing through
PFI is between 6% and 7%; that is your calculation?
David Finlay:
Since the credit crisis, the effect of additional bank finance
costs is 6% to 7%.
Q6 Chair: Yes,
is 6% to 7%.
David Metter: Clearly
the credit margins have gone up enormously since the credit crisis.
Q7 Chair: Yes,
so you took a pre-2008 figure, because it suited the purpose of
your argument rather than reflecting the reality
David Metter:
First, most of the projects are pre-2008. Since 2008 there has
been a real rundown in the number of new PFI projects that have
been financed.
Q8 Chair: My understanding
is there are a lot in the pipeline, and there are a lot that have
been let in the last year. I do not think the evidence demonstrates
that.
David Metter:
If I can get back to the costs, this week we have completed one
of the largest hospital projects in the world, in Montreal: the
new University of Montreal Hospital project. We raised C$1.3
billion, and the credit margin on that was 310 basis points, compared
to the pre2008 debt margins that we were raising in the
UK of 50 basis points. It shows that where there is a political
will these projects can be done, even at these high credit margins.
On our project in Montreal C$1.3 billion of debt has been raised
for 38 years at a 310% credit margin. You can say that the Government
of Quebec is crazy, Canada is crazy, but they are making their
own political decisions about how they want to secure their infrastructure
projects.
They also contributed nearly C$1 billion to the project,
so there is a model that is used in Canada and in France where
the public sector themselves contribute significant amounts of
debt, which brings the overall cost down. All I am saying is
that since 2008 there have been changes to the model. We have
another project in Vancouver, in Fort St. John in northern British
Columbia, where the state put in all the money; all we put in
was the equity, so there was equity plus Government money. The
state took the view that the equity investors effectively drive
the efficiencies of the project. This is the other half. Without
the equity investors in the PFI projects the whole model breaks
down, because you very quickly go back to traditional procurement;
the procurement authority effectively falls back into the Government
Departments.
We would say that, as the equity investors, we are
driving these projects, we are driving the efficiencies, we are
ensuring the projects get built, on cost, on time.
Q9 Chair: What
is your return?
David Metter: Our
secondary funds
Q10 Chair: Can
I ask you two questions? One, what is your return? Are you willing
to share that averaged across your investment here in the UK in
PFI? Two, would you be prepared to have a much more transparent
system, so that, where you invest as a private company in public
projects, that could be open to public account in the same way
as any freedom of information request elsewhere? If you could
answer those two that would be very helpful.
David Metter:
Our returns that we try to achieve for our investors in our long-term
funds, the funds where the investments go in forever, are between
8% and 10% per annum. If you think of it as a cash-on-cash yield,
if they put up £100 million, they want to get between £8
million and £10 million back per annum. In terms of relative
investment opportunity and what is available to investors on a
global scale, that is not a very high return. It needs to be
quite low risk.
Q11 Chair: Do
you think we are getting a good deal? Do you think the taxpayer
is getting a good deal? Is that your proposition?
David Metter:
I think that UK plc is getting an excellent deal. It is unfortunate
that this is not communicated effectively, but to be able to raise
what is effectively £65 billion of finance to finance this
programme, at an average cost of 5.7%, is a good deal by any investor
standards and financial standards.
Q12 Chair: Would
you be prepared to be more transparent about the whole of your
business models, and all that?
David Metter: Firstly,
let us talk about—
Q13 Chair: Would
you be prepared—it is a yes or no really.
David Metter:
Can I just explain first: we are very transparent. All our projects—
Q14 Chair: We
do not think you are. We do not have the information.
David Metter:
Can I just say something? The public sector is counterparty to
all our projects. They have project information; they have a
wealth of information. Sure, there is a challenge for them to
be able to use this information effectively, but at the stage
where a project reaches financial completion they have as much
information as we do. Sure, they do not have the supply chain
profitability—they do not know exactly how much the service
providers fixing the windows on a project are actually charging
to do that—but they have a price, they have a business model,
they have all the contracts and concession agreements. They have
a huge amount of information, and under the new PFI contracts,
SoPC4, they even have rights to ongoing information: at any time
they can request information and see the business models. This
is part of the contractual relationship we have. I'm afraid that
a lot of this transparency discussion is just not correct.
Q15 Chair: Can
I just ask the NAO to confirm that that is your experience?
David Finlay:
What Mr Metter said is factually correct: in new contracts there
is a requirement that the public sector can see information that
investors give to their banks. That is a degree of transparency,
but in our experience we have not seen it used to any great extent.
David Metter:
That is because the public sector is not requesting it. It is
not up to us to deliver information. The public sector is our
counterparty; they have a right to all this information, which
they are free to be able to ask the project companies for and
that is something that they do in some situations.
Q16 Mr Bacon:
Mr Metter, you say that you are transparent and you are happy
to be transparent. Do you pay UK tax?
David Metter:
Do I personally pay UK tax?
Q17 Mr Bacon:
Yes.
David Metter:
Yes.
Q18 Mr Bacon:
There was an article in the Daily Telegraph on 28 January
in which it says—it may be incorrect, of course; it was
in a newspaper so there is always a chance it is wrong—"Mr
Metter did not respond to our questions asking whether he"—sorry,
wrong sentence—"Nor did he answer whether he pays UK
tax", but you do, you are not a non-dom?
David Metter:
I am: I am South African. You should be able to hear that in
my accent. I am South African, and I am classified as a non-dom.
Q19 Mr Bacon:
You are a non-dom?
Q20 David Metter:
But I work in the UK, and I receive my dividends from UK companies,
so I pay tax on that.
Q21 Stella Creasy:
What about your company?
David Metter:
Sorry?
Q22 Stella Creasy:
What percentage of the shareholders in your company are registered
in the UK?
David Metter:
Innisfree Ltd is a UK based company.
Q23 Stella Creasy:
So it is not based in Guernsey?
David Metter:
No.
Q24 Stella Creasy:
You have no shareholders based in Guernsey?
David Metter:
We have shareholders based in Guernsey. I am actually.
Q25 Stella Creasy: What
percentage of the shares in your company is based with people
who are based in Guernsey, or companies, or perhaps banks?
David Metter:
72%.
Q26 Stella Creasy:
So 72% of the shareholders in your company would not pay tax on
UK dividends.
