Q71 Jon Trickett: We are representing taxpayers and it is important to see how accountants calculate things and the discount rate is such a fine tool that it can produce a figure of a £70 million windfall gain for Octagon but in fact that is a completely mythical figure-it is probably £250 million or £300 million.
Mr Burr: We can certainly provide the figures for the cash flows; we can provide that information.3
Q72 Jon Trickett: There were two other points I wanted to make. If I could go to table 23 on page 21, and also table 22. What these two tables tell us in fact is that the Department had decided that we should exclude bond finance; if I could look to Mr Forden? This has cost the Trust a huge amount of money. This was an active policy determined by the Department, but do you have an idea what the cost might have been if we had used bond finance?
Mr Forden: I actually had not calculated that, I am sorry.
Q73 Jon Trickett: Is it true to say that the decision of the Department to instruct you not to go to bond finance has resulted probably in additional cost falling on the Trust which the Department is failing to assist you with? Is that an accurate description of what has happened?
Mr Forden: The fact that the bond market is more developed now would indicate that that is the case, and I was not around at the time and I do not know whether the bond market was so developed at the time.
Jon Trickett: I do not think I have time to explore it but I think it is a serious point. It is clearly costing the Trust huge amounts of money; it was an active policy to create a market in PFI which may or may not have been right at the time, but the burden of that is falling on the Trust and that is the point I was trying to make.
Q74 Chairman: I am afraid the answer, "I was not around at the time" does not impress this Committee.
Mr Forden: I am sorry about that.
Chairman: Mrs McCarthy-Fry.
Q75 Sarah McCarthy-Fry: On page 4 of the Report, "Alternative financing solutions were not seriously explored to ensure the financing terms remained competitive during a two year close deal," and I accept that point that it was assessed for value for money at the start, but you had a two-year period in which case you could have reacted to change. You already reacted to change because you reassessed how many beds you needed. Why did you not reassess whether the financing was correct, given how the markets had changed?
Mr Forden: During the period of the two years, as Mrs Dugdale has said, what we bought was almost a special vehicle as a company that brought finance, building expertise, et cetera, and that is what we purchased. Even going through the competition two years prior to getting down to Octagon, there was very little interest. Our advice from advisers and our advice from the Department at the time when we looked toward financial close was that it would have been a higher risk to the Trust to actually go back out to the market as it would incur further delay, and at the time building costs were rising quite steeply, and it potentially would have cost the Trust more than it could gain.
Q76 Sarah McCarthy-Fry: May I ask Mr Coates if there was any pressure from the Department to close the deal early because it was a pathfinder to prove that PFI worked?
Mr Coates: There was a mutual interest from the Trust and the Department to reach a financial close for this transaction, which we recognised as being one of the most important transactions in the PFI market at the time. I need to emphasise that the Department in its processes did encourage the Trust to come to the contract with a whole consortium. The reason it did this, it did not want to have endless different contract negotiations with different parts of the consortium. Basically a builder will promise to do the work and a banker may have a totally different view whether it is feasible or not. So we insisted that they had one set of negotiations with us so that we had one deal we could take through and knew that we could reach financial close and sign a deal on.
Q77 Sarah McCarthy-Fry: Forgive me for my ignorance, but was there any thought at the time that there could be possible refinancing in the future?
Mr Coates: We were aware of the potential for refinancing benefits to accrue from contracts such as this one.
Q78 Sarah McCarthy-Fry: If I can take you to page 2, which is the analysis of the Trust's share of the refinancing gain, how was that balanced between sharing the benefit between the Trust and sharing the benefit between Octagon arrived at?
Mr Coates: The balance was struck in accordance with the Treasury Code of Conduct at the time, which was that of deals you might say are history, 30% goes to the Trust and 70% to the consortium. New deals are 50-50. We treated the extension to the contract as in effect a new deal and therefore was 50-50.
Q79 Sarah McCarthy-Fry: You say it was a voluntary code at the time. Was there any room to negotiate a different arrangement?
Mr Coates: Based on our experience at Dartford and Gravesham, which was the first refinancing under the code, I can assure you that it was quite difficult to convince the private sector to accept the full wording of the code because it does work against them in the way that various principles are set out.
Q80 Sarah McCarthy-Fry: Was this Octagon's first venture into the PFI market?
Mr Coates: As far as I am aware, yes.
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