Q21 Chairman: The truth of it is that having paid for it, which is not something other people have felt it necessary to do, because interest rates were so low at the time, it is very likely, contrary to what you said, that there will be no refinancing gain at all. So you have paid for a pup, have you not?
Mr Gieve: You cannot win on that. The very strong recommendation from this Committee, I thought, and the Treasury, was that we should aim to get 50% at least of any refinancing gains. At the time we had done our original deal, we were being offered 20% and therefore we had to re-open the deal in order to get that up to 50%. We were not starting from scratch. We paid a little for that. Yes, there is a certain cost, but on the other hand there is a potential benefit and we thought that having half the potential gain on balance was the right thing to do.
Q22 Jon Trickett: Mr Racine, I understand you are the builder, is that right? Could I ask what you felt at the time of bidding for this were the risks in the construction process which you were taking on? What were the risks, having submitted your bid?
Mr Racine: On this project, as for any PFI project, there are two levels of risk: one is to make sure we deliver a building which is to the client's purpose, control through the design development process and all the iterative meetings we have with the Home OYce to make sure what we design fits with what they want and that we stick to what we offered when we submitted our bid. The second major risk for such a project is obviously to deliver the project on time, because it has huge implications for the Home Office. This is critical to us. We have done a very detailed analysis of this risk to make sure we can deliver on time and hand over the building to the Home Office at the time the Home Office requires the building.
Q23 Jon Trickett: I am interested in the construction and demolition and associated risks of the actual building project itself and the comment you made about running to time. Any builder knows that projects can go out of control once you get on site. How do you insure yourself against such a risk becoming an eventuality? What do you do to prevent such an event? Do you defray your risk on the marketplace by insuring, or what do you do?
Mr Racine: No, we have not insured any particular risk associated with demolition. What we did during the bidding process, before and after the preferred bidder, was work out some Plan Bs in case we were delayed on the demolition. It is in fact what happened, because we were quite delayed in the demolition of the rotundas and we were able to reorganise the site to ensure we started the construction of the superstructure in parallel with the completion of the demolition and we also have other ways to make sure we can start the trades inside the buildings earlier to compensate for any delay in demolition. Our solutions are purely technical.
Q24 Jon Trickett: Do you use a process of due diligence in relation to the financiers in this particular matter? Do the financiers require you to do some kind of due diligence in terms of the timing so that things do not slip too badly?
Mr Racine: During the bidding stage, before the deal is closed, the financiers undertake a very detailed technical due diligence and they analyse all our programme for demolition. In fact, at the time we closed this deal all our method statements had been agreed, all the relations with the environment were agreed with Westminster, so we knew exactly what we had to do. This was done. During the works we had detailed reporting to the Home Office on the one hand, the financiers on the other hand, to make sure that demolition was on track.
Q25 Jon Trickett: Mr de la Monneraye, you were nodding in agreement when I was asking about this due diligence process, so probably you were more familiar with the financiers' requirements in relation to this matter.
Mr de la Monneraye: Yes.
Q26 Jon Trickett: I am specifically interested in the risk that the demolition or construction project might have gone badly wrong.
Mr de la Monneraye: To pay the sub-contractor Bouygues and the others I am helped by other consultants in checking the work each month to be sure that we are on time and we are paying the right amount of money and to ensure the funders that completion of the building within the programme is still possible.
Q27 Jon Trickett: So you employ technical consultants who do a due diligence process and then satisfy your sources of finance that the building will be delivered to time.
Mr de la Monneraye: Yes; exactly.
Q28 Jon Trickett: If the builder were to fail, you could take out an action against the people who had given you technical advice.
Mr de la Monneraye: Exactly.2
Q29 Jon Trickett: Thank you very much for that help. This is a theme which I have constantly tried to understand in successive meetings about PFI. I feel that the public sector comparator is consistently manipulated so it looks higher than the private sector bid. I believe that has happened in this particular case. Appendix 2 refers to the cost of the building contract and the additional costs which were added to the public sector comparator. Members will no doubt have noticed that £47 million of risk has been added, which by chance happens to make the public sector comparator bid higher than the private sector bid. May I ask Mr Gieve to confirm that actually the two directly comparable figures are the PFI cost and the public sector comparator cost and the public sector comparator would have been lower had it not been for the fact that the risk element was added to it.
Mr Gieve: Yes, that is right.
Q30 Jon Trickett: During the morning I contacted the C&AG, because I was interested to see that nowhere in here was there a reference to the financing costs, which is something this Committee has been interested in. The financing costs are often as high as or higher than the building and other related costs. It might be as well to ask the C&AG give us an indication. I asked two questions really. One was: what was the interest which might have been charged if we had used conventional public sources of finance and what was the interest being charged on the PFI, neither of which figure appears in this Report? Then I asked what the difference was in the financing costs in the aggregate between the public sector model and the private sector model. I wonder whether the C&AG could give us the response. I know there are several caveats to the analysis, but nevertheless I think it is instructive to get it on the record.
Mr Airey: That is a very good question. The figures I gave you are indeed very "caveated". What we have here is a deal which is funded by the private sector at about 0.7% above a gilt rate. Doing a simple calculation on those terms and adding in the costs of fees for the private sector finance, we have come up with a very provisional figure of a maximum of £33 million additional cost for doing this deal as a PFI project rather than a conventionally funded project.