David Metter:
They do: the only benefit you get for holding these shares offshore—and
there are not that many these days—is a capital gains tax
benefit. You have no benefit on UK source income.
Q27 Stella Creasy:
What would you estimate that capital gains tax benefit for your
shareholders to be?
David Metter:
I can refer you the latest Finance Act; they keep changing it
every year. There are complicated arrangements, which have to
do with capital gains tax and how capital gains tax is paid if
I personally was to dispose of my shares.
Q28 Stella Creasy:
With respect, we are not talking about your own shareholdings.
We are talking about your company, which obviously has a substantial
investment in the UK. As a result of PFI it is making a lot of
money, is it not? It is those shares, and what capital gains
tax is paid on them.
David Metter:
There is a difference; there is me, who is the shareholder in
Innisfree, who is a non-dom. I have said to you that any dividends—and
you read about them in the press—that are paid to the Innisfree
shareholders are subject to UK tax, because they are UK income
arising. Let me finish, let me get through this. They are subject
to inheritance tax. The only benefits of holding these shares
offshore are capital gains tax dodges—they are not even
that good any more—and that is a concession made to non-doms
by Her Majesty's Revenue and Customs.
Q29 Stella Creasy:
What sum do you assess that benefit to be?
David Metter:
I would have to sell my shares in Innisfree.
Q30 Stella Creasy:
But your company; I am not talking about your own personal tax
situation, I am talking about your company's tax situation.
David Metter:
My company is based in the UK, so it pays tax in the normal course.
All our investments in UK companies.
Q31 Matthew Hancock:
Can I come back to the question of valueformoney
from PFI? You said earlier that the average cost of the debt
was 5.7%, was that right? Could you tell me on what debt that
figure is based? Give me a bit more background about that figure.
David Metter:
About our sample?
Q32 Matthew Hancock:
Yes, you have mentioned that the cost of capital was 5.7%, and
you said you thought that was very good value given the difficulties
in the financial markets that we have seen in the last couple
of years.
David Metter:
We did this on a sample of 20 projects.
Q33 Matthew Hancock:
Past projects?
David Metter:
We did this on 20 past projects, where the project capital was
£5 billion.
Q34 Matthew Hancock:
Are these UK projects?
David Metter:
All UK projects. The total equity capital was £493 million,
and the financial close for these projects happened between 1997
and 2007. It was a sample of 20 projects, and we have given this
information to the NAO as well—
Q35 Matthew Hancock:
Sure.
David Metter:
—over a 10 year period. And looking at those projects,
which were mostly large projects, the weighted average cost of
capital was 5.7%.
Q36 Matthew Hancock:
What was the spread on that?
David Metter:
The spread was 2.2%. The reference gilt was 3.5%.
Matthew Hancock: 2.2%.
Chair: This was pre2008.
Matthew Hancock: This
was before the financial crisis, which pushed up your spreads.
Of the financing cost about a third is spread over gilts. You
can work out from that the amount of extra interest paid because
these were procured through a PFI route. Do you have that figure?
David Metter:
I would say 2.2% per annum is the extra cost of the PFI project.
Q37 Matthew Hancock:
Do you have that in a nominal sum?
David Metter:
Sorry?
Matthew Hancock: Do you
have that in a pounds figure?
David Metter:
No, but it would be 2.2% of whatever the number is. If the capital
in the PFI programme is £65 billion, it is 2.2% of £65
billion. Is that right, Graham? Sorry, I have to ask Graham.
It is 2.2% of £65 billion, which I used to be able to work
out.
Chair: It is £1.3
billion; we have worked it out here.
Matthew Hancock: £1.3
billion. Okay. In order for you to make this argument for 5.7%,
even before the financial crisis, and a spread of 2.2% over gilts,
you have got to argue that that extra cost of financing, that
£1.2 billion extra in interest, is worth it in terms of the
extra value. Can you set that out?
David Metter: When
I arrived in the UK back in 1974 my first job was on the Thames
Flood Barrier project, which not many people will remember here.
That was a classic example of what was going wrong with UK procurement;
the project was hundreds of millions of pounds overdue, the procurement
process was flawed, the contractors spent most of their time filling
in claims forms. UK procurement was in the most terrible state:
there was very little trust between the private sector and the
public sector.
Q38 Matthew Hancock:
£1.2 billion is a very high price to pay to get some management
ability.
David Metter:
That is the judgment, whether the extra costs of PFI, this extra
2.2%, is worth—
Q39 Chair: I
keep saying this: it is not fair to say 2.2%. It was 2.2% pre-2008.
We have got to look at what the extra cost is today, and it is
more than that. It is 6% to 7%, which on £60 billion is
a lot of money.
David Metter:
People have to judge whether the trade-off, where we are getting
the private sector to manage effectively the procurement process,
more than offsets the problems. Look at Edinburgh Trams: it would
be worth spending time evaluating that project, and seeing the
procurement failure on that project. It would be worth looking
at the Scottish Parliament. These are not the Thames Barrier
25 years ago, or the British Library 20 years ago: these are projects
today. The Edinburgh tramlink is an embarrassment to everybody,
and it is a procurement failure; equally the Scottish Government
building. This is what happens. One can say the public sector
ought to be able to do this all well, and they ought to be able
to have the right kind of resource to do it, and intellectually
there is no reason why the public sector should not be able to
procure as well as the private sector, but the fact is that experience
shows it does not happen.
Q40 Mr Bacon:
Can I take you up on that? Looking at PFI, this is a problem
I have been wrestling with for the 10 years I have been on this
Committee, because, like you, I think intellectually one ought
to be able to do it. If you hire enough bright civil engineers
and quantity surveyors in the public sector you ought to be able
to get the job done. You are absolutely right about the British
Library. Portcullis House was a conventional project we looked
at on this Committee years ago; I am told that it would have been
cheaper if they had clad the windows with sevenseries BMWs
than what they did. I take your point; there has been a lot of
procurement failure with conventional routes. I looked at a project
in Northern Ireland, two identical high schools, about £7.5
to £8 million each, same number of pupils, same socio-economic
profile of the catchment area; one was PFI and one was not. The
conventional one delivered exactly what it was supposed to, the
PFI one ended up not doing so, because in order to accelerate
the rate of return for the investors they used some of the land
that might have remained as playing fields for the school, lopped
it off, and built houses on it. I have seen hospital projects
in Northern Ireland where they have managed to do it, on cost
and on time, by having the right people on the public sector staff.
