91. One of my colleagues asked a question with regard to funding it by gilts and you said it was inappropriate because of state aid rules. If I have a subcontractor and they are the preferred bidder, where does the resource cross the state aid line? If I am giving them special advice, if I am doing the risk assessment and all that has been funded by the Treasury, where does the other resource, the cash, cross the state aid line?
(Sir Andrew Turnbull) We are paying for some of our own costs, to have our own advisory team. If we then make available money to a private sector organisation which does not reflect the current costs of capital in the market, that is something on which you can frequently find yourself being challenged.
92. There must be a distinct dividing line that says, "This is state aid. If used inappropriately and if I allocate resources of one sort or another to a company in the private sector which may not be able to purchase those resources or gain those resources in the market place such as the risk assessment, such as the special advisers", where does that not transgress the state aid rule; whereas providing the cash from another resource does? It is both money at the end of the day, is it not?
(Sir Andrew Turnbull) If we just bought it, we would be just back to a conventional construction project. In this case, we are lending money to a private sector organisation which then has access to that capital which is not available generally. It does not reflect what other property companies will have access to.
93. But this is the preferred bidder. This is your contractor. All you are doing is supplying a resource, the money.
(Sir Andrew Turnbull) They still have that piece of business. In the competition, we had never hinted that we would do it this way. There is a change of terms where we say, "One of the things you will get if you take this contract is this money at the gilt rate." All the people who did not bid or dropped out earlier would think, "Wow, I would have come in if it was on that basis."
94. You have still confused me here. If I had two different companies they are not going to get any more out of allocated funding. That has all been taken as part of the price of the total contract, the package. This competition does not mean that Exchequer Partnerships are going to get any more money, does it?
(Sir Andrew Turnbull) I interpreted funding by gilts as meaning we borrow the money and on-lend that money to our contractor.
95. You are saying that contravenes state aid rules?
(Sir Andrew Turnbull) I am saying it could do.
96. The truth is it was not even checked?
(Sir Andrew Turnbull) We did not want to do it this way because this is the argument which says the government can borrow cheaper; therefore, anything that it buys from anyone, if anyone selling to us is borrowing in order to fund its activities, it would be much cheaper if we lent them the money. Down the end of that road, you say to the window cleaner, "Do not buy your own ladder. We will lend you the money." The difficulty with that is that the terms on which people are borrowing in order to equip themselves to provide services to us reflect the risk they are undertaking. It is a distortion for us to lend to people at the risk free rate so we would have to set up a proper banking arrangement so that when we were raising money we were then assessing what were the risks of the project. What is the creditworthiness of the people to whom we are lending money. We do not have an apparatus like that in government. By and large, the state does not want to be in a position where it is the all purpose lender for everyone.
97. I did not think I said that. I just said if I have a contractor-my window cleaner is a good example- and if he was coming round to do my 2,000 windows every week and I said, "I want to employ you on a labour only contract and I will provide the materials", it is quite common in business, is it not?
(Sir Andrew Turnbull) It would be probably wise to do it on commercial terms. If you happen to have some privileged source of finance, you would not necessarily assume that because you could borrow at that rate you could lend it to him at that rate.
98. If he is working for me I see no reason why, if I can get the price down by doing that. I would be stupid not to do it.
(Sir Andrew Turnbull) In the calculation you have made in getting the price down, you have to take the risk into account, and you probably have not.
Mr Jenkins: Yes, I would have done, believe me. I would not fund him up-front, I would make sure he got paid on a weekly basis.
Chairman: Can we get back from window cleaners.
99. I want to bring it down to the basics, Chairman, because it is a basic, everyday requirement, raising cash. I have read this report and read about the funding in the city and how effectively it is working and it is a simple way of raising cash to fund this project, but I am more interested in assessing the risks of this project because I think most funders would know what the risks were and would have done it themselves, but we have done it on their behalf. How much risk does that entail, doing the risk assessment for them and then handing the package over to them?
(Sir Andrew Turnbull) We have not done that; they have assessed the risk of all the things I listed in earlier questions. We have not duplicated EP's assessment of risk. What we have assessed is what are the risks we no longer have to provide for, and in the calculation we then put those risks into our comparison of doing it as a public sector project.
100. So EP, being your preferred bidder, your contractor, has looked at all the risks, where do they finish? Where do you go over the line and say, "We now as the funder recognise the risks we took on, for instance we understood the construction costs, but it has gone awfully wrong, or the cost of raising the money has gone awfully wrong, where is the loophole?" Where do they come back and ask for more money?
(Sir Andrew Turnbull) If they come back and ask for more money, which I do not think is going to be the case, the first thing which would happen- assuming there is a big catastrophe-is that their equity would have been used up, the mezzanine debt will have been used up, so some quite considerable risk transfer would have taken place. You may get this argument which says that the danger of some PFI projects is that you transfer risk and you are kidding yourselves, because if eventually something serious goes wrong you end up taking it back or renegotiating the contract. We do not think this is that kind of project. That happened in the IT world but this is a building refurbishment. We do not know what the risks are; we need to wait another 35 years to know whether the assessment of risk they made turns out to be correct. What I will observe is that the most risky phase is when you open the building up and start trying to do the construction. We are past that phase now, so I would be very surprised if it turned out to be one of these boomerang projects because I think we are past the point where the most serious risks of this project have been identified.
101. The standard terms and conditions were accepted, and it was important we got these accepted by the bidders, was it not? Very important. How much did it cost us, because some bidders did not come in because they did not want to accept these standard terms and conditions, how much did it cost us to get these accepted?
(Sir Andrew Turnbull) I do not think we know. What we know is that these standard terms have now become the standard terms. The private finance market has continued. If anything it probably has not cost us, it has probably saved money, both for ourselves and for private finance contractors.
102. If no one had taken part in the competition, who assessed the risk that was an outcome?
(Sir Andrew Turnbull) One of the criteria that the C&AG has identified is when is it a good idea to have a competition, and it is when you can be reasonably sure that you get the commercial close-you have the building, the engineering, identified, and you can take that project and finance it. You are not going to get into a position where you go to the financiers and the funders and they say, "This is the kind of deal we do not want to fund." We were pretty confident we would be able to fund this deal. Obviously the terms on which we might fund it could vary but it was not going to be one of those things where people just said, "This is just not a bankable project." Paragraph 2.25 says something like: "Using this technique we can be reasonably sure you can settle the commercial characteristics of the deal and then take it away and get it funded." That is what we thought was the case with this project and it turned out to be right. If we had seriously thought that the funders were going to raise all sorts of questions and start unpicking the commercial part of the deal, then that is the kind of project which would not have been suitable, but we did not think that was the case and it has not proved to be.
103. So there was no fall-back position? You knew you could sell the deal?
(Sir Andrew Turnbull) We were confident we could, yes.