Q41 Austin Mitchell: Okay, and then you put the frighteners on with the Manchester deal, which is a graphic way of putting it. I wonder how far the dominant consideration was to keep the private sector in at all costs; in other words to keep PFI going and feeding the private sector in the way PFI does. Did you consider alternatives-there are a number of alternatives-that I and an obscure organisation that I chair were suggesting at the time-like bringing pension funds in to invest in PFI contracts or printing the money. We are now going through quantitative easing, and the Bank of England is buying back its own debt; why can't Government write cheques to itself to carry through these projects?
Andrew Hudson: As I say, there's always been a mix of provision here. The Government did-
Q42 Austin Mitchell: Yes, but did you consider these specific alternatives?
Andrew Hudson: We considered a number of alternatives. We did encourage schemes to look for as wide a range of financing sources as possible. We've never thought that the PFI was the only show in town. I mentioned that we took steps to get the EIB more closely involved. Colleagues may be able to say more in a minute about whether we involved pension schemes. PFI clearly has a part to play. There is clearly an appetite for it, viz. the fact that 35 deals went through, and we thought it was important to keep that source of finance as part of the mix, provided that the schemes were value for money.
Q43 Austin Mitchell: The private sector has to be fed, hasn't it? We have to keep it happy?
Chair: Well-
Q44 Austin Mitchell: Did you consider printing the money?
Andrew Hudson: It's not a question of printing money; the alternative would have been to go ahead with Government-funded capital and the Government took a judgment as to how much it was prepared to do there and where that was most appropriately spent and that went through the-
Q45 Austin Mitchell: So even though that could have been done at a lower rate of interest, you are still rejecting it, under Government instruction?
Andrew Hudson: Government borrowing, remember, was running at an extremely high level-
Q46 Austin Mitchell: I remember. They are constantly telling us. I am asking whether you considered using that as an alternative at the time, in view of the desperate need for stimulus?
Andy Rose: The policy at the time wasn't to accelerate deals; it was to make sure deals went ahead when the only thing that was stopping them going ahead was the availability of finance. I think as the NAO Report acknowledges, because the procurement rules are quite tightly drawn, to change the procurement methodology would have caused quite considerable delays because you would have had to re-procure most of those projects. Given that the policy at the time was to ensure those deals that were ready to go went, if the only thing stopping them was finance, to cause delays by re-procuring I think would have been inconsistent with that policy.
Q47 Chair: Can I just ask you three questions arising out of that, because in one or two circumstances you did change tack. You decided in those circumstances that the Newham school would be better brought on balance sheet and do it as a straightforward publicly funded deal. What were the circumstances in which you decided-during this credit crunch period-that you would terminate PFI procedures or that you would look for another route for financing these particular projects?
Charles Lloyd: I would say there were two situations where PFI deals did not proceed: one is where they were not affordable to the authority concerned, so they just didn't have the budget to allow them to proceed because cost had gone up; the other was where they were not value for money. Many deals struggled during this period on both of those grounds. Obviously, 35 did come to close but many others didn't. Just to pick up the Newham one specifically; this was a schools transaction. It had been structured as a PFI deal. At the very last minute the lender dropped out of the picture. A case was made to us there that what we should do is allow that to close on a conventional design and build basis, but with the plan to switch that into a PFI very shortly after the financial close and, indeed, that is what happened in that particular case.
Q48 Chair: Let me just pick you up on the value for money, because as I understand it, the imperative is to keep the capital programme going because of the macro-economic circumstances. Value for money is questionable on all these deals in the traditional way in which you assess PFI, because your loan charges are 6% to 7% higher according to this Report and the margin on PFI is 5% to 10%. I'm not sure you could make a value for money case for any of the 35 deals, could you?
Charles Lloyd: Our view is that you could make a value for money case on all of the 35 deals.
Q49 Chair: How did you base that?
Charles Lloyd: We based it on two main things. One was the piece of PUK work that we commissioned which indicated that margins would have to rise to about 300 basis points for there to be a systemic value for money problem, and the other was that authorities follow the very substantial value for money guidance that exists from the Treasury and that they are required to go through before their own accounting officers or Section 151 officers sign off on these transactions.
Andrew Hudson: I would also just point out that we are grateful for the NAO's endorsement of this, that the report at paragraph 28 says, "It is our opinion that in the circumstances the extra finance costs of projects financed during 2009 were value for money." And-
Q50 Chair: Just to interrupt. It says that and I understand that and this is not, in a sense, us being critical of you. It says that, in the circumstances, the overall policy objective was to maintain this capital expenditure for macro-economic reasons. That seems to me a different test to the one you would have applied to PFI projects in 2003-04? That's the point I'm making. Am I right or wrong?
Charles Lloyd: I don't think you're right on that point. The TIFU intervention was designed to redress a particular problem in the market, the problem of liquidity and lending capacity. The approach we took to all of these transactions, consistently, through the market was that we should solve that problem-and we think we did-but that deals should only come to financial close if they were, on a conventional assessment basis, value for money.