Why do you think it is that so often that has not been the experience?
David Metter:
It goes to the heart of public sector productivity. There are
huge problems in public sector productivity, which have to do
with incentivisation. I am no expert on this, but people coming
into the civil service do not choose to work in procurement.
There are other jobs in the civil service that are much more interesting
and much more attractive, perhaps, to high fliers. Procurement
in the past has not been the place where your bright young fliers
have arrived.
Q41 Chair: I
am going to bring in Mr Doughty to answer, because I feel conscious
we have not heard from him. Mr Doughty, what is your view on
whether or not we are getting a good deal? Mr Metter thinks we
are, do you?
Bill Doughty:
You are getting a good deal: there have been in excess of 700
projects done.
Q42 Chair: How
do you measure a good deal? We know how many have been done and
how much they cost; we want to know whether you are ripping us
off, or whether you are giving us good value for money?
Bill Doughty:
The difficulty with these things is that the measure of whether
you are getting a good deal or not is what risks you have avoided,
and whether we have managed to avoid those risks through procuring
through the private sector. If there were just a series of private
sector disasters, then you would probably sit there and say, "Thank
God we did not have that visited upon us". The fact that
we have done it very well means that all you can compare it against
is your track record in other forms of traditional procurement.
The aegis of PFI was because that record was not very good in
the past. The disciplines about the provision of longterm
infrastructure, its maintenance and its upkeep, etc, in the past
have been very poor. One of the disciplines in PFI has been that
people are forced to maintain infrastructure assets so that they
live out their design lives.
Q43 Chair: To
ask you two questions: the £74 million PFI that we had in
NewSchools Cornwall had to be terminated. There are failures
in PFI just as much as there are through the public sector.
David Metter:
That was our project. I can give you some information.
Q44 Chair: It
had to be terminated.
David Metter:
It was terminated, but it was—
Q45 Chair: It
had to be terminated, just to get it clear, with one headteacher
saying they had to delay the staff term by three days because
the contractor had not fixed the tiles on the roof properly.
The council estimated it had to spend £10 million putting
things right in the 28 schools affected. One school, Rosemellin
Primary School, was paying £52,000 for cleaning, catering,
and maintenance, but they failed to fix a blocked drain for four
years.
David Metter:
Can I just give you a little bit of general context on that, because
it was one of our projects, and we were very sorry to lose the
money we lost on that, because we did lose a lot of money.
Q46 Chair: Probably
the public sector lost a lot of value.
David Metter:
That project was bid at a time when it was very competitive.
In order to win that project, we had to agree with Cornwall that
its direct service people would provide the services to our service
offer. It was a complicated project, because their direct service
operation was effectively taken out of Cornwall, and put into
our services operation, so we were sandwiched between ex-Cornwall
workers plus our PFI offer. It was always very difficult, because
Cornwall were not fully supportive of the PFI project.
Q47 Chair: It
is always somebody else's fault.
David Metter:
No, no, no. We agreed to that, but the point about it is it was
not as simple as saying, "This school was late". We
were in a very difficult position, because we had to take on the
local direct workforce, and what's more, when we came to try and
fix the project, the head of the Cornwall local authority decided
it would be better value for him to finish off the PFI project.
People have that choice: at any point the Government can terminate
PFI projects.
Q48 Mrs McGuire:
Can I ask what the problem is about taking on the local workforce?
Surely if you were going to manage the facilities on site you
would have had to recruit from the local labour pool?
David Metter:
Very often it is better to have one's own labour pool, but if
you are taking on the incumbent workforce it is often very difficult
to drive efficiencies. This has happened in the NHS as well.
Often the deal to take on that local workforce is done in order
to win the project, so there were slight problems that happened,
and happened at that time. In order to win that project we had
to take on the local direct workforce as part of our project.
Chair: So you estimated
wrongly?
Q49 Mrs McGuire:
As you entered into that contract you were aware that there might
be issues, as you say, around driving efficiency?
David Metter:
You go into these projects and you try very hard to drive the
efficiencies, and you take on the workforce, often through TUPE,
ancillary workers; you try and do this and you take on the services.
Mostly it works, and sometimes it does not work. It did not
work in Cornwall. In Cornwall, the ending was a happy ending
for Cornwall, because they determined that they were better off
doing it themselves.
Q50 Chair: The
Wythenshawe Hospital is another of yours. I understand the asset
is worth £66 million, but the cost to the taxpayer over 35
years will be £1.06 billion, 16 times the original capital
value. Do you think that is good value to us?
David Metter:
Adding up nominal numbers is not fair; it is voodoo mathematics.
One has to look at the present value of these costs, not adding
up.
Q51 Chair: That
is such a gap.
David Metter:
If you take the 1913 war loan of £1.3 billion, or whatever
it was, if you add up the future liabilities on that war loan,
they exceed the entire PFI programme.
Q52 Chair: £66
million to £1.06 billion?
David Metter:
One has to look at that in present value terms. With these very
long projects, you are escalating the nominal amounts, and that
is what happens: we constantly face this kind of mathematics,
where people are not looking at it in real or today's values.
Q53 Chair: Would
you like to do a note to this Committee justifying the £66
million to the £1.06 billion?
David Metter:
I would be very happy; Wythenshawe is one of our projects, we
would be very happy to explain it to you.
Q54 Chair: If
you can do us a detailed note, which shows a justification of
that, we would be happy to receive it. It seems to me, looking
crudely at these figures, they look potty. Have you agreed to
do that?
Graham Beazley-Long:
It is very simple. We will set it out.
Q55 Chair: Right,
thank you.
David Metter: Most
of them are service costs, they are not capital costs.
Amyas Morse: I
just wanted to add to what you were saying, David. First of all,
of course you cannot exclude time interval in these calculations;
I appreciate that. I just wanted to make sure I had understood
what you were saying earlier on: what I think you were saying
was that in order to get efficient procurement, you need PFI deals,
more or less. I am not trying to put words in your mouth; I am
trying to understand that. Is it not the fact that you have got
contracts in place that mean you cannot change the rules halfway
through? That makes the difference, not necessarily the full panoply
of PFI? The fact you have got outside private financing, and
there are very strong conditions on that financing, and those
conditions cannot be done away with without considerable damage,
keeps everybody honest, so to speak. Isn't that the benefit that
keeps things where they should be, rather than simply saying it
is some miraculous expertise about private management? Do we
really need to have the whole of PFI in order to achieve this
better procurement, or would you advise that it can be achieved
in other ways?
