209. Sir Andrew, like Mr Steinberg, I think virtually everything has been covered and I do not want to re-cover the same ground but just a couple of points, jumping around the place. In answer to Mr Davidson you made two points. You said you did not know the cost of a conventional public sector contract for this project and you also said subsequently, and this may have been a statement of conviction, that the public sector if they had taken it on would not have spent enough. Do you remember saying that? That is what you said because I wrote it down at the time. The only question which occurs to me is, and I am sure there is an obvious answer to it, in that case if you do not know the cost of a public sector contract and if you recognise it would not have been enough, how can you say the public sector comparator is £20 million more?
(Sir Andrew Turnbull) There was a calculation by a team which was different from the one working on this project of what the public sector comparator would cost. The reference to not investing enough in terms of examination advice was a remark about public sector construction contracts in general, and that was a finding which has been made in numerous Government reports on public sector construction projects.
210. If your public sector comparator were a genuine comparator, the point you made would not have applied. May I say I found this a very interesting project, I am not knocking the project, I am just interested. We have had problems before in public sector comparators where we have found them as low as £1 million higher, and we have the feeling the books get cooked a bit in the comparator process. I am interested to know how you reconcile the £20 million plus with the fact you would not have spent as much and you do not know the cost of a public sector contract.
(Sir Andrew Turnbull) I think the way you reconcile the two is that not being rigorous enough in the definition of a project in its early stages is reflected in the historic performance of public sector contracts, and an allowance was made for that in the calculation of the public sector comparator.
211. So what do you do, think what it would have worked out at if it was done in a conventional way and then add an X on top to get the comparator? Where does the comparator come from on the basis of what you said to Mr Davidson?
(Sir Andrew Turnbull) If the thing overran in the private sector version, we would not pay for it. If the standards of the service which are provided during the life time of this contract do not meet the contract, we do not pay for them in the private sector contracts, so we are not at risk of under-performance of delivery. These are important risks which we have transferred off. In order to make the relevant comparison, you have to allow for those in establishing what you think would have happened in the public sector case.
212. In fairness, you did say very early on and repeated subsequently referring to Mr Gershon's organisation's chart that most risks occur when opening the building up, at the early stage of the project in other words. When you arrived at your 189, and you threw out that figure, you said, "That is 189 million allowing for risk." What did you allow for risk?
(Sir Andrew Turnbull) That allows an overrun of about 15 per cent. It also made an allowance of about one point something for latent defects and allowed for the fact that the cost of the services provided would rise by half a per cent more than the rate of inflation.
213. Mr Stewart, you assessed risk at the same time. In their allowance for risk in their comparator they arrived at £189 million, how did your assessment for risk differ from their assessment for risk and why?
(Mr Stewart) I do not work for Exchequer Partnership.
214. I do not mind who answers it. My apologies if I went to the wrong person.
(Mr Lewis) When we analysed the project and looked at the work which would be required to satisfy the requirements of the project, certain risks had to be taken on. We had to assess commercially how we approached those risks, how we might dispel them during the course of the job, and how to price them, bearing in mind we were in a competitive position and had to make sure it was the right price for the job.
215. But if they were right and you were wrong, you would have been £20 million out and you would not be here now as a witness, putting it bluntly. Why were you able to get it so right and why did they get it so wrong in assessing the risk?
(Mr Lewis) I am not suggesting Sir Andrew's team got it wrong.
216. They got it different?
(Mr Lewis) I am not suggesting we got it right yet either. We have several months to go before the construction element of the job is completed, so we are not yet sure but we had to make certain assessments. Bearing in mind the private sector expertise and the advisers we had on our side and in our consultancy team, we believe we assessed those risks properly and priced them properly.
217. You, I assume, would have to get external expertise to advise you on the early stage risk, why did you go where you got the risk and why did you not go where they went to get the risk?
(Sir Andrew Turnbull) I am not sure I understand. They are making an assessment of the risks they face and we are making an assessment of the risks we think we would have assumed compared with giving the job to them. We were not making an assessment of their risks; that was for them and then the people backing them financially.
218. You did make the point when you were refuting the odd balance sheet argument that the main reason for PFI
, which we understand-we hear it constantly, it just never arises in performance up until now-is to transfer risk. We have had a whole series of glowing examples like the passport computer, the immigration computer and various other things where the risk was passed but the public still ended up paying when things went wrong. How sure are you that you have transferred the risk? (Sir Andrew Turnbull) In this case I am quite confident we have transferred risk.
