Q81 Helen Goodman: Can I ask you to look at box 10 on page 18? It says-this is an NAO point, and I want to know whether you agree-"In our view it would seem more appropriate in such cases where the post refinancing IRR is significantly above the base case IRR for the full amount of the gain to be shared." Are you saying that you do not agree with that point?
Mr Abadie: We definitely can see the attraction of changing the arrangements, because that would clearly give more money to the public sector. However, as John suggested, part of the deal that we struck with the private sector to get it voluntarily to offer up the 30% was that the code would not be changed. We stand behind that commitment, and that is what that sentence is effectively referring to.
Q82 Helen Goodman: In effect, you are admitting that you did not get as good a deal as you might have done and the public sector is not getting the shares that it might have got, but that, having done the deal, you do not want to go back on you word?
Mr Kingman: In a sense, it is always the case in any negotiation of this kind that one could imagine better outcomes. We believe that the code has been successful, and I note that the NAO, in its own analysis of the code, describes it as a good negotiating achievement. In the discussion that then took place in this Committee, the OGC was congratulated by at least one Member of the Committee, who noted that we did not have much in the way of negotiating power, which was a fair comment.
Q83 Helen Goodman: I would like to turn to the issue of changing liabilities for the public sector following a refinancing. Is it not really the case that it is too soon to tell whether the refinancings offer the public sector value for money?
Mr Kingman: Yes, it is too soon to tell in a number of respects. Many of these are long contracts, and as the Report quite fairly says, we will need to see how they work through. If we are in a situation where liabilities are a big issue, we will need to look at that down the track. We are, as you know, cautious in the Treasury about public sector bodies agreeing to higher termination liabilities. We think that that constrains their negotiating freedom, and they should think very hard indeed about agreeing to them.
Q84 Helen Goodman: When you look at this issue, what account do you take of the changing patterns in service delivery?
Mr Kingman: Whenever a public sector body enters into a PFI contract for a school, hospital or prison, it needs to think very hard about whether it needs that school, hospital or prison. When it enters into commitments with a PFI contractor, it needs to be clear that those are the right commitments to enter into. Of course, that is true under public sector procurement as well: if you are going to build a hospital, you need to think very hard about whether you are going to need it.
Q85 Helen Goodman: Yes. This point is made in paragraph 2.14. Hospital provision is an area where it seems likely to happen. I know that from my own constituency. A PFI hospital was opened there four years ago, but already the medical practice is changing and there are proposals on the table to close wards. Obviously, if you close wards, you are not getting the money in to pay the PFI charges. Despite that, paragraph 2.5 says:, "Most public sector departments have chosen to take the gain as a lump sum with the exception of the Department of Health which has advised NHS trusts to take their refinancing gains over time." Why is that? In the one area where delivery is changing fast, you are allowing people to behave like that.
Mr Kingman: As I said earlier, there are legitimate reasons why a Department may choose to take these in different form. I do not know whether Richard-
Q86 Helen Goodman: Yes, but what are they? That is my question.
Mr Abadie: It is probably a question best asked of the Department of Health. I shall try to answer as it has told me in the past: the Department of Health feels that its share of the refinancing gain is best amortised over the forward commitments. You referred to 30 years of commitments; the Department of Health's policy tends to be to rebate the unitary charge evenly over the life of the contract, rather than taking the cash up front.
Q87 Helen Goodman: I understand that, and I am asking you, "Why?" Further, I want to know whether in allowing the Department of Health to behave like this, you have talked to your colleagues who deal with controlling spending on the health side.
Mr Abadie: I cannot answer the latter question. Again, the decision to approve or not approve a refinancing is for the Department and the trust concerned. As I mentioned to another Member, it is not a decision that is taken by the Treasury. We do not approve the refinancing, so I doubt that our spending teams would have been involved in that decision making process.
Q88 Helen Goodman: Okay, but could I suggest that you ask the Department to reconsider this in the light of changing patterns of service provision, please?
Mr Abadie: We will do that.
Q89 Helen Goodman: Thank you. I would like to turn to the question of what is happening in the equity market. The Report says that you have excluded equity sales from gain sharing, because you are assuming that they are subject to taxation. Do you think that that is a realistic assumption?
Mr Kingman: That is not the main reason why we see them as rightly excluded from the code. As I said at the outset, we see equity transactions as very different from a PFI refinancing. The latter takes place within the project and it is an important change that affects our rights and interests as a purchaser. A change in the equity ownership of the project is different: it is outside the project, it does not affect our rights and it happens in any form of public procurement. Companies that sell-
Q90 Helen Goodman: You are saying that it is analogous to the operation of the gilts market really?
Mr Kingman: Well, it would not be the closest analogy in my mind. The closest analogy would be if the Government were to sign a property lease, as that is very similar to a PFI project. If the Government were to lease a property, you would expect us to drive a hard bargain on the lease and to drive a hard bargain if somebody wanted to change the lease; however, you would not expect us to try to secure rights over the freehold, which is the equivalent of the equity stake.