David Metter:
This is all just opinion. We have 57 projects; we have asset
managers that manage these 57 projects. They wake up in the morning,
they go and they look after these projects. Our customer satisfaction
across our projects is very high. If the Government Departments
were doing this, would they be getting the same service? Would
they be able to solve the problems? We had huge problems in the
financial crisis with monolines going broke, and all sorts of
financial issues; we had problems with contractors, we had problems
with our public sector customers. This all has to be managed,
and I think we do that very well. It is easy to test that by
going back; we have been doing this for 15 years, and that is
a long enough period to have a look. Go to all these hospitals,
schools, and railway lines, and ask them the questions. Say,
"Do you think these work?" Mostly our public sector
customers are very happy.
Amyas Morse: I
was not trying to suggest that you do not do a good job; I was
on another matter, which is, do you need these to do the job?
David Metter:
Let somebody else do the job.
Amyas Morse: No,
I was trying to ask you: do you need the full panoply of the various
elements that are in a PFI deal in order to secure the rigour
that comes from being contractually bound with third parties?
I am not saying: are you doing a good job? I am saying: is the
only way to do this by having the full complexity of a 25 or 30-year
PFI deal? I would be interested to hear what your advice is.
David Metter:
I will tell you what's happening in Canada at the moment. They
are changing the models, and it is quite different. In Canada
a lot of the debt that is raised in the capital markets only lasts
for the construction period, and then after that the Government
comes in and replaces all the construction finance. At that point
it is left with the equity and the public sector partner. We
can be got rid of, the service contracts can be changed. There
is lots of flexibility in changing the process as one goes along.
Q56 Chair: Is
it better? The model that has been suggested is that the service
and management contract is not part of the PFI.
David Metter:
In a lot of PFI projects there are no soft services, so that takes
out the food and cleaning.
Q57 Chair: "Is
it better?" is the question you are being asked, not "What
is?" Is it better? Would we get better value for us, the
taxpayer; for you, as a British taxpayer?
David Metter:
If you took services out? Maybe. The key challenge in PFI to
date has been the construction and delivery of the projects.
Q58 Chair: Yes,
the capital cost.
David Metter:
If you build a huge hospital project, it is managing the construction,
the commissioning, and the operation. Now if you could say, "We
will put a whole lot of new managers in to manage the services
now", maybe it could be done very well, I do not know. All
I know is that we have responded to Government invitation to operate
in those projects, and that is what we do.
Q59 Chris Heaton-Harris:
I have got three quick questions I would like to pose to you both.
Firstly, are your companies co-operating with the new Treasury
code of conduct in these matters? Secondly, you are often making
savings by refinancing, and there is always a pressure for making
savings on these deals. If you do make savings on these deals
over time, would you think of offering to share some of these
savings with the taxpayer?
Austin Mitchell: Voluntarily,
of course.
Chris Heaton-Harris:
Thirdly, how big are the savings that you could make over the
course of a contract? If you have got a 25-year contract, if
you refinance in 10 years' time when interest rates are a lot
lower, you could make a decent sum of money I would assume. What
sort of money do you think you would be able to save in the course
of a contract?
Chair: Shall we go to
Mr Doughty first?
Bill Doughty:
In terms of the answer to the first question, compliance with
the code of conduct, the answer to that is yes. In terms of sharing
savings, the question is how the savings arise. If we can work
with our public sector counterparts to look at the scope and the
usage of the asset and those types of things, and there are savings
to be made, then the benefit of that should repair back to the
public sector counterpart. Where we are making efficiencies on
things like insurance under contracts—there are insurance
sharing mechanisms already in place—the number of other
opportunities for the equity owners and equity managers of these
projects to make savings outside of the obvious one of refinancing,
which you have highlighted, and there is already a code of conduct
that covers that, is very limited.
There are many other facets in projects, for example,
life cycle and long-term maintenance of assets, where there may
be savings to be made in some projects, but unfortunately you
have to wait 30 years before you work out whether you can do that.
There are also losses that we make along the way, and absent
currently is any mechanism where, if we are going to share savings,
we have reciprocity around losses. If there is a matched or better
bargain to be struck around that then—
Q60 Chair: Can
you give us an example of a project you have lost money on?
Bill Doughty: I
will express it in financial metrics, because we have—
Q61 Chair: Can
you just give me an example?
Bill Doughty:
Of a project where we lost money?
Q62 Chair: Where
you lost money.
Bill Doughty: In
the past I was involved in the National Physical Laboratory, and
we lost a substantial amount of money.
Q63 Chair: That
was PFI?
Bill Doughty: That
was a PFI project, yes.
Q64 Chair: And
have you lost money on anything?
David Metter:
Me? Cornwall. Also Dalmuir in Scotland.
Q65 Chair: I
was going to ask Mr Beazley-Long to answer the questions that
Chris Heaton-Harris put.
Graham Beazley-Long:
All three, or just the refinancing one that Bill hasn't answered?
Chair: All three.
Graham Beazley-Long:
I do not think the Treasury has started consulting on its code
of conduct, but we will be very willing and open to discuss with
them whenever they are ready to do so.
Chair: So you are not
abiding by it.
Matthew Hancock: I do
not think that is true, I think the code of conduct—
Stephen Barclay: The Treasury
minutes of March 2011 refers to the further voluntary code of
conduct within the PFI industry, so what you are saying, as I
understand it, is the Treasury has not got round to sharing that
with you.
Q66 Chair: Paula,
can you help us on that? Where are we on it?
Paula Diggle: Are
you talking about equity sharing?
Stephen Barclay: I was
guessing you were referring to the old code not the new?
Mr Bacon: The refinancing
one is old hat.
Graham Beazley-Long:
The refinancing code of conduct we will of course follow, yes.
Paula Diggle: If
you are talking about debt refinancing, there is a code of conduct
on that, yes, certainly.
Q67 Chair: Are
you complying with that?
