104. Essentially this project is the Treasury instructing a contractor to spend £125 million doing up the Treasury and instead of paying the bill, the £125 million, once the private sector had done everything which needed to be done, you wanted it paid over 30 years in HP instalments of £10 million a year? Is that not essentially the difference? That is where you get into this problem of this risk transfer.
(Sir Andrew Turnbull) This is the argument about why are we doing PFI. There are lots of people who think that is what PFI is all about, and they are wrong. You are kidding yourself if you think you are saving money. If you do the true financial calculation, instead of borrowing money and having it added to the national debt and then having an asset, you have a liability spreading out into the future. In terms of your true balance sheet, those two things are equivalent and you should not get into the PFI if that is your only motive. The main reason for getting into this was we thought we could do it better, would get a better project, we could transfer risk, we could get more innovation and all the advantages I listed earlier.
105. I see that in terms of getting a private contractor to do the work, to manage the work, to get a private contractor to take care of the maintenance of the building, all very good, but I do not understand why you need to have the funding of this project done by the private sector.
(Sir Andrew Turnbull) The funding is what drives the contractor. The due diligence of the funders is the thing which is exerting pressure on them to do this thing well.
106. Why? I do not understand why that should be. Why is it not just saying, "You can construct the contract to do the repairs, to do the refurbishment, to do the servicing on an annual basis"?
(Sir Andrew Turnbull) We have 30 years of experience of borrowing money and getting people to just build things for us.
107. That is when you have managed it yourself. I am saying get the private sector to manage the project, get the private sector to manage the servicing of the building, but not get the private sector to raise the funds and fund it and give you an HP arrangement, which is essentially a big part of this contract.
(Sir Andrew Turnbull) But the fact they have raised the funds, they then are managing the risks and-
108. The risks you have talked about today are to do with the building project-the asbestos, the design, the listing problems. Is the Treasury a bad risk in terms of paying this?
(Sir Andrew Turnbull) We are not a bad risk.
109. So where is the risk in terms of the funding? (Sir Andrew Turnbull) They have to manage this thing efficiently, they have to make a decision at the start as to how they build it relative to how they subsequently maintain it, and then they have to take that proposition and get it funded.
110. Only because you want them to get it funded, because that is how you want to pay for it. There is nothing inherent in a construction project that it be funded in this way, is there? You could quite easily pay for this up-front.
(Sir Andrew Turnbull) You are suggesting we have a design build operation with no funding?
111. Yes.
(Sir Andrew Turnbull) We believe that bringing the funding in is what actually creates an additional pressure, because people are then backing their judgment of the risks of this project against the finance they themselves are raising.
112. I think it goes to the motive of the project. I do not accept that at all. It does not make sense to me at all. I am a Conservative member here, so I am not opposed to capitalism and the free market. To go back to the original question, if the motive was simply to get this thing off the Government's books, that would be a wrong thing to do. I see the funding element of this as precisely that. I do not understand where the credit risk is in terms of this project. You are the Treasury, if you are a credit risk, God help the country, frankly.
(Sir Andrew Turnbull) They are not lending money to us-
113. But is that not the way you have structured it? Essentially, they are lending the money to you so you can refurbish the Treasury, and the only reason you have constructed it in this complicated way is so you do not have to include this as gilt-edged debt.
(Sir Andrew Turnbull) No. We have constructed it in this way because we think we would get a better performance out of the people building the project and subsequently maintaining it if the money they have raised is at risk.
114. I do not see that. You can transfer all that risk to the private sector by just having a construct, design, build contract and maintenance contract. You really can.
(Sir Andrew Turnbull) Experience is against you.
115. Where in the Government accounts then is this liability or this long-term financial commitment?
(Sir Andrew Turnbull) In the Budget documents we report the future service payments of PFI projects.
116. So it is all spelt out for the financial markets to see. If I get the Red Book out or the PBR in November, I will be able to see in that book-the Green Book or the Red Book-all the financial commitments the Government has entered into in these kind of arrangements in the long-term on an annual basis, is that right?
(Sir Andrew Turnbull) I am not sure whether it goes right the way forward for 35 years, but certainly for the medium-term future.3
117. Basically what you are trying to do is shift off the Government's balance sheet significant amounts of debt in the same way that companies in the 1980s shifted off balance sheets-
(Sir Andrew Turnbull) That is not our motivation.
118. It may not be your motivation but it concerns me it is the state's motivation to get this stuff off balance sheet, because I do not really see any other justification for it. I do not see that you cannot get this risk transfer in other ways. It can only be that the real motivation somewhere is to get this stuff off balance sheet. My concern is, what is to stop every government department loading itself up with these long-term commitments, provided they can meet the annual payments in the short-run, and then suddenly we discover in 10, 20 years' time we have a state sector riddled with debt which we do not see any sign of in terms of looking at the accounts now.
(Sir Andrew Turnbull) The resource accounts will include these payments to departments, so they quickly get to the point where the sum total of all the annual payments they are making is actually a charge, is creating a pressure, on their departmental expenditure limit.
119. Can I turn to page 30 in the report. The annual payments are £14.037 million. Am I right in thinking that is split between £10.6 million debt service and £3.433 million service fee? What is the difference between a debt service and a service fee? Is debt service the interest plus capital repayments?
(Sir Andrew Turnbull) Yes.
120. And the service fee is the maintenance of the building?
(Sir Andrew Turnbull) Security, maintenance, cleaning, all the rest.
121. So that £3.433 million is a considerable drop from the £9 million?
(Sir Andrew Turnbull) The £9 million was the total cost of what we are paying at present, some of which included the rental equivalent. Someone asked me, did I have in my head the figure for the facilities management bit of this, and I said I did not but I can-
122. So the £9 million is not the facilities management fee?
(Sir Andrew Turnbull) No.
123. That really undermines the answer.
(Sir Andrew Turnbull) The £9 million is equivalent to the £14 million. That was clear between us. I do not have a figure for what is the equivalent of the £3.433.
124. Will the £14 million increase over the period?
(Sir Andrew Turnbull) The increase will be in line with RPI.
125. So it will go up with inflation every year, the £14 million?
(Sir Andrew Turnbull) Yes.
126. When you calculated the net present value of £170 million, did you take that-
(Sir Andrew Turnbull) I did that in real terms.
127. What assumption for inflation did you use?
(Sir Andrew Turnbull) It was done in real terms.
128. So you used a basis of 6 per cent?
(Sir Andrew Turnbull) That is the discount rate. All these Green Book evaluation projects are done in real terms.
129. But the 6 per cent return includes an inflationary element.
(Sir Andrew Turnbull) No, it does not.
130. That is real?
(Sir Andrew Turnbull) It is 6 per cent real plus risk plus cost of raising the money, so it is a composite.
131. I do not know that I follow that. Maybe there are clever people here who can.
(Sir Andrew Turnbull) 6 per cent is not meant to be a nominal rate.
132. So is that the real rate then, the 6 per cent?
(Sir Andrew Turnbull) It is the rate which is used to evaluate public sector projects.
133. Yes, but-
(Sir Andrew Turnbull) All of which are done at the prices-
134. The Bank of England lending rate at the moment is 4 or 5 per cent, but that assumes there is a certain amount of inflation in the system. When I borrow a mortgage at 6 per cent, that assumes there will be a level of inflation.
(Sir Andrew Turnbull) If you are borrowing at 6 per cent, that is not the same 6 per cent as this 6 per cent.
Chairman: I do not think we are shedding a lot of light on this.
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3 Note by witness: Table C18 of the Red Book 2001 sets out the estimated payments under PFI contracts up to 2025-26.