Examination of Witnesses (Question Numbers
Mr Adrian Olsen, Mr Philip Turville and Mr Laughlan
8 DECEMBER 2009
Welcome to the Economic Affairs Committee. This meeting
is the eighth public hearing of our inquiry into private finance
projects. Copies of the members' entries in the Register of Interests
and of interests declared as relevant to this inquiry are available
to the public and to the witnesses. Mr Olsen, Mr Turville, Mr
Waterston, welcome. Thank you for sparing your time this afternoon.
We would be grateful if you could speak reasonably clearly and
slowly for the benefit of the webcast and the shorthand writer.
When we reach the questions, in order to save time, if one person
answers and the others are happy with that answer, then leave
it at that, but feel free, if you want to add to the first answer,
to do so. Would you like to make an opening statement or should
we go straight into questions?
Mr Olsen: Happy to go straight to questions.
Q420 Chairman: Perhaps I might start
with the first question, a general question. What has been the
impact of the recent financial crisis on raising funds for private
Mr Olsen: Clearly the shortage of both capital
and liquidity in the financial markets over the last 12 to 18
months has had a significant effect and influence upon the ability
for projects to find banking finance over the last 12 to 18 months
of the process. A number of projects have closed but a number
have struggled to find sufficient lending capacity from the markets
to permit those to go to full financial close. There has been
a significant effect on the availability of bank debt.
Mr Waterston: May I add that to an extent the
withdrawal of all of the mono-line insurers from the markets and
the lack of liquidity in the bond market have also resulted in
less funding being available for PP projects and any other project
finance transactions. I refer to the mono-line insurers because
they insured the bond issues which used to fund project finance
and gave them a high credit rating so they were able to be bought
in the market.
Mr Olsen: A further by-product of the reduced
capital and liquidity has been the disappearance of the syndication
in the market. As banks have withdrawn or reduced their capabilities
to lend, those banks which historically would have taken an underwriting
position prior to syndicating into the market have ceased to do
Q421 Chairman: Do you think this is a
temporary phenomenon or have we moved on to a new era?
Mr Olsen: The severity of the situation we have
found ourselves in is temporary. We will, in time, move back to
some semblance of normality, let us call it. There has been a
paradigm shift, a quantum shift in the way in which banks in this
space and indeed banks generally will lend in future. The capacity
that was in place two or three years ago will be significantly
less when we emerge from current troubles than it was at the peak
of the market.
Mr Waterston: Twenty to 30 banks were lending
in PP/PFI before the crisis with long term debt at very cheap
margins because of their very cheap cost of funding. That number
has now been dramatically cut; at one point it was down to less
than five and is probably around 10 at the moment. That is very
temporary but whether that will increase to where it was before
the crisis is debatable. I doubt the liquidity will return to
quite that high level. A few banks may return but it is the issue
of providing the long term debt with the level of liquidity there
used to be. I think that is very unlikely but the liquidity will
increase a bit.
Q422 Lord MacGregor of Pulham Market:
We are very interested in the secondary market for PFI projects.
Could you give us an overview of the pros and cons of the existence
of the secondary market?
Mr Olsen: When you say "secondary market"
do you mean secondary equity market or secondary debt market?
Q423 Lord MacGregor of Pulham Market:
You could try both but particularly the secondary equity market.
Mr Olsen: It would be fair to say from my perspective
that I have little experience of secondary equity markets. I can
speak to the secondary debt markets but other than observing from
a distance, not to avoid the question, I really do not have anything
very much to say on that particular subject.
Mr Turville: RBC is more on the advisory side
than perhaps my colleagues here. We have been involved in a number
of transactions, both buying and selling secondary assets in the
PFI market. The secondary market remains open but there is a lot
less liquidity within the market now. There has been some change
in the players and some of the funds which were very active say
two years ago are less active in today's market. You may have
seen from the PFI press of last week or so that there have been
a few transactions which still occur; Carillion sold a couple
of assets in the last couple of days, for example.
Q424 Lord MacGregor of Pulham Market:
Until recently did it encourage the initial flow of funds into
the PFI market in the sense that people knew that there was a
secondary market to pass on to?
Mr Turville: It certainly does. It is the same
on the bank debt side. The presence of the secondary markets encourages
people to provide funding to the transactions in the first place.
Mr Olsen: It is particularly pertinent to those
equity providers which are perhaps construction companies or operating
companies which are effectively recycling their capital into the
secondary market, freeing up capital to return to the primary
market for the next set of deals.
Q425 Lord MacGregor of Pulham Market:
Mr Turville, I see you advised on the Norfolk and Norwich University
Hospital NHS refinancing.
Mr Turville: Yes.