Graham Beazley-Long:
Yes. I thought you were referring to the code of conduct that
was mentioned in a recent Treasury—
Q68 Stephen Barclay:
It was. I can give you page 5, paragraph 4.2 of the March Treasury
Minutes to be precise.
Graham Beazley-Long:
Yes, I would suggest you ask the question to the gentlemen behind
us. We would be very willing to talk to them when they are ready.
The second question was on sharing; I would agree with Mr Doughty
about if we re-engineer a contract so that there are operating
cost savings—which is what has happened on Romford and many
other contracts. For example, Innisfree is an investor in the
MoD main building contract where £1.1 million per annum of
cost savings have been engineered out of our costs.
Q69 Mr Bacon:
Mr Beazley-Long, can I just clarify, from what you were saying
a moment ago, so far you have not yet had discussions with the
Treasury about arrangements to share equity gains, although you
would be prepared to do so. Is that what you are saying?
Graham Beazley-Long:
I do not believe that code of conduct talks about sharing equity
gains.
Q70 Chair: Say
that louder: the acoustics are terrible.
Graham Beazley-Long:
My understanding is I do not believe that code of conduct talks
about sharing equity gains.
Q71 Mr Bacon:
I do not have it in front of me, but I am looking at the article
by my Parliamentary colleague, Jesse Norman, in the Financial
Times from last year in which he says, "What we need
now is a new voluntary code promising a modest acrosstheboard
rebate. PFI consortia have played their part in rebuilding Britain's
infrastructure, but they must play their part in rebuilding the
nation's finances too."
Paula Diggle: Mr
Bacon, can I clarify? We are thinking about what we can do about
equity sharing. We have not got to a stage in making proposals
at this point: we are very happy to work on this.
Q72 Mr Bacon:
I took it that that was the case. May I just finish by asking
my question, which is, do you accept that PFI consortia have a
role to play in helping restore the nation's finances in the way
that Jesse Norman suggests, and that there is scope for PFI consortia,
such as your own and others, to make a modest acrosstheboard
contribution?
Graham Beazley-Long:
Innisfree is a fund manager that runs four funds; the investors
in those funds are predominantly UK pension funds. You as a Government
have the desire to continue to use UK pension fund, institutional
money, in your infrastructure programme. If we were to go back
to our investors and say that the UK Government wish to renegotiate
its contracts, such that their returns would go down, I do not
think that would be—
Chair: You are not prepared
to share. As for the third question—
Q73 Chris Heaton-Harris:
There is a new code of conduct that is coming out in July, and
you have so far been refusing, as far as I am aware, to engage
with the Treasury on that.
Graham Beazley-Long:
That is completely untrue: we would welcome engagement with the
Treasury on it, we have not yet been approached. They are taking
their consultations elsewhere.
Q74 Chris Heaton-Harris:
I will check with Andrew Rose later. On the soft services, you
are getting to about £1.2 billion of service or maintenance
contracts that you have renegotiated, or you had made a saving,
and you were getting to the point where you were going to offer
to share that with the taxpayer.
Graham Beazley-Long:
100% of that goes to the taxpayer. We do not take any margin
on any of the savings that we make on any operational contracts,
on the operations, and they go 100% to the taxpayer, and we have
produced a list of those and sent them to the Treasury.
Q75 Mr Bacon:
Can I just make my point while I am still on it? The point that
you just made by way of answer, Mr Beazley-Long, which is a fair
objection, was also made by Mr Norman in his article. He said,
"There is an obvious objection: these are private companies
with commercial contracts signed with willing counterparties,
so it should be no part of Government policy to set aside, tear
up, or rework these contracts." I understand that. Also
it is particularly clear that where contracts have been on-sold,
and institutions are investing in them and expecting to pay a
particular price in order to get a particular return for a certain
class of assets, there are going to be problems, but that is not
to say that a modest contribution would be impossible on a voluntary
basis. Going forward, the NAO Report suggests £200 billion
worth of transport and energy infrastructure projects that are
coming down the pipeline. There may be scope there to increase
the share that the taxpayer gets of any equity gains when they
come along. I am simply asking you: do you think that it is reasonable
for the Treasury and Departments and authorities, on behalf of
taxpayers, to ask to share in equity gains, both ones going forward,
and perhaps, to some extent, ones going backwards?
Graham Beazley-Long:
On new deals going forwards, you can set out the terms and conditions
of the transaction that you wish to do. The Treasury, IUK, would
have a view on whether that pushed up the costs of capital, because
of the equity sharing mechanism or not.
Chair: I think we're
getting into negative noise. I want to draw this to a close.
Mrs McGuire: I want to
clarify the engagement between the sector and the Treasury, because
there is some confusion here. In the Financial Times in
February it said that, "The Treasury is struggling to get
investors in private finance initiative projects to give it a
rebate on the £8 billion a year the public sector spends
on such deals in order to help with the governments swingeing
public spending cuts." It also goes on to say that, "After
six months"—so this is in February—"of,
so far, inconclusive talks, the Treasury says it continues to
seek a voluntary code of conduct". Could I ask you, Mr Doughty,
have you had any engagement with the Treasury to get involved
in a voluntary code to look at a rebate on the £8 billion
that is spent on PFI?
Bill Doughty:
Yes.
Q76 Mrs McGuire:
Innisfree?
Graham Beazley-Long:
We have had plenty of discussions about reducing costs.
Q77 Mrs McGuire:
I am asking specifically about this. Mr Doughty says that he
has had an engagement with the Treasury—
David Metter:
We have had discussions, but we have said no.
Stella Creasy: But you
have said no, so you are saying—
Q78 Mrs McGuire:
You have said no, that you are not going to get involved, as
opposed to—
David Metter:
Can I make a point, because it is really very important: the PFI
programme costs £130 billion in today's money. Half of that,
£65 billion of it, is service charges, which are paid as
you go along. There is lots of opportunity there to change and
regear those contracts, so there are opportunities for savings
in that package of services, which is ongoing, and we are supporting
that carefully. Of the other £65 billion, which is the finance,
this has been entered into through longterm financial contracts
by parties acting in good faith in both sides. It is no different
to an investor buying a gilt: would you go to gilt investors and
say, "Can you take a little bit less interest to help the
British taxpayer?" If you do it is called a haircut, and
everybody is terrified of haircuts. If we go to investors and
say, "This rebate they are talking about is, in fact, a haircut,
a rescheduling of your investment", it would be very bad
for UK credibility.
