Examination of Witnesses (Questions 100
- 119)
WEDNESDAY 10 DECEMBER 1997
MR R SPENCE,
MR R WARBURTON,
and MR E TRACEY
MR S QUINN
100. Is there no possibility that anybody else could
have had access to your work and in particular the background
work on that valuation?
(Mr Tracey) No possibility at all.
101. Why does that valuation rest in your
files still rather than in the Department's files?
(Mr Tracey) I believe it is in the Department's
files, is it not?
102. I thought we were told in answer to
questions earlier on--
(Mr Tracey) That was not that. That was some reports
in relation to capital expenditure.
103. I am sorry. I may have misunderstood
that. The valuation is in your Department.
(Mr Spence) It is a report which we have and the
Department of Finance have it as well.
104. Why did you ask Touche Ross to carry
out the valuation when Hambros had carried out a valuation in
1991? What process was arrived at? Was there a bidding process
to ask Touche Ross to carry out the valuation process?
(Mr Spence) Touche Ross were carrying out the
valuation process as part of a very large programme of advice
which they were giving to us on the whole privatisation process.
They were appointed to do that job after a competitive competition
to appoint advisers to help us with the airport privatisation.
105. Was Hambros asked to bid for that particular
work?
(Mr Spence) I do not know.
(Mr Warburton) Yes, and they declined.
106. Why was it that the valuation was so
wide-£13.5 million? On any professional valuation, a valuation
which varied by 50 per cent is almost not worth carrying out.
(Mr Tracey) That is not true. The valuation range
flowed from the variety of valuation methods which we used. Once
we had decided to look at a variety of valuation methods, it was
a matter of reporting the valuations that they produced.
107. I see that on page 49 but presumably
when you had come up with these various different methods of valuation,
you did indicate to the Department which method of valuation you
considered to be more reliable and therefore what the realistic
value was.
(Mr Tracey) In the report we gave all of the valuations
[12]
and in particular showed that the comparable transactions basis
had a range of £34 million to £38 million subject to
the various special factors of Northern Ireland, referred to in
this report, and then the external finance method had a £25
million to £35 million range.
108. I see that on page 49 but did you indicate
to the Department which method of valuation and therefore what
you considered to be the most sound basis for carrying out a valuation
on this project?
(Mr Tracey) The discussion was held subsequently
in the meeting referred to on 11 May. We thought both methods
were appropriate and indeed the clarification was sought in the
11 May meeting as to which was the more appropriate measure of
what could be achievable as opposed to what would a finance based
bid contribute which was the external finance bid. That range
was narrowed which was essentially showing an estimate of the
effect of the special factors on the comparable transactions range.
109. I find it extraordinary that a professional
firm like yours would want to come up with a range of valuations
of that range. How many different airports have you in fact valued
as a firm? Where did you get your comparables from?
(Mr Tracey) The only real comparable was in fact
the East Midlands purchase.
110. That was the only comparable you could
find.
(Mr Tracey) Indeed. At that stage that was the
only reasonable comparison. We thought about BAA, which we knew
quite a lot about as our firm are the auditors to BAA, but really
that was not an appropriate comparison at all. East Midlands was
the only comparison; indeed our instructions had told us to look
at that in the 3 February meeting.
Mr Hope
111. I am trying to work out whether this
is straight incompetence or a conspiracy. It seems that the consultants
appear to have done very nicely out of all of this and so have
the management buy-out people but the taxpayer seems to have lost
quite substantially. It seems curious to me that the Department
seemed to take guidance from the Treasury when it appeared to
be against the taxpayers' interest but then ignored that guidance
when it was in the taxpayers' interest. Can you explain why?
(Mr Spence) We abided by the Treasury guidance
both in relation to clawback arrangements and in relation to our
control over capital expenditure.
112. It specifically says here that you
did not. Paragraph 5.19 says quite clearly that you do not accept
the view that Treasury guidance was set aside. Obviously the Treasury
does think you did. Can you explain the discrepancy in the views
between yourself and the Treasury?
