| COSTS INCURRED BY THE AUTHORITY
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| C&AG's Report para 3.1
| 18. The Authority incurred sale costs of £3.1 million and £2.2 million costs for consultancy support in connection with the formation of the Facilities Services Division, equivalent in total to 44 per cent of the sale proceeds. The sale costs were 24 per cent higher than the Authority's March 1994 estimate, and the formation costs were 16 per cent higher.
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| Qs 8 and 20
| 19. Our predecessors asked the Authority why these costs were so high and why the Authority were not able to estimate the costs more accurately. The Authority said that they considered that only the £3.1 million direct sale costs should be compared with the sale proceeds. They accepted, however, that the failure to estimate both sets of costs more accurately arose because they had not had much experience of this activity.
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| Q 22
| 20. Our predecessors asked the Authority whether, in the light of their lack of experience and the very large costs which were incurred, it would have been possible for them to obtain advice which would have enabled them to estimate the sale costs more precisely. The Authority said that, because their experience was very modest, they had sought advice and had compared what they were trying to do with the sale of the Property Services Agency.
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C&AG's Report para 3.7
PAC 8th Report, HC 154 (1993-94) Annex 1
| 21. The Authority's principal adviser, Coopers and Lybrand, were awarded seven contracts with a value of £4.4 million (excluding VAT) without competition. Our predecessors stated in their report on the "Proper Conduct of Public Business" that full and open competition should be applied in all save the most exceptional circumstances (for example, where no alternative supplier was available) in order to secure the best the market could provide at the most competitive price.
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| Qs 10, 11 and 153-155
| 22. Our predecessors therefore asked the Authority why they had not let these contracts through competition. The Authority said that they had considered competition. The first contract had been a small contract for advice on what might be done with the Facilities Services Division. This was not let by competition as the Authority believed that, even under competition, Coopers and Lybrand would have been appointed because they had separately won by competition another piece of work for the Authority and had provided advice on the sale of the Property Services Agency. The Authority told our predecessors that the later contracts had been awarded to Coopers and Lybrand without competition as a follow on to the initial advice they had provided and because of the very tight timetable for the sale. The Authority said, however, that with hindsight there had probably been more time than they had expected because in the event the sale had been completed ahead of schedule.
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| Q 183
| 23. The Authority told our predecessors that, in almost all other cases of significance, they had sought competition for advisory contracts, and that they should have done so in this case.
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Q 66
Q 96
| 24. Our predecessors asked the Authority whether the decision to award contracts to Coopers and Lybrand without competition had been discussed by the Board of the Authority. They said that the first small contract was not discussed at the Board, and the decision to award subsequent contracts to Coopers and Lybrand had been taken by the Authority's Board member for services who regularly reported his decisions to the Board. The Authority said that it was now a requirement that the award of any consultancy contract above £1 million had to be approved by the Board of the Authority and consultancy contracts in the range of £0.5 million to £1 million had to be approved by the Accounting Officer.
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C&AG's Report para 3.12
Qs 23-24
| 25. At the time that Coopers and Lybrand were appointed, a former senior partner of that firm was a part-time member of the Board of the Authority. Our predecessors asked the Authority whether the part-time Board member played any part in the Authority's decision to award the seven contracts to Coopers and Lybrand without competition. The Authority said that the part-time Board member was in no way connected with this decision, and that his role as a non-executive director of the Authority was completely separate from Coopers and Lybrand's success in winning work from the Authority.
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Q 245
C&AG's Report para 3.12
| 26. Our predecessors therefore asked the Treasury for their view on the way that the Authority handled this potential conflict of interest. The Treasury said that the award of contracts to Coopers and Lybrand by competition would have had the additional benefit of demonstrating that care had been taken to avoid potential conflicts of interest; it would have been advisable to have had an open competition.
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C&AG's Report Figure 7
Qs 194 and 195
| 27. One of the contracts awarded to Coopers and Lybrand was to provide, for seven months, a secondee to replace the Commercial Manager of the Facilities Services Division who had resigned. The Authority told our predecessors that the Commercial Manager had given, and worked, a notice period of three months. Despite this period of notice, the contract for a replacement had been awarded to Coopers and Lybrand without competition at a cost of £149,000 for the seven months.
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| Qs 90-92
| 28. Our predecessors asked the Authority whether, with competition, they might have found a commercial manager at a lower rate. The Authority told our predecessors that ideally they would have sought competitive bids for more of the consultancy support contracts but that it had been necessary for them to pay for a consultant to replace the Commercial Manager as they did not believe they could have recruited someone for the seven months, given that they were about to sell the business.
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Q 153
C&AG's Report para 3.9
Q 11
| 29. The Authority told our predecessors that, although they believed that they had acted in the public interest in awarding the seven contracts to Coopers and Lybrand, they accepted that, with hindsight, it had been difficult to justify the award of these contracts without competition. The Authority accepted that competition was always desirable and that it would have been helpful if they had formally tested Coopers and Lybrand against other suppliers at some stage. They were not, however, convinced that the taxpayer would have achieved better value for money as a result.
