Q121 Helen Goodman: I would like to ask a question to the Treasury Officer of Accounts, if I could, which is: have you considered shifting the 50-50 split even further in favour of the taxpayer?
Mr Glicksman: The 50-50 split was negotiated with the industry just four years ago now and we have published it and applied it to all PFI contracts since then. I do not think that we have had any experience of refinancings under that 50-50 split, so I do not think we have had any experience on which to consider changing it.
Q122 Helen Goodman: And there is no current review of the 50-50 split? You are happy that if another refinancing occurs you will continue with guidance to departments on a 50-50 split?
Mr Glicksman: We would obviously review whatever experience came forward. Our minds are not closed but we have not had any further refinancings under that arrangement.
Q123 Helen Goodman: Fine, there is just one point I would like to correct earlier just so that we have got that on record, if that is possible. Although Octagon themselves have not previously done a PFI deal, looking at Table 4 on Page 6, ABN Amro, who are one of the major partners, had been involved nearly three years before so there was some prior experience. I would just like to place that on the record if that is possible. Finally, I would like to ask a question of the NAO which comes back to the points that Mr Trickett was raising. In Table 2, Note 1, why was the test discount rate 18.94%? Why was that test discount rate used here? Why was it discounting using 18.94%, which was the internal rate of return for shareholders and not the standard test discount rate of public sector investment?
Mr Finlay: In that respect it follows the Treasury guidance and the intention was to compare with the return that the shareholders originally expected. That is a very clear explanation. The method of calculation is set out in Treasury guidance. It is effectively calculating refinancing gains using as a comparison the rate of return that the shareholders expected at the outset. You have to use some discount rate and the Treasury consider that that is the most appropriate rate.
Q124 Helen Goodman: Why do they want to use the internal discount rate of the shareholders for these PFIs when they are not using that discount rate for other pieces of public sector investment or for measuring other long-term future costs?
Mr Finlay: Because it is a different type of calculation. The other calculation you are referring to, where a discount rate is used at the moment of 3.5% in real terms, is used for calculating investment flows which the Government is going to enter into. This is a different type of calculation. This is essentially about the benefits to the private sector from refinancing and so it is not unreasonable that the test is by reference to their own particular expected rate of return.
Mr Glicksman: Would it be helpful if I comment? As Mr Finlay said, what we are looking at here is quite different from comparing an investment through one route with another route. What it is doing is trying to look at how the returns from the financing should be split between the two parties, so for that purpose it is more appropriate, we have felt in our guidance, to use the rate of return that was originally expected in the contract in order to divide up the returns between the two parties.
Helen Goodman: Could I just make another comment or ask another question which is I do not fully understand why you take that view and in particular I would like to challenge it because this internal rate of return is much higher than the private sector's internal rate of return across the economy as a whole, so using that one does seem rather strange.
Q125 Jon Trickett: It is generous.
Mr Glicksman: It is this one because this was the one that they were using for this particular contract when we signed up to it in the first place. For another contract it would be a different figure. It would be the figure that was proposed for that contract. So we are using the figure that was proposed for the contract and we are looking at it on the refinancing, and the impact of using different rates of returns is to change the way in which sums received earlier on and sums received later on in the contract are evaluated. That is the impact of using a different rate of return.
Q126 Helen Goodman: I understand that but it does make it quite difficult for the Committee of Public Accounts to compare projects if different numbers are being used.
Mr Coates: Having been involved in discussions about the code and the numbers, this is an area where there is no science to it. It is simply the higher the discount rate you choose the better the benefit is to the public sector because it values gains more highly that way. If I may suggest, we will provide you with a note of what it is at 18.94 to demonstrate that forcing the private sector to use a high rate benefits the public sector because the cash yields are deemed to be higher.7
Chairman: Mr Davidson?
Q127 Mr Davidson: Could I ask Mr Forden if you had known at the time you were signing the deal what you know now what would you have done differently?
Mr Forden: I would have tried to ensure that my colleagues knew the same as I know now in the Treasury and Department of Health, that we could renegotiate it to a higher share of the split.
Q128 Mr Davidson: Can I just clarify the extent to which you and the Trust had any veto over the refinancing?
Mr Forden: We could have objected to taking on the potential higher liability and that would have limited the amount of refinancing.
Q129 Mr Davidson: It does strike me that you have not played your hand as well as you might have in this regard because, as I understand it from the Report we have here, Octagon, which is John Laing and Serco and these other people, were receiving in the run-up to the refinancing less than the 18.9% surplus that they had anticipated and that you agreed to a deal which allowed them to move up to 60% of a surplus from the position. Now, if you had the opportunity to block that, it does seem to me you did rather have a stronger hand than it might appear from the deal that you ended up with. Can you just clarify that for me?
Mr Forden: Unlike Mr Trickett, I like to look at the cash and our cash payments have actually gone down. Whether the shareholders got 60%or100% or 3% our cash payments went down, so that was good news for the Trust. The maximum we could get was very much governed by the guidance at the time. The guidance at the time was 30% and 50% on the extension. So we actually got as a trust as much as we possibly could by following the guidance.
Q130 Mr Davidson: Can I be clear then about that. I accept that you got a better deal than you had before but you could have got a better deal than you had before by getting sixpence off the amount you are paying. You are saying to me you would have taken anything. If you had the opportunity to block the deal why is it that you got such a small benefit and they got such a big benefit?
Mr Forden: The maximum we were able to go for as a trust was the 30%.
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