71. If the project had gone ahead in 1997 rather than being put on hold because there was an election and a change of government, would there then have been financing competition?
(Sir Andrew Turnbull) Probably not. This was an idea that was developed by the Treasury Task Force which came into existence in 1997. We have been lucky in that technical progress in the financial world had moved on in that year and a half and when we revived the project a technique was available to us that we had not developed in 1996.
72. Somebody-presumably Exchequer Partnership if they have been sensible enough to go ahead with finding the best funding route-would have been left with an extra 13 million?
(Sir Andrew Turnbull) Yes. It could have cost us more. You could say this vindicates the decision to have another look at it.
73. I am trying to find out whether somebody lost 13 million.
(Sir Andrew Turnbull) I do not think anyone has lost 13 million.
74. Or lost the opportunity to make an extra 13 million profit.
(Sir Andrew Turnbull) We have an indexed flow of payments that we are making and we have come up with the idea of funding that by indexed bond. We have managed to get a match between the nature of the flow of payments and the nature of the finance raised. When you do that, you knock some risk out of the system. There has been a genuine saving to everyone. As it happens, we think we have captured most of that for the Treasury.
75. As a result of going through this process with the better methods that you have discovered and this brainwave that you would go in for financing competition, you are happy that in the second part of this report there are now criteria laid out as to when you might want to do the same sort of thing in the future?
(Sir Andrew Turnbull) Peter Gershon is consulting on this at present and has set out the criteria, building on the findings of this report. Some of it we may want to modify in the light of the discussion and conclusions you eventually reach, but we are trying to get agreement on the criteria throughout Whitehall and the public sector on when is a good idea to go down this route and when it is no and at least when you should ask the question.
76. Are you happy that you have now got sufficient controls in place to make sure that those criteria, when you have decided what they are, will be used in the future and therefore we will not in future have you or your successors before this Committee to say, "Why on earth did you not use financing competition because clearly you ought to have done?"
(Sir Andrew Turnbull) I cannot say we would never get a project where we regretted not having it. The main sanction is that if we go ahead and it turns out badly then we will have to answer to you. We have quite a lot of influence through PUK on the formative stage of projects, particularly large projects. It is certainly a question we will be putting to any team putting together a proposal.
77. Mr Lewis, from what we have just heard, it looks as if your original proposals would have cost the Treasury £13 million more than the final position. Why did you get it £13 million wrong to start with?
(Mr Lewis) I would not say that we got it wrong. At the time, we were making certain assumptions about the project. Things had moved on from when we first priced the project and we were going to make certain assumptions in terms of the funding competition. It is possible we would have gone down the index linked bond route. We were looking at different options at the time and when the project was relaunched we had to look at it in a commercial manner.
78. Are you saying that if it had gone ahead in 1997 it would have cost the Treasury £13 million more than it finally did and there is no way you could have avoided that?
(Mr Lewis) I cannot say that because we had not gone into the depth of the funding competition that happened in the end.
79. Why not, given that presumably you could have offered the Treasury a lower price and been more likely to win the contract had you bothered to find out that there were other ways of financing the project which might have cost as much as £13 million less?
(Mr Lewis) In terms of the way the project was funded eventually, at the time there were relatively few index link bonds. From my point of view, things had moved on. The long concession term was one of the issues which we would have had to look at at the time.
80. Can I ask the Treasury for their view on that? Is it correct that there were not any index linked bonds around a few years earlier that could have been used in this way?
(Sir Andrew Turnbull) This is a question relating to corporate index linked bonds. This was a market which was developing.
(Mr Stewart) There were a number of small index linked bonds. There was no real liquidity in the market. There was great uncertainty as to their deliverability. When the funding competition was launched, there was much more liquidity in the index linked bond market and banks were looking at offering an index linked product as well, although they were struggling to do so. The market had moved on between the time when the original bid was put together and when the funding competition was run.
81. Had we gone ahead in 1997, as we would have done if there had not been a government change, the whole project would in practice have cost £13 million more because the option which was finally chosen was simply not available because companies were not producing index linked bonds.
(Mr Stewart) It undoubtedly would have cost more. The Treasury were seen to have influence in the negotiating power and the power of the Treasury generally had an effect on the market at that time. You have to compare a competition that was run by Exchequer Partnership but in close consultation with the Treasury with a competition which was run in isolation within Exchequer Partnership.