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| Q 184
| 30. Our predecessors said that they were constantly faced with a relatively small number of consultancy firms who command very high fees, frequently much higher fees than they said they were going to command when they first set out their contract and that Departments used the fact that they had employed leading consultants as a defence against any accusation that they had not performed their duties properly. Our predecessors therefore asked the Treasury whether they had collected information on the total amounts of fees paid to the top five consultancy firms over the whole privatisation programme and whether the current arrangements governing the use of these consultants were satisfactory. The Treasury told our predecessors that they did not hold information in that form and that it was up to Departments to use their judgement on what was proper and good value for money.
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| C&AG's Report para 3.5(a)
| 31. Nearly all of the 24 per cent increase in sale costs compared with the March 1994 budget was because of an increase in the costs of Binder Hamlyn, the reporting accountants. Their actual costs were £709,000, compared with the Authority's budget forecast of £161,000.
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| Q 12
| 32. Our predecessors asked the Authority whether this escalation in costs had taken them by surprise. The Authority said that they had sought a fixed price bid from Binder Hamlyn to prepare a long-form report. Binder Hamlyn gave the bid on the basis that all the information they needed would be available to them. The Authority acknowledged that this had been a mistake since the information Binder Hamlyn needed had not been available and much of it had to be developed. Binder Hamlyn helped with the development of the information and as a result their work cost more than had been expected.
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| Qs 119, 120 and 187-188
| 33. Our predecessors therefore asked the Authority why they had made such a mistake in their budget. The Authority said that, when they began preparing for the sale, the Facilities Services Division had not been managed as a single unit and, with hindsight, they should have made it much clearer in the specification for the reporting accountants that the business was at a formative stage and more work than usual would be needed before the reporting accountants' report could be produced.
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| Qs 68-76 and 124-125
| 34. Our predecessors further asked the Authority the extent to which they received advice from their financial advisers, Coopers and Lybrand, on the specification for the reporting accountants. The Authority said that they received advice from Coopers and Lybrand but that the decisions on setting the budget and awarding the contract for the reporting accountants were made by the Authority. The Authority said that, although they were aware that data would have to be collected to enable the reporting accountants to do their work, this had proved more difficult than they had expected.
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C&AG's Report para 10
Q 81
| 35. Preparation for the sale of the Facilities Services Division took place simultaneously with the formation of the Division as a separate business entity. Our predecessors asked the Authority whether the problems they had encountered during the sale stemmed from trying to do these two things at once. The Authority said that ideally they should have allowed more time but they had felt that time was not available.
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| Conclusions |
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| 36. We note the Authority's argument that the advisers' costs of £2.2 million they incurred in the restructuring of their Facilities Services Division for sale should not be set against the sale proceeds. We are not convinced by this argument since the purpose of this restructuring was to put the division in a form in which it could be sold. Such costs when added to the sale costs of £3.1 million were equivalent to 44 per cent of the sale proceeds of £12 million.
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| 37. We are also concerned that the sale costs were 24 per cent higher than the Authority's March 1994 estimate and the restructuring advisory costs were 16 per cent higher. We note the Authority attribute this to lack of experience in preparing such budgets. We consider it very unsatisfactory that the Authority did not recognise their lack of experience in these matters at the time they proposed budgets and so take appropriate advice.
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| 38. We are concerned too that, contrary to our predecessors' longstanding recommendation, the Authority let seven contracts with a total value of £4.4 million without competition to their principal adviser, Coopers and Lybrand. Not only does competition generally lead to the best value for money in the appointment of advisers, it also demonstrates that appointments have been made in line with the proper conduct of public business. In this case, it would have helped to demonstrate that there was no potential conflict of interest. We note the Authority's recognition that their decision to award the seven contracts to Coopers and Lybrand without competition was difficult to justify. We share the Treasury's view that an open competition would have been desirable and we urge them to remind Departments that full and open competition should be applied in all save the most exceptional circumstances.
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| 39. We note with concern that, at the time these contracts were let, there was no requirement for the decision to award any of the contracts to Coopers and Lybrand to be approved by the Board of the Authority. We are pleased to note the changes to the Board of the Authority's financial procedures which now require Board approval for contracts with a value in excess of £1 million.
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| 40. We are concerned that the Authority underestimated the costs of Binder Hamlyn, the reporting accountants, which, at £709,000, were more than four times the Authority's budget of £161,000. We are also concerned that the Authority failed to recognise that more work would be needed before the reporting accountants' report could be produced. We note the Authority's recognition that they should have made it clearer in the specification of the work that more work than normal was likely to be necessary.
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| 41. We note the Authority's view that many of the problems that occurred in the sale arose because the Facilities Services Division was being created at the same time as it was being prepared for the sale. We agree with the Authority that they should have allowed more time for this.
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