Q79 Mrs McGuire:
I am not asking whether or not you are going in for a haircut,
I am asking for clarification.
David Metter:
(I need a haircut.)
Mrs McGuire: (I think
probably you and I share the same hairdresser by the look of your
hair.) Can I ask Mr Beazley-Long to confirm what he said, because
unless I picked him up wrongly there was a strong implication
that there had been no engagement with the Treasury on this voluntary
code.
Graham Beazley-Long:
We have lots of engagement with Treasury, and lots of discussion.
Q80 Mrs McGuire:
No, that is not what I am asking; do not try to work around it.
Graham Beazley-Long:
I do not believe we have had a specific discussion about a piece
of paper—
Q81 Mrs McGuire:
You have had a specific discussion?
Graham Beazley-Long:
I do not believe we have had any specific discussions about a
piece of paper called a code of conduct.
Mrs McGuire: Right.
Thank you.
Q82 James Wharton:
I might be alone in this, but I have a little bit of sympathy
with you as private contractors, because you have made a deal
with politicians, and it is always very difficult, because when
we realise that you might have got a good deal out of it, we do
not like it very much. That is what we are starting to feel now;
the state of the public finances in particular is driving a desire
to get a better deal, both looking backwards and going forwards.
What I would like to explore and get your feeling for is, if,
looking at future contracts, the Government, which is a monopoly
buyer effectively with PFIs, tries to push for a more flexible
deal, tries to push for equity sharing and getting some of these
benefits that we are talking about that are being discussed, and
putting in forward-looking provisions for potentially getting
rebates, what impact do you think that would have on actually
driving up the base cost of PFI anyway, and what impact do you
think that would have on yourselves as commercial operators who
are trying to deliver these programmes?
David Metter:
All I can say is that we look at the returns that come out of
these projects when we are asked to bid for them, and we have
a certain return range that we look for, because we know we can
raise funds to invest on that basis. Currently we need to get
about 8% to 10%. If the models are changed and we find that extra
deductions have to be added in, that might drop us below our thresholds.
That is the negotiation: that is how PFI developed. It was a
long development and negotiation between quite sophisticated parties
about what trade-offs you have to make to make this whole package
work.
Q83 Chris Heaton-Harris:
Did Mr Doughty not just say that he is willing to talk to the
Treasury and look at this in the future? So why not you?
David Metter: We
talk to the Treasury all the time. We have said we cannot go
back to our lenders and our equity investors and say, "Take
a haircut".
Q84 Chair: But
you do not agree, Mr Doughty, do you? You can.
Bill Doughty:
What David is saying is—and he has been quite precise and
accurate in his answer—that there are certain constituents
where it is impossible to go back. In our communication with
the Treasury we have identified those. They did not take much
identification, because the Treasury is fully aware of those things.
There are areas in these projects where they are potentially
perhaps over-scoped; services providers are being remunerated
for services that they do not need to provide, or that the public
sector does not require. That is just a waste of money. Graham
has said that, in the circumstances where they identified those,
100% of the benefits of that were going back to the public sector
counterpart.
There are other areas, but what you cannot do is
to say, "Let's take an overarching view and everyone puts
their hand in their pocket for a percentage of the return".
It does not work that way. You can look specifically at each
respective partnership and look to see where there are savings
that can be made, and where those savings can be repatriated to
the public sector, we are very willing to do that.
When it comes down to equity returns, if you are
going to look at contracts in the future, and you perceive, based
on some of the information that has been provided in reports,
by us or otherwise, that the private sector is making an unacceptable
return, then you must stipulate what you think the right return
is; and if you believe that there should be a threshold above
which you are entitled to a share then I am sure there would be
no embarrassment and no resistance to that being incorporated
into contracts. I have seen it in other types of project financing
where that exact model occurs.
Chair: The incentive
is not to reach the threshold.
Q85 James Wharton:
Mr Metter, you are saying that in order for PFI to be viable
commercially it needs to provide 8% to 10% return roughly.
David Metter: Sorry,
it needs to?
Q86 James Wharton:
8% to 10% return.
David Metter:
That is what we have found; Bill might be procured for less.
Q87 James Wharton:
What I would like to understand is, if the various deliveries
of PFI schemes have got this level of return, which of course
they have, which they need to deliver, then all of the discussions
we are having, all of the things the Government are looking at
to save money on future PFI procurements will, unless they are
driving efficiencies, reduce that return which the private sector—
David Metter:
The service pack, at £65 billion, does not impact upon our
returns at all, it is a straight pass through. These are revenues
collected from Government and paid straight out to service providers,
so that does not affect our returns at all.
Q88 James Wharton:
What my concern is—and you can tell me what you think the
likelihood of this being a danger is—that if the Government
find ways to drive efficiencies from future PFI contracts, all
that will end up happening is the market will react to that by
driving up the base costs, and everybody's competing bids will
go up in price to reflect that change that the Government has
brought in, in the way the contracts are structured. Overall
the taxpayer will not save any money at all. Therefore, we have
got to decide: are PFI's about as efficient as they are going
to get, in which case, are they the way we want to do procurement,
rather than focusing all our energy on debating the actual detail
of PFI contracts as they exist today or might exist in the future?
David Metter:
One has to look at detail, but I can tell you something: all this
talk of rebates and haircuts adds political risk into the whole
equation. We have investors who say, "Is this Government
going to honour the obligations of a previous Government?"
These are transactions you entered into in good faith. We had
a lot of problems raising money in the early years of PFI because
of this question mark about how trustworthy is Government? We
find that when people talk about rebates, the people who have
entered into these contracts may think, "Hang on a minute,
our returns are going to be cut, arbitrarily, by our customer".
I do not think that will ever happen; why would the British Government
ever do that? But the fact is that people talk about it and articles
are written about it, so we are hammered about it. It gets into
the investor's minds. We have investors who say, "Until
all this stuff calms down, we are not investing in your funds".
Q89 Austin Mitchell:
I am sorry to hear that when Government is telling us, "We
are all in it together", you are not quite in it together.
