Q61 Mr Dunne: I agree. It makes it very difficult for you to do your job and monitor the cost-effectiveness of these projects if you do not know what returns third parties are getting, does it not?
Mr Abadie: There are various ways of looking at that. The nature of the contract we enter into with the private sector is effectively for a fixed price. What we are looking for over the period of the contract is certainty of delivery of the services.
Q62 Mr Dunne: But, in order to make the judgments that you have made that this is better value for money than previous procurement policies, you must be able to establish how much money third parties are making out of these contracts.
Mr Abadie: If I may, I think that the yardstick by which we judge value for money is not how much profit people are making-people may make significant profits and they may make losses-but whether we are getting better projects purchased at less cost and delivered to time. That is what we mean by value for money.
Q63 Mr Dunne: But as far as these refinancings are concerned-they are generally at the stage after the construction risk has been taken out of a project, and I recognise that construction risk is one thing and that operating a financial risk thereafter is a completely separate sort of risk-the Treasury should have a good grip on the returns being made by the industry. From what you have told me, you do not have that at present.
Mr Abadie: That is correct. We do not request from the projects on a periodic basis what the contractor-the PFI company-is making in terms of ongoing equity returns. That is a different matter, though, from assessing whether a refinancing is value for money for the public sector. The trade-off there from a public sector point of view is the amount of money that we are getting under the gain share. We always get 30% or thereabouts, so it is the amount of money that we get relative to the increase in termination liabilities and the probability of those occurring. That is the value for money assessment that takes place under refinancing.
Q64 Mr Dunne: I accept that a great deal of good work was done by this Committee before I joined it in encouraging the private sector to share some of these gains, but unless you can assess the quantum of the gains, you are in a weak negotiating position in order to extract maximum value for money.
Mr Abadie: The NAO points out in the Report that it and weare not aware of any transactions where the private sector has not told us that it has done a refinancing. Therefore, we are aware of all the refinancings that have taken place. Every refinancing has to be signed off by an Accounting Officer's value for money for his or her Department. So, coming back to the value for money equation, every refinancing transaction that has taken place that we are aware of-and we are aware of all of them-has been deemed to be value for money somewhere in that process. I do not know if that answers your direct question.
Q65 Mr Dunne: It sounds as though you are making that assumption without the full set of data on which to base it.
Mr Abadie: Again, I can only refer back to the Report, which says that we are aware of every single refinancing that has taken place. We are not aware of any refinancings that have not been advised to be-
Q66 Mr Dunne: I am seeking to be on your side here because I think that this is ultimately likely to reduce the cost to the Government. In theory, the more sources of secondary market capital there are to invest in PFI projects, the lower the economic cost to the public purse, so this is a good thing to develop. I find it inconceivable, however, that you can sit here and tell us that you recognise that there is a data shortage and you do not plan to do anything about it by changing the terms of the contract.
Mr Abadie: I am not saying that we are not going to change the contract. I think I said that we agree with the NAO recommendation about collecting further data. We have a process under way with the intention of doing just that, but I emphasise that that in itself does not impair value for money on the back of a refinancing. That is a separate exercise and a separate decision.
Q67 Mr Dunne: Mr Kingman, does the Treasury or the different Departments underwrite any of the PFI projects to any degree? Is there any comeback on the Government through these contracts?
Mr Abadie: I am happy to answer that. Under our standard contract, there is no guarantee in that sense. If a project is terminated, for whatever reason-public sector default, private sector default or because we want to do so voluntarily-there is a compensation regime that differs in different circumstances. It does not contemplate a guarantee on underwriting-if I understand the question-but there may be individual projects when an authority decides to go counter to the standard contract and, for reasons unique to its project, may seek to provide some form of underpin or guarantee of either the debt or the equity in that transaction. We are aware of a couple of those.
Q68 Mr Dunne: Those have been done by local authorities or by agencies.
Mr Abadie: No, there are some central Government ones. On the London Underground, the debt was underwritten to an extent. On Skynet 5, which is a Ministry of Defence satellite project, something similar was also done. They are not local authority projects.
Q69 Mr Dunne: Are those accounted for in a different way from those where there are no Government guarantees?
Mr Abadie: The accounting may or may not be impacted by the guarantee, depending on the level of risk transfer. That is independently assessed under the extant accounting rules by the auditors and, if necessary, the National Audit Office. It depends on the balance of risk.
Q70 Mr Dunne: For each individual project, does the Treasury do an assessment of the anticipated borrowing cost that the project can sustain?
Mr Abadie: It is assessed in the round, together with all the other costs. We do not specifically assess borrowing capacity for the project. It is part of the value-for-money analysis and when the business case has come forward, either to the Department or, if large enough, to the Treasury to sign off on, we assess the value for money in totality, not just of the borrowing costs.