Q91 Mr Bacon: Because you would have more deals going more cheaply, because the EIB-
Chair: Bureaucratic inertia, I think is the answer.
Andrew Hudson: I understand the point. I don't know whether that was considered at the time. What I would say is that the Treasury had a huge number of other preoccupations at the time. So it is an imaginative idea-
Q92 Mr Bacon: Like keeping the money coming out of the bank holes in the wall-
Andrew Hudson: And keeping the banking system, as a whole, afloat, so I hope it wasn't simple inertia but there were some other priorities in that space.
Q93 Mrs McGuire: I'd like to turn back my question to something that Austin highlighted, which is the length of time that it took you-that it appeared to take you-to respond. Given that there was a storm raging around some of our financing of infrastructure projects, did you feel that you were just like one of these big tankers that just didn't know how to turn? What I am trying to, I suppose, elicit from you is what lessons did you learn from that period-one hopes we won't face another period like it-because just to say, "Well, we did it over a six-month period," frankly, is not good enough. The Chancellor of the Exchequer at the time was warning in September 2008, I think, that we were about to face the greatest economic crisis that any of us would ever have countenanced. What would you have done differently to respond far more quickly than, frankly, you did?
Andrew Hudson: I think it is always easy with hindsight-there are always things that you say you could have done more quickly and in a minute I will ask Andy, who was in the thick of the discussions on the financing at the time, to say more. My perspective is that what was happening in the markets was unprecedented, very fast moving and hard to read. We were trying to balance first of all identifying what the appropriate policy should be on these deals, and advise Ministers on that, and also think about what financing options we had. In the end, the TIFU approach was the one we went for. That process did take a certain number of months. In the course of that, we commissioned work to get some better idea of the value for money implications of the higher margins that were emerging; we commissioned PUK in the winter to produce a report, which came out in early lanuary, that gave us a handle on how far margins could rise before threatening the value for money assessment. It wasn't that nothing was happening at this point. We were doing some detailed work that enabled us to put together the policy response for Government and the TIFU intervention which then kicked in in March-April. I don't know whether Andy wants to-
Andy Rose: I think it's fair to reflect just how uncertain things were post Lehman. There really was a high degree of uncertainty about what was going to happen thereafter and I think-from my understanding-what did Treasury do? I think Lehman happened in September. Over the next three or four months there was a lot of analysis about the value for money. There was also a lot of analysis about different responses. TIFU wasn't the only response considered by Treasury.
Q94 Mrs McGuire: What other options were on the table?
Andy Rose: Looking at shortening the term of the financing to create an embedded refinancing is the term, technically a mini perm financing; ways to look more at the pension funds and the capital markets. For a number of reasons, TIFU was chosen as the preferred intervention, which was put in place over January and February. That then took to March. TIFU made its first loan in April. One of the, I think, very important things was advising procuring authorities to have more flexibility in their OJEU notices so they weren't tied into one particular financing. There was encouragement to look at more capital contributions from more authorities, which reduces the price by changing the mix. There was the issue about increasing the refinancing gain that the public sector took, and also giving the authorities the right to call for a refinancing, which they didn't have before. So I think to call it a "tanker" wouldn't be the word I would use, because I think there were a number of things. I think lessons learnt: again, I think it's just really important to reflect on how uncertain things were for anyone who was very close to the finance community. We were entering a world that none of us had ever seen before.
Q95 Mrs McGuire: So you were being so cautious because you were frightened you might make things worse?
Andy Rose: I don't think setting up TIFU was cautious. I think a lot of people would say it was quite a bold move.
Andrew Hudson: Yes. It was a very big change from previous practice. Just reflecting as Andy Rose has been speaking, I'd rather be sitting here saying that knowing what we know now we could have perhaps have moved a little quicker, than sitting here explaining why we rushed into something which turned out to fail, which the TIFU intervention didn't, or to be wholly misjudged.
Ian Swales: If it was such a good idea, why did you only do one project through TIFU?