I wonder if I could just put it to you, as an outside admirer,
that you have got a pretty good racket here, have you not? Here
you are with contracts at a guaranteed return over 25, 30 years,
in which you are providing services, again, with a guaranteed
charging rate. At a time when Government is examining every public
service through a microscope to see what they can cut and who
they can fire, your return rolls on, and your money comes in whatever
you do: it is guaranteed. You have purchased that, and you are
not prepared to share it with anybody else retrospectively. This
is an insane situation, isn't it? Here we have manufacturing,
which is looking to make a return of base rate plus a couple of
per cent, not much; you are on a return of base rate plus 6%8%—quite
a high return—every public service has been examined for
cuts, yours are not. The efficiency savings you make, and any
savings from scale you make, go into your back pocket, not into
the public purse. That is a pretty good racket.
David Metter:
It is a nice story there, but the fact is that the services which
represent half the cost are benchmarked and market tested every
five years, and the Government can take services out. This idea
of these long-term service contracts that last for 25 years that
can never be changed is just incorrect.
Q90 Austin Mitchell:
Is that true of all your service contracts?
David Metter: All
the service contracts can be adjusted. They are subject to market
testing and benchmarking.
Q91 Austin Mitchell:
Huge returns on putting in a light bulb are mythical?
David Metter:
Imagine, if the private sector had been asked to take those risks
at the outset, how expensive these projects would have been.
They had to be reset every five years, and that is what happens.
Q92 Austin Mitchell:
But your management services are not subject to—
David Metter:
You come to the capital side: if you borrow a mortgage for 25
years, and the Halifax gives you a mortgage for 4% for the 25
years, that is what you are buying up to. You can change your
mind at a later point, and maybe you can refinance that mortgage,
but that is how the finance is put in place. The Government does
not want to pay out £1 billion of its own money to build
a hospital: it wants the private sector to do that, and finance
over long-term. That makes sense, because it is matching the
payments to the use of the resource.
Q93 Austin Mitchell:
You are still a very happy man.
David Metter:
We work hard.
Q94 Stephen Barclay:
Can I come back to your evidence earlier, where you talked about
pricing in the management of risk? Are you not also pricing in
the knowledge that, but for yourselves, Government will not fund
certain projects that they have to do? There is a regulatory
imperative, as there was with the Manchester incinerator, or there
is a defence imperative, as there was with the air tanker where
the discount rate was adjusted and the Treasury rate at the time
was not applied—an outofdate rate was applied.
In other words, Government does not want to fund things and so
you are able to charge over the odds, knowing that they have to
do things which they will not pay for?
David Metter:
Can I say one thing? You cannot charge over the odds, because
these projects go out to competition. There are lots of procurement
rules, they are not only governed by UK law, they are governed
by EU law. You cannot just go and get a project for a big price;
there is competition. There is keen competition for all these
kinds of infrastructure projects. The public sector can be confident
that they are getting the right price; they are going to Tesco
and they are getting the price—
Stephen Barclay: I just
wanted to clarify—
Mr Bacon: It is an oligopoly.
Sorry, Stephen.
Stephen Barclay: I want
to clarify: the earlier exchange with Mr Hancock, that is purely
on the management of risk in terms of low fees? That is fine.
Can I ask about insurers, because insurers are not active in
this market? There are questions about whether that is to do
with regulation. Insurers would add to competition.
David Metter:
Graham is an expert on insurers.
Q95 Stephen Barclay:
I would welcome your thoughts as to why in your view insurers
are not active in this PFI market.
Graham Beazley-Long:
Insurers of what risks?
Q96 Stephen Barclay:
Since Equitable Life, using bonds: if one looks at the funding
of the Channel Tunnel—
Graham Beazley-Long:
Why are institutional investors not buying the debt of projects?
Stephen Barclay: Yes.
Graham Beazley-Long:
They do not like construction risk. Up until about two years
ago we had monoline insurers who gave bonds a AAA guarantee, and
the investors felt that that gave them something and enabled them
to buy debt in riskier projects. The investors buying debt bonds
are very interested in buying long-dated income flows. The Treasury
Select Committee discussed this yesterday, but once a project
is completed, raising bond finance at that point would be quite
easy. Raising it prior to construction at the moment is proving
quite difficult in the UK, although as David said, just last week
one of the projects in Canada raised C$1.3 billion in that way,
and a handful of Canadian investors are prepared to spend the
time to understand construction risk and pricing, and are buying
those bonds when the deal closes.
Bill Doughty:
It is not correct that they are not involved. Organisations like
AXA and Norwich Union are substantial financiers and debt providers
in PFI projects, and the General Practice Finance Corporation
was originally backed by Norwich Union. The way that the returns
went pre-2008 was what saw them exit the market. Whether they
are still excited about it, and whether now, if it carries on
with slightly better margins, they would come back in again, who
knows?
Graham Beazley-Long:
Those three or four investors that do understand it are doing
it privately and they are not public bonds.
Q97 Mr Bacon:
Mr Metter, you said earlier that there was a potential risk element
to this, and your potential investors are saying, "Can we
rely on the Government not to break its word or to come back for
a haircut", so to speak. I suggest to you the reason why
there is the political risk is that people are hacked off with
the behaviour of the PFI sector. About seven or eight years ago
I met a securitisation expert in an investment bank, who was involved
in the PFI sector, and he said, "I like PFI. It is a good
source of income, it is good for the business, but as a taxpayer
it really pisses me off." That is when I first woke up to
the issues around PFI. He said, "There are about 100 people
in London making £1 million a year out of this". According
to a newspaper—again, it is only a newspaper, so it may
be wrong—the Daily Telegraph of 28 January reported
you as getting pay and dividends of £8.6 million last year.
Is that correct?
David Metter:
That is correct.
Q98 Mr Bacon:
You are paid more than the chief executive of the Royal Bank of
Scotland, whom we had here the other day. In an environment when
the whole country is going through a tough time, here are you
paid more than the chief executive of the Royal Bank of Scotland—
David Metter:
Can I respond to that?
Q99 Mr Bacon:
I have not finished my question yet. It speaks to your behaviour.