82. Mr Gershon, paragraph 1.14. The compensation being offered to Societe Generale if they did not come in with part of the funding-why exactly was that done in the sense that I would have thought it would be more logical to wrap that up in whatever price was being paid to Societe Generale anyway.
(Sir Andrew Turnbull) That is probably for James or I. You have to separate their role as an adviser. We would not want to wrap up their role as a provider of funds with their role as a provider of advice. The explanation for this is that they had, in the original bid, offered to provide this mezzanine level of debt. We wanted to have a competition for that. We wanted to compete that as well as the senior debt, but we were also advised that it was quite difficult just to have a separate competition for that one tranche. We wanted to hope that the people providing the senior debt would also offer this mezzanine debt. There was some doubt as to whether people would do that so you could have got a situation where you had one bidder who provided the senior debt and the mezzanine debt and another bidder who only provided the senior debt. Therefore, you would not have a competition. We arranged with SocGen that they would maintain their offer to provide this, which might get taken up and it might not. In effect, we bought an option with them. What it means was that when we had these two bids came in, we had the Ambac bid which was for both the senior and the mezzanine debt and the FSA bid which was only for the senior debt. We were then able to combine that with the SocGen offer which had been maintained and kept on the table since 1996 and effectively we were able to then have two competing proposals. This was an offer which we think is entirely vindicated because if we had not done it we would have had a problem with this competition. It was worth paying that fee to maintain that option.
83. Can I come back to paragraph 1.25, which talks about the number of institutions originally invited and the number that declined? You said that the need to agree the standard terms was not one of the reasons why any of the nine declined. We are told in the report that the reasons were, .".. mainly because they did not feel that they would be able to offer a competitive bid and did not want to commit resources to the competition." I am quite surprised that there were so many that you did not have some pretty good idea in advance that they would not be able to provide competition or the funds.
(Sir Andrew Turnbull) We did not know how many other fish they were chasing at the same time. Some of them said, "We do not want to go in for this because we are making an effort somewhere else", which was a perfectly reasonable, competitive business decision for banks to make.
84. It seems quite a lot to me, that about a third of the total refused to bid at all. Is that usual?
(Mr Stewart) A lot of people often prequalify for these things to find out what is going on, purely to get the information into their hands and the documentation. What the banking market at the time was having to assess was whether they would have a chance of winning. The term of this deal, which is 35 years, means that any bank that was going to be competitive would have to lend extremely long term. At this time, the building societies were entering the fray and pushing out the term of debt available in the banking market. To be honest, people looked at the competition, at the Abbey Nationals and the Halifaxes of this world and, because they were beginning to be very competitive, they took the view that it was not really worth the effort of continuing.
85. Or even prequalifying?
(Mr Stewart) There were 28 expressions of interest which were trying to get hold of the initial information and I think the surprising thing is that 19 submitted term sheets.
86. You said 28 expressed interest. I thought it was 28 invited by the Treasury to express interest.
(Mr Stewart) You are right. 28 were invited, received a bit of preliminary information and 19 submitted term sheets of which they short listed down to the six financial institutions and the two bond arrangements. I think 19 is the more surprising figure.
87. We are told " mainly" because of these two reasons. Do you know what the other reasons were? Presumably some of these nine dropped out not for those reasons but for other reasons.
(Mr Stewart) Primarily, it was the fact that they were not going to win. They could not compete on the term or the period of the debt that they were being asked to offer.
88. The fact that they would not be able to offer a competitive bid is listed here as one of the reasons but I am wondering what other reasons there are.
(Mr Colman) It is up to the banks to decide at the time whether they want to proceed and there can be any number of reasons for a particular bank to be unenthusiastic about proceeding.
89. We are told most of the nine dropped out because they could not offer a competitive bid or because they did not have the resources but presumably because it is "mainly" there were some other reasons as well. I am trying to chase up what the other reasons were.
(Mr Colman) We have been told while we were doing this work that some of the banks did not like the standard terms and they were not supposed to like them because the Treasury was wishing to achieve something with the standard terms which might not please all banks. That may have been a factor.
90. We were told by Sir Andrew earlier in answer to Mr Gardiner that that was not one of the reasons.
(Sir Andrew Turnbull) We eventually had a field of 19 bidders to play with. We did not curtail this field to something that was a problem to us.
(Mr Stewart) I have a whisper in my ear that no reasons were expressed by some of the bidders.