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 comments.
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.