219. Tell us why.
(Sir Andrew Turnbull) Where people have reopened the thing and come back, first of all, they have only done so after they and their equity have probably been used up and possibly some of their banking borrowings have been forfeited, so there has been some loss, but when it gets too great they say, "Sorry, we would rather hand you the keys back than continue with this project" and we have renegotiated it. That has happened in a number of IT projects and you have examined a number of those. This is a building refurbishment. Now there are risks in that but we are past the point where if something was going to go wrong it would have gone wrong, but there are still nevertheless some risks left although I would be very surprised if it turns out they were such that the contractors came along to us and say, "We would rather forfeit all these payments than carry on with it."
220. One of the reasons refinancing has been successful is for this same reason, that in building a prison or a hospital the risk is in the early period and therefore you borrow at higher rates and short, and then you refinance at lower rates once you have got on to a steady income stream minus the problem.
(Sir Andrew Turnbull) Yes.
221. But that still has not solved the problem as far as the customer, the public, is concerned. Let us say 25 years down the line, just so you can tell me how it is covered-what I am getting at is how strong is your contract and is there a system of penalties and so on-something happened and half the building had to be closed down for six months. What is the public protection?
(Sir Andrew Turnbull) We would not pay the rent.
222. That is not much good, you have not got anywhere to live, have you? That is not much of a protection. There should be a penalty. This is what happened with the Passport Agency. What happened there was that they thought they had the risk covered, and this came out clearly in the hearing, but in fact all they had covered was the extra cost to the Government of taking on the staff, there was no penalty for the inconvenience or loss to the public, so when there was a loss of 12.5 million the contract was not even strong enough to stand up to that in court, and it ended up with the Government paying £10 million of it and the financier only paying £2.5 million, and he only agreed that two weeks before he came here because he did not want to come here saying he had not paid anything. How are you covered? I am not talking about not paying rent, what protection have we got for things which go wrong which make a significant difference?
(Sir Andrew Turnbull) It depends how seriously they go wrong. If there is a requirement to maintain the temperature to at least 22) and over a period they fail to do that, there is a schedule which says what is knocked off if various standards like that are not met. You are saying, what happens if the thing becomes unhabitable. I think the answer is that we can terminate this contract meaning that the future payments we would have made we do not make.
223. But then you have an unusable building for a while.
(Sir Andrew Turnbull) Yes, but we also have all that future rent which we are not going to pay.
224. But there is no penalty clause as such?
(Sir Andrew Turnbull) It is a pretty severe penalty to them if they have invested in it. They still have the bonds to service. If we say after 25 years, "Sorry, this is so unsatisfactory, we are terminating this", that is a pretty severe penalty.
225. Our problem has been that we have run up against several risk problems where the public has lost out, and it is where we are most concerned-and I think you can pick up the pattern of the questioning-whether risk transference has been as real as you genuinely, obviously, feel it is. This is a new system, who came up with the idea? Whose idea was it? Was it yours?
(Sir Andrew Turnbull) To separate out the funding element?
226. Yes.
(Sir Andrew Turnbull) That was developed in the Treasury Taskforce which was set up after May 1997. Adrian Montagu was the guy leading that and Dougie Sutherland. This was a set of ideas they worked on.
227. It is very ingenious, I am impressed by it as a concept, but I do not impress my colleagues by saying that. Can I then take up one final question and go back to Mr Stewart. I see from your CV that your responsibilities include the origination and execution of PPP transactions in Europe and the rest of Europe. Are the rest of Europe ahead of us in any way in the development of this kind of contract and, if so, in what way?
(Mr Stewart) There is not a simple answer to that. The rest of the world and Europe are catching on to this concept. Some countries are further ahead than others. Probably the furthest advanced in Europe are the Dutch and the Irish, who have established a taskforce like the Treasury Taskforce as a centre of excellence and they are pursing projects. One of the key differences between the European market and the UK market is that the European markets tend to be much smaller so that those countries are focusing on a smaller number of projects which, if you go back, is probably the case in the UK.
228. Are there any notable lessons we could learn on project development and safeguards and so on?
(Mr Stewart) They certainly come and talk to a lot of people in the UK to learn lessons from here and I think there are lessons for the UK to learn from them. So there is a constant dialogue going on.
229. Which country would you go to if you wanted to learn from them?
(Mr Stewart) I would talk to the Irish, who I think have some interesting ideas. They, for instance, have made great efforts to involve all the stakeholders- unions and so on-in the process from day one. The jury is still out on whether it is going to work. I would also talk to the Australians, right on the other side of the world, who have extensive experience of these projects and a slightly different approach.
Mr Williams: I think the Public Accounts Committee had better reconsider its decision not to go to Australia, in that case. Thank you very much.