Q111 Ian Swales: Just to emphasise that point, as we heard earlier we've never had a default on a body not being able to pay for the construction. We have had two cases, I think you said, where it's the operation that falls down. So the two risks are different.
Charles Lloyd: So, to pick up on Mr Humpherson's point, I think there is a clear case for combining in a contract the construction of an asset and then the maintenance of that asset in order to get the cheapest whole-life cost. There are different issues that arise when you look to also bundle into the contract what we would call soft services: cleaning, catering, security, IT helpdesks and all of that. We've issued a lot of guidance on this in the past, which I think has made clear that the Government, the Treasury, do not insist that those services get bundled into those contracts. Each authority is expected to make an assessment of whether there are benefits in bundling those services together or not.
Q112 Chair: Is there a value for money issue there as to whether or not you do? Have you looked at that? So is it better trying to untangle this debate? Were you not to incorporate those into the PFI would you get better value for money or not? Have you looked at that?
Charles Lloyd: I think the answer to that would probably vary significantly between sectors. So if I take a couple of sectors, in the prison sector I think there is quite a case for integrating all services so that you have one provider who is providing every service to do with that asset. Indeed that has been the model. I think in other cases-hospitals, schools are ones that come to mind-where in any event the Government's policy has been that the front-line delivery of services remains a public sector job-teachers, nurses, doctors and so on-there is more room for discussion and debate.
Q113 Mr Bacon: It is not that uncommon to unbundle. I visited the new Belfast cancer centre some years ago, where they had done the building and the machines that go inside it in different ways. One was conventional and one was PFI. I can't remember which way round it was, although originally they had assumed they'd do it all in one group, they found it was better not to. When Mr Swales said there are two components here I think he was perhaps even understating, because there are three: there is the original construction, there is the operating, and then there is whether you keep it at all or whether you sell it off into the secondary market. The House of Lords Economic Affairs Committee said more work should be done on this.
Now, Mr Hudson, a minute ago you were saying there is of course a way to share with the taxpayer the gains once the risk is reduced, but it says in paragraph 3.9, "Treasury guidance currently permits such equity sales without the sharing of resulting gains with the public sector." Are you going to change your guidance on that? Why shouldn't the taxpayer get a share of gains from equity sales? At the moment there is an incentive. This happened with the Norfolk and Norwich Hospital; they refinanced the project. At the time they refinanced it they put an extra £100 million, £106 million of debt on top of it. Interest rates were falling at the time; the internal rate of return went from 18% to over 60%. Essentially they extracted all their profit or most of their profit from the 35-year deal up front. Well, you don't have much interest then, once you've already got all your profit out of it, in whether you run the contract in the way that PFI theology says that you should over the life of the contract. In fact, the House of Lords called for further investigation of any impact on service delivery that may result from the sales of shares. So if you believe-which you do, because you just said so- that taxpayers should share in the gain, for example from the reduction of risk and the consequent refinancing, why don't you do the same for equity sales?
Andrew Hudson: Well, that is something that we are working on as to how we would respond.
Q114 Mr Bacon: It says, "The Treasury has yet to publish research on the contribution made by equity investment at various stages in the life of a public-private partnership." When will you be producing research?
Andrew Hudson: I don't have a date for that yet, Mr Bacon, but it's something that we're working on.
Mr Bacon: Right.
Q115 Joseph Johnson: Turning back to TIFU please. The credit crunch hit in full in late 2007. TIFU wasn't set up until March 2009, 15 to 18 months later. If I understood your earlier answer, I think you were saying it's no longer going to be funded going forward as of the spending review. What steps are you taking to ensure that, in the event there is a new freeze-up in capital markets and in bank lending markets, there won't be a similar hiatus that causes UK PFI projects to suffer from lack of access to finance?
Andrew Hudson: Well, I think having gone through the process of setting up TIFU and working out how it might operate, what the appropriate governance is, although it is not being funded at the moment, it would be much quicker to turn that facility back on again.
Q116 Joseph Johnson: Are you retaining the staff that were associated-
Andrew Hudson: Yes.
Andy Rose: One of the things that IUK has enabled us to see, and particularly the mandate it has around looking at the critical area of inward investment for the £200 billion that was articulated yesterday, is that an enormous amount of work with finance expertise is required. So examples are working with UKTI on inward investment, working with BIS on the Green Investment Bank, working with DECC on the electricity market reform-areas where we think finance expertise is critical to be successful. So we have retained a degree of operational flexibility in that capability is retained and employed in IUK, but no funding is currently provided by Treasury.
Q117 Joseph Johnson: I suppose what I'm driving at is it would seem, from the decision to cease funding of TIFU, that you've reached a sort of epiphany in terms of your understanding of what the role of the Government is; whether it really is the role of the public sector to lend to itself in order to enable private players to cream off the very rich returns that are available from participating in PFI-style projects, or whether you actually do believe that that is a good way of proceeding.
Andrew Hudson: I was just going to say that the policy was always that TIFU's activity should be temporary and reversible. As it turned out there was only the one loan and, given the present state of the market and the work that is going on on other financing sources that we've talked about, we felt that it was time to be clear that there wasn't funding for other projects.
Andy Rose: Yes, I think a lot of it is to do with the statements around the spending review, where public finances are just more constrained. I think TIFU can only be credible if it has a budget that it can lend, and to allocate funding to an entity that had not lent for a year and a half, I think, people felt was inappropriate.
Q118 Jackie Doyle-Price: Going back to what you said earlier, Mr Rose, about when the contract regarding the M25 widening was concluded successfully, if we look at the figures in the report we see that there was a massive increase in costs by 23%, and that much of this was down to increased financing costs. On what basis can you say that was concluded successfully?
Andy Rose: Well, first of all I'm aware that there is an independent report due on that so I won't comment too much. What I meant is that, from a TIFU perspective, the money was made available from the private sector, and therefore it was completed without TIFU being asked. In that case, the Department for Transport had made money available should it be needed and that was never used, but I am very conscious that there is a separate report pending on that transaction.
Q119 Jackie Doyle-Price: What I'm trying to get to is the degree of challenge-that you really considered the value for money aspects of this in terms of securing this as a way of finance, because this is a considerable increase in cost from what was originally-
Andy Rose: Again, from a TIFU point of view, we were very clear to separate the policy role that was held by Charles and the transaction role. So TIFU was staffed by senior project finance specialists from the market with the hope that it would give confidence to taxpayers that money was lent very professionally. We did not take a policy view about value for money because we didn't want the market to see policymakers only, and there was a very clear separation between TIFU's activities and the policy activities of Charles. When I talked about it being successful, I meant the private sector delivered that transaction without recourse to TIFU.
Q120 Jackie Doyle-Price: So you are talking about success in terms of negotiating a contract, rather than seeing it against the broader scheme of-
Andy Rose: To be fair, I'm coming from a very narrow perspective and my comment was that at that stage my role was solely to lend when asked to and there was a very comprehensive process that we went through before a lending request would come into TIFU.