Q426 Lord MacGregor of Pulham Market:
I should declare a very oblique interest in that I am resident
in Norfolk and was an MP there for some time. We had some criticism
from the previous witness on that. I do not know whether you have
had chance to see it. If you did, I would be interested in your
comments and if not, perhaps you could look and let us have your
Mr Turville: I have not seen those particular
comments. I did attend the hearing of the Committee of Public
Accounts probably two or three years ago on that. I am happy to
have a look at those particular comments and revert separately.
Chairman: If you could let the Clerk
have a note, that would be useful.
Q427 Lord Levene of Portsoken: I wonder
whether you could let us know your overview on the effectiveness
of PFI projects generally in terms of having projects in the public
sector built on cost and on time compared with traditional procurement.
When the system was originally introduced this was largely the
object of the exercise, to say the public sector is not very good
so, if we do a project like this within the private sector, it
should improve it. What has been your experience of that?
Mr Olsen: It is certainly the case and the evidence
would suggest, as you have already stated, that the projects which
have been completed have to a very large extent been completed
on time and on budget. I would put that down to the policing,
the rigours of the due diligence process which go in to and up
to financial close and then the monitoring and the policing which
happens on the project post actual close. Certainly evidence would
suggest that PFI definitely delivers on time and on budget. I
am sure there are exceptions but in the main that seems to be
the case. That surely is one part perhaps of the value for money
debate and discussion that ensues from PFI. Certainly my own evidence
on the 50 or 60 deals that my bank has done in this space would
suggest that PFI does deliver on time and on budget.
Q428 Lord Levene of Portsoken: When you
are talking about those transactions, were they straightforward
construction projects or did they include the running and operation
of them as part of the deal?
Mr Olsen: In all cases running an operation
post construction and of course a mixture of construction technology.
At one end of the spectrum, a standard accommodation type project
all the way through to some of the MoD projects, waste projects,
with a full spectrum of technologies and difficulties from the
very simple to the very complex.
Q429 Lord Levene of Portsoken: We had
a witness here three or four weeks ago who told us that they were
virtually only able to use PFI as a method of procurement because
it was the only area where there was cash available but that the
traditional method of procurement through the public sector doing
the procurement itself was much cheaper and more effective. What
would you answer to that?
Mr Olsen: My personal view is that I simply
do not have enough reference data to compare it with the traditional
procurement method. My answer would be that I have seen PFI in
action and the evidence suggests that it does work on time and
on budget but unfortunately I have no frame of reference to look
at the traditional procurement method.
Mr Waterston: I agree that it is difficult to
comment on the traditional procurement side because there is very
little evidence, whereas there is a huge amount of statistics
on the PFI side. I would certainly back up what Adrian says that
there is no doubt on our side that the PFI structure does help
ensure that the PFI projects are more often built on time and
on budget than you would see under traditional procurement. You
just need to look at projects such as the Scottish Parliament
or Thames Barrier to see the evidence of that.
Q430 Lord Levene of Portsoken: Presumably
you are saying that is how not to do it.
Mr Waterston: Yes, sorry; evidence that the
PFI structure is more effective. Furthermore, under the PFI structure,
and this is an important point, where there are time delays or
cost overruns, in the majority of scenarios they are borne by
the private sector, whereas, if it were a traditional project,
the cost overruns and the time delays would more often be borne
by the public sector. It is a very important distinction to make
that if there is a delay in a PFI project, which does not happen
that often but it does happen, first of all the costs are borne
by the builder, who pays liquidated damages to cover the bank's
costs, cover additional costs in the project. If there is an extra
cost to them in building it, perhaps steel goes up in price, then
they have to cover the cost not the public sector. That is another
benefit of the PFI element, referring to some points in the PPP
Forum paper which was submitted to the House of Lords and which
refers to a 2003 NAO Report on construction and PFI projects which
gave some interesting statistics on how they very often did complete
on budget and on price.
Q431 Lord Forsyth of Drumlean: Earlier
we have some evidence some weeks ago from the contractors and
someone said that they were pretty neutral as to whether they
did a project by PFI or by traditional means. When they were asked
which resulted in them making most money, they said it was PFI.
Why is it that the contractors should make more money out of PFI
than traditional methods, do you think?
Mr Waterston: That is a difficult question to
answer from the banking side.
Q432 Lord Forsyth of Drumlean: That is
why I asked it.
Mr Waterston: We do not see the actual profit
level within the building contractor. I suppose it depends case
by case between the various contractors. Perhaps that contractor
had not had delays on its projects so had not had to pay liquidated
damages or perhaps had calculated the costs very carefully so
there were no cost overruns. I am sorry I cannot answer that in
any more detail.
