Q491 Lord Levene of Portsoken: Was it one contractor or a consortium?
Mr Davies: It is a consortium.
Q492 Lord Levene of Portsoken: And they performed more or less on time, did they?
Mr Davies: Yes; so far, absolutely and they have taken over the full operation and everything worked. They did immediate clearance of the area and the evening of financial close they were on site doing it. So far yes; on time and on budget.
Q493 Lord MacGregor of Pulham Market: A wind-up question. You heard what our previous witnesses said about the effect of the credit crunch and I wondered whether you could just project forward as to what you think the impact of the credit crunch will be on the long-term impact on funding of the PFI.
Mr Davies: May I start and maybe talk about the M25 as an example?
Q494 Lord MacGregor of Pulham Market: Are you answering the old question or the new question?
Mr Davies: The new question.
Q495 Lord MacGregor of Pulham Market: I have not finished the question.
Mr Davies: I do apologise.
Q496 Lord MacGregor of Pulham Market: I really want to address this to Mr Metter. I understand the point about LVI but my impression is that most of the LVI arrangements at the moment are with long-term gilts and long-term bonds and so on. I am not fully aware of the big impact of what you have been talking about for the pension funds. How is that being marketed at the moment? Do you see that as a way of overcoming any short-term difficulties with the bank market and so on?
Mr Metter: I think we are going to go through a difficult period with PFI because I do believe it is driven by government will, ministerial will. They really have to want to build schools and build hospitals for some kind of political purpose and that gets the wave going. We see that in Canada now where they have overcome the problems. We do not have that at the moment. We have had a very slow deal pipeline for the last two or three years. There are not that many new UK PFI projects coming through. Then when you overlay the problems in the debt markets on top of that, it makes it even more difficult, particularly, as I mentioned earlier, as it is a trade-off between various stakeholders. For example, for equity, the new debt arrangements are very bad, these ideas of semi-perms and banks requiring really tough terms to provide long-term finance starts unpicking the equity investment case. There has been £60 billion of PFI projects and 90% of that is being provided by way of debt, that is about £54 billion. Long-term debt has been raised effectively by the Government in very, very strong credit markets, so the other side of the credit crunch has been that the Government have been able to raise the funding very cheaply. The banks have been providing debt at around about 50 basis points above the reference gilts for these projects. Today it is costing £350 basis points above the reference gilts so it is becoming much, much more expensive. The question now is whether 50 was the right price. It was a very good deal for the Government. If you look at the overall cost of capital for PFI projects, which is what people should look at, you will find that the overall cost of capital for PFI projects through the 10-year to 15-year period has been about the reference gilt rate plus about 1½-2%, depending on how you measure the equity return. The Government have been able to raise this money indirectly through PFI, lock it into these contracts and have the benefit of all the infrastructure in what, time will tell, have been very, very favourable terms. I do not think we are going to see this for some time. The question is whether this national investment bank might be the answer because they might be prepared to provide the debt to these projects on terms which mirror the terms that were previously available.
Q497 Lord MacGregor of Pulham Market: Does that also mean you think it is going to be more difficult to market to pension funds?
Mr Metter: We are quite a specialist fund manager and we do not market to our investors because we have got to know them over the years and we add new pension funds in. They have fairly sophisticated teams who are investing across the infrastructure area so that was tough for them as well. We find that with pension funds generally, most investors who we might go out to try to raise funds from today would find it very tough because they have lost so much money in the last few years.
Q498 Lord Griffiths of Fforestfach: It comes down to performance indicators. You made a very convincing case that we should be broadening performance indicators to get at the final outcome. Mr Metter, you gave the example of this school in Glasgow and I am sure a new school has a terrific impact on the culture of a school. However, we might have some civil servant from the Department for Education come along with a very sceptical turn of mind asking whether we know, for example, the quality of entry of the pupils who come into this new school compared with what you are benchmarking it against or the quality of the teaching staff, whether that has changed, or the quality of the head or the senior leadership of the school that you have, if it is an academy, what role the sponsors play, the question is how difficult it is to isolate in the example of the school that you gave in Glasgow-and I believe it is clearly having a changed effect-the contribution of the building as opposed to all these other factors?
Mr Metter: If you look, the general GCSE attainment has been measured and there has been a lot of improvement in PFI schools because we measure PFI schools, but actually it is probably also the case for any new school where children have a better environment. So how much extra is the PFI school offering? A lot of the PFI services are not interfacing with the children but interfacing with the staff at the school. Their lives are hugely improved and headmistresses and headmasters do not have to do all sorts of things they previously did. My guess is that it is the new school which is transforming the environment, so if you can get them a new school, that is 90% of the way there. We had a school in Aberystwyth and when they opened that school in Aberystwyth the Mayor of Aberystwyth said it was the best day in Aberystwyth's life since 1876 and they had been trying to get a new school for 125 years. Okay, maybe they said that to make us feel good but I think there was some truth in it. You just cannot get new schools. PFI has been able to deliver hundreds of new schools. It is changing now because Government are going soft on the Building Schools for the Future programme. It is now becoming the Refurbish Old Buildings project, not new schools.
Lord Griffiths of Fforestfach: Aberystwyth is a master stroke in convincing us of the case.
Q499 Baroness Hamwee: If you have figures which you think are valuable on the performance of the schools which you have been involved with or which have been produced by PFI, I would be very interested to see those, if that is possible.
Mr Metter: May I once again invite you to come to visit some of our projects.
Baroness Hamwee: We have heard that and I am sure the Chairman is going to discuss that with us afterwards.
Chairman: We will draw a line under it now and thank you very much for your time with us and your obvious enthusiasm for PFIs. We have indeed noted your invitation, although I think you will find that around this table there is quite a bit of experience of PFIs in one fashion already. We will get back to you if we feel the need to follow that up. Thank you very much.