Q71 Mr Dunne: What credit rating do you apply?
Mr Abadie: For a bond project when the project is accessing the capital markets for those projects, the monoline guarantors require the project to be an investment-grade project, which is then credit enhanced by a rating agency. Bank projects normally border on investment grade, either slightly higher or slightly lower.
Q72 Mr Dunne: Just for mybenefit, does investment grade mean triple B or greater?
Mr Abadie: Triple B minus, or greater. That is correct.
Q73 Mr Dunne: What credit rating do the Government borrow at?
Mr Abadie: Triple A.
Q74 Mr Dunne: Who makes the spread between those two rates? Does it accrue as a return to the funders, or to the equity share in the PFI scheme? Sorry, does it accrue to the investor in the underlying instrument when there is bank borrowing or bonds, or does it accrue to the equity owner of the PFI project?
Mr Abadie: The difference between the cost of Government borrowing and the cost of the project, where it is the average cost of capital, accrues to the private sector. It is at the heart of the value-for-money analysis that occurs. What you really do there is to trade off the cost of finance against the risks that John referred to earlier: the risk of construction being transferred, the risk of operation and the like. If it is deemed that the finance cost-the premium paid for the private finance-is in excess of the risks, as we determine them, that are being transferred to the private sector, the project under current guidance should not go forward because it is not value for money.
Mr Kingman: It is worth adding that we require all projects to undergo a comparison against precisely such a public sector comparison.
Q75 Mr Dunne: On average, what is the percentage difference in the funding cost for a project that is being financed through a PFI vehicle and a Government-funded project?
Mr Abadie: It depends on the source of funding. A couple of hospitals have closed during the past year and from a price point of view, the overall interest cost was about 70 basis points higher than prevailing Government gilt rates.
Q76 Mr Dunne: 6%.
Mr Abadie: 70 basis points-0.7%.
Q77 Helen Goodman: I would like to begin by asking you about the way in which the code is operating. If you turn to page 23, it says, "The Code is voluntary and the private sector has stated that any changes could damage their commitment to it". Do you agree with that?
Mr Kingman: When the voluntary code was negotiated, one of the conditions that was required by the private sector was that the code would not be revisited. I think that the private sector had a concern that the Government would, in a sense, seek to salami slice it. A judgment had to be reached about whether to agree to that condition-
Q78 Helen Goodman: But do you not think that this is a case of "They would say that, wouldn't they?"?
Mr Kingman: Well yes, that is true in any negotiation. We took a judgment that, since the private sector had been very clear about the issue from the beginning, we were much better off with the gains that we had accrued under the code than with not having the deal.
Q79 Helen Goodman: Somewhere else, the Report-I cannot find the page now-said that some refinancings had not gone ahead because the PFIs were too small and the amount of management time involved would make them too expensive. Why did you not have a new code for new PFIs or a sliding scale in the old voluntary code?
Mr Kingman: I am not certain that I know whether anyone thought about that at the time. In a sense, we have two codes: we have a backward-looking code for-
Q80 Helen Goodman: But they are not related to the size of the PFI; they are just related to the timing. Would not a sliding scale be a way of overcoming the disincentive to refinance at one extreme and the very large returns accruing to the private sector at the other extreme?
Mr Kingman: Possibly. We are where we are with the code, in the sense that it was negotiated and it is not something that can, or should, easily be reopened.