Q161 Mrs McGuire: That's definitely a Sir Humphrey answer. Can I ask one more question on construction costs? I think sometimes it's quite easy to draw international comparisons, as have been done in the foreword. I wonder whether or not there will be an attempt to judge construction costs, not just in terms of how much money they cost, but whether or not we have a regulatory regime in this country that makes our construction industry one of the safest industries in Europe. All of the higher construction costs are not just about the way the financial market operates in the UK, but relate to-there is still all sorts of room for improvement-some of the lowest rates of fatalities and injuries on our construction sites anywhere in Europe. Will the Treasury be considering that aspect of the construction costs?
Andy Rose: There is an extensive review being led by Terry Hill from Arup, and IUK are supporting that; as you suggest, the cost of construction is not just a simple number. It encompasses an enormous amount of areas. I think there was something posted on the Treasury website yesterday or before, but the final report should come out late December-I think that is the current estimate. As you suggest, it will address the issue that the cost of construction is not just a simple number, but encompasses an enormous amount of issues. I'm sure that things like health and safety will be factored in, so that will not be left out of consideration.
Q162 Stephen Barclay: Could I just take Mr Rose back to something he said earlier, about a recent PFI deal where bank finance was chosen over bonds. Is there any difference in the regulatory treatment of risk between banks and insurers?
Andy Rose: I'm not an expert; I'm sure there may well be.
Q163 Stephen Barclay: What I was trying to drive at is, is there any regulatory arbitrage? We talked earlier about the desirability of getting pension funds into these long-term investments. If you look at the earlier projects like the Channel Tunnel, that was driven by the insurance market and bonds, and there was a potential backlash after Equitable Life. I'm just trying to understand: is there a difference in treatment in the way the same risks are being assessed between the way banks are financing it and the insurance market is?
Andy Rose: Again, I am not a regulatory expert but I'm sure all the regulators for different markets apply capital differently. From the purpose of the Trust that is paying for it, that's a completely different thing. My point was, are we beholden to the banks? No. We do look at, and encourage authorities to look at, a range of funding options, and then run a competition. Are there reasons that those prices vary, that are driven by regulation and capital allocation? Very possibly, but-
Q164 Mr Bacon: This is a very interesting point-I don't know, maybe for Mr Hudson to answer. Surely the point is, if there are differences, it might be that pension funds are not as eager as they perhaps could be, because there are regulatory inhibitions that perhaps need not be there. To take a slightly different case, the reason the French and German banks filled their boots with the Greek Government bonds wasn't because they trusted the Greek Government, it was because Greek Government bonds were regulated as if they were the same risk as buying UK gilts, or German Government bonds, and therefore the bank had to set aside the same amount of capital as it would if it were buying UK gilts, but gets a better return, because everyone knows that Greek Government bonds are dodgy, so the yield is high. So I think that's the point Mr Barclay is making. If, in the same way, or in the reverse way, pension funds were being inhibited from investing in these vehicles, because of regulatory constraints, you're the guys who've set the regulations, at the end of the day.
Andy Rose: I think it's a much broader discussion about the appropriateness of the regulatory regime for insurance companies and pension fund investors, which, again, I don't feel well enough versed to-
Q165 Stephen Barclay: But Treasury is the driver; clearly, the FSA, and even the Bank of England, will set the regulatory landscape in conjunction with European authorities. But HMT has a big say in this, and my point is: the policy you're setting, again, is pointing in two different directions. Linking on to that, what concerns do you have that Basel III will put up the cost of finance for banks?
Andy Rose: It is back into the same area of regulation, and again I think Basel III has developed quite a lot over the last few months, so I think the banks would say they are concerned about any change that causes the costs to them of long-term funding and of investing in long-term assets-
Q166 Stephen Barclay: If they have to hold more capital for these long-term loans, they're going to have to put their prices up.
Andy Rose: It goes back, I'm afraid, to my prior answer. I understand that point, that if holding these loans increases the cost to them, that will mean that will be a risk that they will pass on, but it brings in so many different constituent parties to whether that is the appropriate thing to do or not, that I absolutely accept the point that if there is a regime that increases the cost to them, they would attempt to pass it on. I don't feel well enough versed to give a view on Basel III and the implications.
Q167 Stephen Barclay: To me, you see, if we look at paragraph 27, the NAO is warning on the value for money for subsequent projects. In its paragraph 23, which is on page 10, it's saying, "The usual cost advantage lay in a range of 5% to 10%" some of which, when they audited it, showed smaller savings. Yet the annual contract charges are going up by 16% to 17%. We have touched on this tension in some of the earlier questions, but if there's regulatory hurdles in terms of the access to this market for the insurers, which is why they're losing this competition you just referred to, and also the banks' costs through Basel III are going up, then the viability of PFI surely comes under more pressure?
Andy Rose: I will go back to Mr Morse's comment earlier about the recommendations the NAO makes about transferred risk across the criteria; I think we welcome that. I think as part of the review we're doing, we will certainly take those recommendations on board, and we are looking at this, but as I say, there are other areas in the market-global banking regulation-that may have an impact, and that would ultimately drive into the value position of the overall PFI valuation, because the finance is one component of that evaluation.
Q168 Stephen Barclay: We heard with these major projects, because of the urgency and the macro-economic climate, individual assessments were not called in, because there was seen to be an overarching policy priority. In terms of PFI projects that haven't closed as of today, will you be reassessing those?
Andrew Hudson: That's a continuing exercise of the Treasury, whether through the Project Review Group or through the Treasury spending teams doing their work on the value for money of a project, and of the Department doing its work on value for money, because in the end, responsibility rests with the Accounting Officer, to satisfy himself or herself that a project is still value for money.
Q169 Stephen Barclay: Sure, but, Mr Hudson, we've heard in reply to Mr Johnson's questions, about the role of the Treasury as the green-light body on this, and the role moving forward in terms of having some sort of central control-it just seems strange. What I am trying to understand is what has changed. We have a clear reason why individual assessments were not done in this report, because we were told there wasn't time. There was a policy objective that overrode that need. What I'm saying is: is that policy urgency in terms of time still a constraint, and if so, when is it going to be lifted? Or if not, why is it that individual assessments are not being called?
Andrew Hudson: Those deals that have closed-
Q170 Stephen Barclay: The ones that haven't closed, I'm talking about.
Andrew Hudson: They will be going through a scrutiny process at the moment, which will take account of current market conditions.