Q433 Lord Forsyth of Drumlean: Surely
as bankers you will be looking at the margins which are going
to be obtained in forming a deal. I am surprised you do not have
Mr Olsen: We do indeed. The due diligence and
the risk process that we go through on that is to look at the
price and establish that it is neither too much more nor too little.
We need the contractor not to pare the price down to the bone
and perhaps get into difficulty over the thing but equally not
to overprice because they will not win the competition that ensues
around the bidding process. It is a question of finding a balance
between "too expensive" and "too cheap". Neither
is good from our perspective: one does not win the bid and the
other one leaves a contractor potentially in difficulty. There
have been some examples over the life of PFI where contractors
have actually ceased to exist because of the mis-pricing of their
Q434 Lord Forsyth of Drumlean: So they
make more money because you, the banks, insist on a bigger cushion.
Mr Olsen: What I am saying is that there is
a happy medium between the two. The price they charge is the price
they charge; they do their due diligence, they do their costings.
We ask our technical advisers to look at those costings and the
detail. We would bring expert help to bear on that. The question
we ask of our technical advisers is whether it is a fair price,
a sensible price for the work the contractor is going to do. There
will be some element in that price for the risks they perceive
they are taking on but, most importantly, we will make sure that
the price is not too little so that we have a contractor with
the potential to bleed very badly in actually undertaking that
Q435 Lord Griffiths of Fforestfach: You
have made the case from your experience that for PFI, in terms
of construction, it is on time and on budget. You then said that
in 60 or so transactions in which you had been involved there
were also subsequent running costs. I just wonder whether you
have any observations on the role of the private sector as opposed
to the public sector in delivering services, on the quality of
services delivered when the project is completed and the cost
of that as you go forward.
Mr Olsen: Clearly most PFI projects require
the private sector both to construct and operate certain elements.
Clearly in schools the private sector does not deliver education,
they deliver janitorial services, if I may use that term. I come
back. In a way it is the same answer as I made to Lord Forsyth
of Drumlean's question. We will look at the operator, the company
which is providing the operational services through the life of
the project and we will ask similar questions of the contract
price that they are proposing to put forward to them, that is
whether it is an appropriate price for the services that they
are going to deliver over the next 20 or 30 years in a lot of
cases. Is it the case that the public sector could provide those
services? I am sure the answer to that is yes. Could they provide
it more cheaply, more efficiently? Again, I am afraid to say,
I do not have enough data to be able to compare the two. Evidence
to date on the projects that I am aware of which have reached
construction completion is that the operational services appear
to be going very, very well. A very clear delivery is required
and for those contractors who are not delivering there are sanctions,
usually in the form of reduced payments, which again is the policing
that PFI brings to the process.
Q436 Lord Tugendhat: I realise that we
are deviating somewhat from the line of march but nonetheless
might I deviate still further, in particular to ask Mr Olsen a
question. The Bank of Ireland must of course have a great deal
of experience of the Republic of Ireland and also Northern Ireland.
Mr Olsen: Yes.
Q437 Lord Tugendhat: Coming back to the
question Lord Levene of Portsoken asked about the efficiency of
PFI versus traditional public sector procurement in the United
Kingdom, on the basis of the Northern Irish and the Republic of
Ireland experience, is there any light you can cast on this. How
do they do it in the Republic?
Mr Olsen: If I may cover Northern Ireland first,
clearly the processes in Northern Ireland are identical to the
processes in Great Britain. You could argue that there are certain
local issues, let us call them, which need to be dealt with.
Q438 Lord Tugendhat: I imagine.
Mr Olsen: The general underlying process in
Northern Ireland is identical to the procedure in England, Wales
and Scotland. In the Republic the process was a little later in
starting. We only started to see a programme around about 2000-01,
maybe six or seven years after the UK launched. Again, the process
is very similar. Obviously the law is very similar and the processes
are, in fact I would be hard pressed to name any particular part
of the process that deviates from the UK, with the possible exception
of the method by which the bid is submitted. In some cases, but
not all cases, when a bid is submitted it has to be submitted
with full bank financing in place as the bid is submitted into
the authority, which is not the case here.
Q439 Lord Tugendhat: Did the Republic
follow the United Kingdom in this particular case because the
benefits of PFI over the traditional form of public procurement
had been sufficiently demonstrated on this side of the water?
Mr Olsen: I clearly cannot speak for the politicians
and civil servants of the Republic. I sense and imagine that is
the case and indeed in other jurisdictions as well. We are seeing
this concept elsewhere, variously named but fundamentally what
we know as PFI rolling out in Canada, in mainland Europe, Australia,
New Zealand, Far East and Middle East. It is rolling out right
across the world as a concept. Whilst every jurisdiction has a
slightly different hybrid, the fundamentals are basically the
same as the UK.