The Norfolk and Norwich Hospital, which is in my constituency
now following the boundary changes, is owned by Octagon Healthcare,
or was, in which you were a 25% shareholder at the time of the
refinancing. At the time of the refinancing, the repayment period
for the hospital was extended, from 34 years to 39 years, increasing
the total cost to the taxpayer, and at the same time the internal
rate of return for the shareholders—this was in a National
Audit Office Report at the time—went from 18.9% to over
60%. It more than tripled. So costs to the taxpayer up, and
the internal rate of return for the shareholders up through the
stratosphere. That is what people do not like; that is why people
turn on you. I fully understand your concerns and your discussions
with investors. I find it very difficult to see how you can get
money out of a project that has already been sold on, frankly.
But the reason people are pissed off is because of your behaviour,
frankly, and the behaviour of people like you, and if you do not
understand that then you should go back to your investors and
start talking to them about why people think there is a political
risk.
David Metter:
Could I respond to some of that? The first thing to say is Norfolk
and Norwich is a very successful hospital: there is a high degree
of customer satisfaction. People are very happy with the amenity
in Norfolk. It has actually transformed—
Q100 Mr Bacon:
I go there a lot because it is in my constituency, and my second
child was born there. I can tell you, one of the lifts was out
of order for about 48 to 72 hours. I accept it is a good hospital,
I do not deny it for one minute.
David Metter:
Okay, so the hospital is good. This refinancing gain is like
an urban legend, it keeps coming back, but for every large refinancing
gain that was made at that time there were big losses, like the
National Physical Laboratory. We altogether, through five projects,
made financing gains, £55 million in total. This was
a time in the market when the cost of finance got cheaper, and
the reason why the cost of finance got cheaper was that the investment
community and the investment market started saying, "The
British Government are good people to do business with" and
so the cost of doing the business got cheaper.
Q101 Mr Bacon:
And global interest rates were falling. But my point was the
nature of the deal was to increase the cost to the taxpayer by
lengthening the repayment period, adding on debt to the project
and accelerating the return of the shareholders all at the same
time. Nice work if you can get it.
David Metter:
There was a tension between the Norfolk and Norwich Hospital and
the Treasury at the time.
Mr Bacon: Yes, I know.
David Metter:
They wanted to keep the gains from the refinancing, some of them,
themselves. Actually, for our £55 million of gains,
the public sector got £65 million altogether, so it
was not that the public sector was not getting anything.
Q102 Mr Bacon:
Sorry, can I just clarify, that was because of the retroactive
30% voluntary shareholding, was it? Is that right? Sorry, is
that right, when you say the taxpayer got £65 million?
David Metter: That
was because of the refinancing code of conduct.
Q103 Mr Bacon:
That was because of the subsequent retroactive code of conduct.
David Metter: I
do not know if it was retroactive.
Q104 Mr Bacon:
It was not at the time, it was afterwards.
David Metter:
I do not think it was retroactive. But the point being was that
Norfolk extended that contract: they got something out of it by
extending the contract. It was a deal that was done between the
private sector and the public sector. If I can just say one thing
on your earlier comment, which is about reading in the press and
then hammering me about it. Firstly, if you take Innisfree and
its four funds—if it were a corporate, Innisfree would be
a FTSE 100 company. We are not a small organisation. We have
£1.1 billion of funds invested in UK and foreign infrastructure
across 57 projects. We are not some small company. We are a
lot more successful than some of these banks that have lost people
a lot of money. We have not lost the taxpayers any money, and
we have done our job pretty well. The fact is that we as a fund
manager, one of 2,000 fund managers in the City, earn reasonable
revenues, and these are a cost to our investors, they are not
a cost to the projects. If we were paid absolutely zero, if I
never got one ounce of dividend or one ounce of pay, it would
not change the price of the PFI project, because that is won in
competition. Our investors choose to pay us what they want in
order for us to manage their money for them. And I can tell you
something else: what we charge our investors is in line with the
fund management market, and the fact that we are able to earn
such good revenues is because we manage quite large amounts of
money. Our investors can sack us without cause any day they like.
We have not got any sinecure. Tomorrow our investors could pass
a resolution, saying "Thank you very much, we have had enough
of you, David Metter and your colleagues." This is how the
capitalist system works.
Q105 Chair: I
will draw it to a close, I just want to know—very very quickly,
because we have overrun—what proportion of Innisfree's business
is not public sector contracts?
David Metter:
Can I include Canada and Sweden's public sector, and the Netherlands?
They are all public sector.
Q106 Chair: They
are all public sector. The money you earn comes out of the taxpayer—
David Metter:
No, the money we earn comes from our investors' returns.
Q107 Chair: No,
but the money in the end is funded through tax. Can I just ask
two other things? There is a code on refinancing, which Mr Doughty
said he stands by; I am less clear about Innisfree. If there
were a code developed on the change of the asset value, would
you both say you would not be interested in that?
Bill Doughty:
Can I just clarify?
Q108 Chair: Just
yes or no; the growth in the value of the asset. If there was
a code about sharing the profits made in the increased value of
the asset, would you be willing to participate in that?
Bill Doughty:
Subject to the detail and the thresholds, yes.
Q109 Chair: Would
you, yes or no? Very quickly, because we have really overrun.
David Metter:
It is very difficult to say yes when we do not know what we are
talking about.
Q110 Chair: The
asset goes up in value over time; you benefit from that: are you
willing to share some of that benefit with the taxpayer?
David Metter:
You mean if the shares are sold?
Q111 Chair: Yes.
David Metter:
We would be unhappy to.
Q112 Chair: And
the running of the building, any efficiencies that you get out
of that, would you be willing to share that?
David Metter:
Absolutely, we do that.
Q113 Chair: Would
you both? Okay. Can I just ask finally, are both of you engaged
presently in negotiating new PFI contracts?
David Metter:
We are active in Canada.
Q114 Chair: In
UK?
David Metter:
Not in the UK.
Q115 Chair: Are
you in the UK?
Bill Doughty:
No, that is not the market we are in. We are a secondary business,
so we take —
David Metter:
The UK market is getting too expensive.
Q116 Chair: Are
you both committed to a more transparent system so that you can
report your experiences, good or bad, to help us assess value
for money?
David Metter:
We have no problem declaring what price we buy and sell assets
at. We have never had a problem with that. If the Treasury want
to know that, it is our pleasure. We do not sell things.
Q117 Chair: What
about you Mr Doughty?
Bill Doughty: Absolutely.
Q118 Chair: Good.
Thank you very much indeed. We have overrun. Thanks for coming.
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