Examination of Witnesses (Questions 1
- 19)
WEDNESDAY 10 DECEMBER 1997
MR R SPENCE,
MR R WARBURTON,
and MR E TRACEY
MR S QUINN
Chairman
1. Today we are hearing evidence on the
privatisation of Belfast International Airport. I welcome Mr Spence.
Perhaps you would introduce your colleagues to us for the benefit
of the Committee.
(Mr Warburton) My name is Richie Warburton. I
am presently Director in the Belfast Regeneration Office of the
Department and formerly an Assistant Secretary who led the team
on the privatisation of the airport.
(Mr Tracey) I am Eric Tracey, Partner in Deloitte
& Touche, which is the name which Touche Ross is known as
in this report. I was involved in our team working for the Department
throughout the process.
2. I am going to start the questioning with
paragraph 2.13 in the NIAO report. We see from the paragraph that
the MEBO bid fell by over £6 million during negotiations.
Why did this happen and were you satisfied with the performance
of your negotiating team?
(Mr Spence) The report itself deals with some
of the reasons. The original bid from the MEBO was in a range
of £34 to £39 million. They then sought to narrow that
bid if they were given exclusive negotiating rights and they sought
to narrow it to £37.5 million to £39 million. As the
report shows, there were probably three main reasons why the gap
reduced. The first one was the size of the cash strip, where we
expected £15.15 million instead of the figure which the MEBO
had been assuming. That explains £2.25 million of the reduction.
The second reason was the tax liabilities, where the MEBO team
were unclear about the tax liability for the 1993-94 year and
the reality was that was to be paid by the purchaser. That explains
another £1.7 million. The third factor was probably the environmental
risks where the MEBO team reduced their bid by £1 million
because we were unwilling to give them a warranty to cover future
expenditure arising from environmental risks. That closes most
of the gap. There is a difference left but if you regard the MEBO's
bottom line as £37.5 million rather than the top figure of
£39 million those differences explain the gap and there is
not one. Those three factors explain the closing of the gap from
£37.5 million to the figure which they actually bid.
3. That rather reinforces my next question.
Paragraph 3.23. The Committee of Public Accounts has consistently
emphasised the importance of proper valuations before public assets
are sold. In this case, the valuation would appear to have been
badly handled. It is clear from paragraph 3.23 that many of the
problems associated with the valuation could have been avoided
if proper terms of reference had been established at the outset.
Why was that not done?
(Mr Spence) The valuation exercise carried out
by Touche Ross was part of a continuing process in which they
were involved for some months if not years. The valuation work
which they carried out was part of that process. There was no
doubt in our minds or in their minds what information we expected
from them. The problem about the valuation exercise was first
of all that it came later than we would ideally have liked; that
was due to Touche Ross's need to have the most up-to-date information
about the previous financial year, to have up-to-date information
about various changes in the potential income and expenditure
of the Northern Ireland Airports Limited. Those were the reasons
why the valuation came quite late in the process. Having said
that the valuation range which they produced and the narrowing
of that range and the subsequent discussions with them turned
out to be a pretty valid guide to us. It coincided quite closely
with a valuation which the Treasury had done on an internal basis.
We were confident that this was the right sort of range of figures.
At the end of the day the real test was what the bidders were
willing to bid for the airport. Though the valuation is valuable,
it is not the absolute key to the right value of the airport:
it is the market which will determine for us the right value.
4. Others may want to question you rather
more on that. We can elaborate that at some length, but I will
move on. We are told in paragraph 4.7 that the gains from the
onward sale were very substantial and that a clawback liability
of 20 per cent on super profits would have yielded additional
proceeds of around £11.6 million. Would you accept that there
were uncertainties about the value of the airport, particularly
in view of what you have just said, and one of the lessons of
this case is that a clawback arrangement would have been sensible?
(Mr Spence) There were no uncertainties about
the value of the airport. The market produced the right price
at that time. The question is whether a clawback arrangement would
have been appropriate in this case. There are three elements to
the clawback. First, should there have been clawback on the sale
of the main business? There was no clawback on that. Another area
of clawback was in the eventuality of a merger between Northern
Ireland Airports and its main competitor Belfast City Airport
and there was a clawback arrangement there. The other area where
we considered a clawback was in the sale of the surplus land attached
to the airport. We did introduce a ten-year clawback there and
that was the right judgement because it is the uncertainty about
the development potential of that land which holds out the most
realistic prospect of getting some money back. The recent decision
by the new owners to apply for planning permission for a vast
development which they claim will create up to 15,000 jobs at
the airport demonstrates that we were right to have a clawback
in relation to the development potential of the land. In terms
of a clawback on the core business, we did not have a clawback
because we were acting in accordance with the Treasury guidelines
on this. We checked on the Treasury view of whether there should
be clawback and the advice was firmly no. Our own judgement is
that that was right; that was sound advice. If we had had a clawback
arrangement, we think it would have depressed the selling price.
The experience with the clawback we did introduce in terms of
the merger between Northern Ireland Airports and Belfast City
Airport showed that the introduction of a clawback even of that
nature would have depressed the price. We do not know what effect
the clawback would have had on the attitude of the MEBO. The Audit
Office report suggests that if there had been a clawback over
the first three years to eat into super profits, that would have
produced £11.6 million. What we do not know is how the MEBO
would have reacted to that situation. Common sense suggests that
they would have thought very carefully about selling within the
three years and they could have readily avoided clawback of that
nature by delaying disposal until three years and one day. Our
decision not to have a clawback arrangement on the sale of the
main business was not only correct in terms of the Treasury guidelines
which we were advised to follow, but it was actually right in
terms of the impact which it might have had.