Q96 Mr Bacon: Going back to why didn't you get more of the margin on more of them: admittedly it was the taxpayer who was going to pay for it, but the net effect down the line would have been overall to reduce the cost. If you could get most of that margin by providing the funding through the Treasury directly, obviously that sent a signal to the private market that, if they didn't step up to the plate, you would. That did probably scare them, I'm sure it did. It probably gave them confidence I suppose, which was a good thing in circumstances where nobody had any confidence-
Chair: It is a very attractive market.
Mr Bacon:-but it gave them confidence to buy a near gilt, but once you got the structure going if you could do one, you could do two. If you could do two, you could do four. If you could do four, you could do 35. In doing so you would have then extracted all of that extra margin and you'd have ended up with TIFU making an enormous profit that they could have then repaid to the Treasury.
Andy Rose: Because that was not the policy at the time. The policy at the time was very clear: it was temporary and reversible; it was to only finance when there was not available finance from the private sector. I think going further would have done two things. I think it would have changed the risk transfer mechanism in a lot of projects, rather than just by necessity in one, because it is the taxpayer lending into Manchester. I think the other thing is there was a risk that it would unsettle the rest of the market. Again, 49 further projects have closed, and I estimate 25 different banks have participated in those 49. I think if the other banks saw this as an unlevel playing field then there is a real risk that they would not have stayed in the market the way they have, which from my point of view was consistent with the policy at the time.
Q97 Chair: But it might have met another objective of better value for money with lower loan rates.
Andy Rose: Well, it would have achieved better value for money by Government taking back the risk as a lender by driving down price, but that I think would have had a material change on the risk profile had that been across the whole market.
Q98 Mrs McGuire: Just on the same line, were you astonished at how quickly you unblocked the market-
Andy Rose: Yes.
Q99 Mrs McGuire:-with this one loan, and does that give you any feeling that perhaps you should have been tougher on the banks from the beginning? It is like miracle at Manchester, frankly.
Andy Rose: No, I think again the reality of the market with hindsight is there were two very, very large projects and, again, we talked earlier about competition; there is competition on the smaller deals. There wasn't competition really on the much larger deals and I think that was quite difficult and club deals have been referred to earlier. I think, with hindsight, with Greater Manchester and the M25, which between them had approximately £2 billion of finance to be raised, a lot of banks were very uncertain post-Lehman about the markets, and I think once those two deals closed successfully and banks and procuring authorities knew that TIFU was there, that gave confidence to the market, and personally it did surprise me how quickly the banks recovered.
Q100 Austin Mitchell: I can see your predicament. You are correct in saying that you were bound by policy at the time, even if the policy was insane. You were bound by it. Or daft, should I say? Daft. Mr Hudson said the situation was difficult to read-not quite true because two people, Vince Cable and I, read it perfectly. He did better out of it than I did, because he was better at publicity.
Mrs McGuire: Talking about miracles.
Austin Mitchell: You were being screwed by the banks, to put it in simple terms. Now, the problem is, having succumbed to that screwing, what we do now in the future, because it is my argument, and I think it is Richard Bacon's, that you weren't inventive enough at the time. Now the report says at 3.2 on page 26, that as a result there may have been a long-term increase in the cost of using private finance. A long-term increase. Now, the infrastructure report just out, which is a very good one actually-I hate saying this, but it's good-says in the introduction, this is page 4, paragraph 3, that there's meant to be a reduction in construction costs, but there also needs to be a reduction in the costs of capital, and a 1% reduction in the average cost of capital would result in an annual saving of £5 billion. Now it is you jokers that are paying out these huge sums on capital projects through PFI. Aren't you going to have to be much more inventive about finding alternatives to bank financing, perhaps involving the pension funds, perhaps even printing money, which is what I suggested, but you are certainly going to have to cast around for a way of reducing those costs. Andrew Hudson: Well, the National Infrastructure Plan raises a number of new ways of providing finance for infrastructure, spanning private and publicly funded infrastructure. Indeed, yes, we are looking at those new ways, being more inventive, and things like the Green Investment Bank will have a part to play with public funding behind it. There are other things set out here which the private sector will want to think about, and part of the purpose of the Plan is to set an environment in which the private sector will feel more confident about financing infrastructure. Andy may want to say more about some of the specific ideas.