5. I will remind you that of course you
are the Accounting Officer and responsible for making the judgement
on this matter, Treasury guidelines notwithstanding.
(Mr Spence) Yes.
6. This is an arithmetic calculation here,
as you would no doubt be the first to point out. It is not beyond
the wit of man to design clawback arrangements which are not susceptible
to horizons and windows. This is very common in the outside world.
Are you suggesting that a clawback arrangement which would deliver
something of this order would have reduced the initial price by
more than £11 million?
(Mr Spence) We do not know the answer to that.
It is obviously one of the points which the Government and the
Department of Finance and Personnel and Treasury generally will
want to look at in the light of what this Committee decides.
7. Can you tell me how much money the managers
in the MEBO made from this deal?
(Mr Spence) No, I do not have that information.
It may be that other people in Northern Ireland may have seen
the press speculation about the profits they made but the Department
does not have that information, nor would it have the authority
to obtain it.
8. Comptroller and Auditor General, could
you give us any guidance on this?
(Mr Dowdall) We do not have audited figures and
our sources are the same as the Department's. However, we do understand
that the three main directors in this deal invested £50,000
cash each and on selling the airport received £6 million
each.
9. That rather introduces some doubt into
the idea that they would not have gone ahead under slightly tougher
conditions. Would the Treasury Officer of Accounts agree that
one of the lessons of this exercise is that the Treasury guidance
on clawback needs to be looked at?
(Mr Quinn) Yes, I would. Our belief is that in
the state of knowledge at the time on the basis of experience
of privatisations then available, the decision and the policy
was reasonable. However, Government is bound to take cognizance
of the findings of this report and whatever the Committee has
to say subsequently. I cannot commit the Treasury to any particular
course of action on receipt of your findings.
10. We see from paragraph 5.1 that Treasury
gave you clear guidance on how you should handle investment proposals
from the airport in the period leading up to the sale. The guidance
stated that projects of a discretionary nature should not be undertaken
unless you were able to show this Committee-that is a notable
point; it is not a common piece of guidance-that the investment
had increased the sale proceeds significantly. It would seem that
this guidance was contravened and the taxpayer lost at least £4
million. Why was the guidance not followed in this case?
(Mr Spence) We would argue, with the exception
of one special case, the hotel, which you might want to deal with
separately, that we did in fact follow the guidance and that there
were examples of expenditure which you could regard as discretionary
like the proposal to have a major new check-in facility which
did not go ahead. We would regard the other areas of expenditure
which did go ahead as essential. From the date of the decision
to privatise the airport, expenditure of around £6 million
went ahead. We are satisfied that expenditure was either finishing
off a project which had been agreed before the privatisation date,
or was in relation to expenditure which was essential for the
proper management of the airport and to meet security and safety
considerations. All the projects I am talking about were checked
by Touche Ross on our behalf against the Treasury guidelines.
We were satisfied that the expenditure after the date of privatisation
was consistent with the Treasury guidelines.
11. I have not seen any documentary assessment
from Touche Ross on this matter. Does it exist?
(Mr Spence) Yes, it exists in Touche Ross's files.
[1]Some
of the information is not recorded on the Department's files because
at that stage Touche Ross were acting on our behalf on the examination
of these projects.
12. Normally speaking most commercial practice
is that when an assessment is done it becomes the property of
the person who pays for the assessment. Why is it not resting
on your file?
(Mr Spence) While this exercise was going on there
was daily contact between all the different interests concerned
and project groups and working parties dealing with different
aspects of the privatisation process. This resulted in some papers
being held in the Department and some in Touche Ross's control.
In this case their assessments of whether the projects met the
Treasury guidelines were held on their files.
13. Since it looks like this might have
cost the taxpayer £4 million if you are wrong in the assessment
you have given to us now, do you not think it would have been
reasonable for us to have access to that information and to hold
it on your files in order to enable that to happen?
(Mr Spence) We could provide the Committee with
the paper setting out the projects which were cleared during this
period and explaining why they were within the Treasury guidelines
and that would draw on the information we have on our own files
plus the information in Touche Ross's possession. [2]
14. The wording is that projects should
not be undertaken unless you were able to show this Committee
that the investment had increased the sale proceeds significantly.
(Mr Spence) That is in relation to discretionary
expenditure. We are saying that no expenditure of that nature
was allowed to proceed in the period. The expenditure which took
place after the decision to privatise the airport was, in our
judgement and Touche Ross's judgement, essential to the operations
of the airport.
Chairman: I have to say to you that
I think the NIAO and this Committee should have access to the
original papers [3]
explaining why it was thought that this was the case.
Mr Williams
15. May I ask the Touche Ross representative
whether this was a charitable venture? Did you do this for nothing
for the Department or did you get your costs covered?
(Mr Tracey) We charged fees for our work.
16. You did not make a loss over it.
(Mr Tracey) We did not make a loss.
17. Why is the report your property not
the Government's property?
(Mr Tracey) I am not sure that is what was said.
18. In that case, if it is not the property
of Touche Ross, they are just holding it, why can we not have
the original documents?
(Mr Spence) I have offered to make available to
the Committee--
19. You offered us information extracted:
we want the actual document. Are you suggesting that a Department
of State is going to refuse to supply it to the Committee of Public
Accounts?
(Mr Spence) We would obviously make available
to the Committee documents which are in our actual possession.
There is some work which was carried out by Touche Ross which
is in their possession.
1 Note: Not reported (PAC 157B) (See also Evidence,
Appendix 6, page 22, (PAC 246). Back
2 Note:
Not reported (PAC 157B) (See also Evidence, Appendix 6, page 22
(PAC 246). Back
3 Note:
Not reported (PAC 157B) (See also Evidence, Appendix 6, page 22
(PAC 246). Back
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