(Mr Spence) In paragraph 5.22 we express our view
that we did not set aside the Treasury guidance and we did comply
with it. We will produce a paper for the Committee which will
list the schemes which were approved during this period and why
they are consistent with the Treasury guidance.
113. Are you not surprised that we are told
that 12 new capital projects costing £5.7 million all came
in under less than £1 million? Paragraph 5.19. Later on we
are told that disaggregating the expenditure has circumvented
the £1 million approval limit which had been previously relaxed
in the first place, meaning that you still had total lack of control,
not even spotting when you were duped, which was quite obvious.
(Mr Spence) We are confusing ourselves here. The
£1 million ceiling refers to projects for which we would
have required Department of Finance approval specifically. In
the case of the £6 million covering 12 projects, all those
projects would have been properly appraised and would have been
assessed against the Treasury guidelines and whether they should
have proceeded. We have to stress that those projects were for
quite essential things in terms of safety, in terms of security
arrangements at the airport and in terms of the convenient day
to day administration and operation of the airport. These were
not additional discretionary items.
114. The flight management system cost £999,800,
£200 below the limit. Did not a warning bell sound somewhere
that somebody was playing games with the limits here?
(Mr Spence) The flight information system [13]
was the concluding part of quite a long project which had been
started before the privatisation process had been announced. This
was one of the final stages of it.
115. I appreciate you are telling me when
it happened and who was involved. I am asking whether no warning
bell sounded when you realised that a bid had come in for a disaggregated
piece of work £200 below the £1 million limit?
(Mr Spence) We did not regard that as an attempt
to avoid controls.
116. Why not when it is obvious that it
is?
(Mr Warburton) May I explain the limit? There
is a danger here of two unrelated items being discussed. The delegated
limit refers to £1 million, set at that time for all the
transport utilities. What happened then in the privatisation context
was that it was immaterial that this particular regulatory framework
was in place because we had actually set up control mechanisms
to ensure that we were aware of all capital expenditure. The £500,000
to £1 million and £1 million and above limits were immaterial.
We had a steering committee in place which had both the Treasury
and the Department of Finance on board and therefore they were
aware of every single item of those 12 particular projects.
(Mr Spence) I am sorry, I should have made that
clear. We were controlling all these projects, no matter what
size they were.
117. What I am interested in is that the
framework specifically prohibits the NIAL from spending approval
if it is below £1 million; if it is below £1 million
they can get on with it without your approval. One comes in at
£200 below that £1 million figure. It looks to me as
though they have deliberately disaggregated the finances in order
to get on without your approval. I am just surprised that was
not ringing bells.
(Mr Spence) We were checking that all these projects,
no matter what cost they were, were consistent with the Treasury
guidelines, that they were essential projects which could take
place during a period when the airport was being privatised. The
cost of them does not really matter. They were all being looked
at.
118. May I ask the Treasury whether the
Treasury still holds to its view that the guidelines were set
aside?
(Mr Quinn) That is not our view, I am afraid.
We take the view that in relation to the £5.7 million worth
of projects the Treasury guidelines were properly adhered to.
The discretionary case is the hotel but in relation to the generality
of those projects we regard the guidelines as having been appropriately
applied.
119. May I turn now to consultancy fees?
I am still confused by that and I do not feel I have very many
satisfactory answers: spend appears to be happening with little
control with the result a cost of £4 million. Paragraph 6.2
says, "DFP has requested that the £3.4 million figure
should not be disaggregated in the Report". It is interesting
that sometimes they seem to be doing it and sometimes they do
not appear to be doing it when again it is either in the taxpayers'
interests or not. Am I right in assuming in the note which is
going to be produced that the figure will be disaggregated in
a way which will identify consultancy fees for specific pieces
of work?
(Mr Quinn) Yes, we will try to do that. [14]One
caveat, if I may, which is that I should like to consult with
my Treasury colleagues because the basis on which this request
was made was not unique to Northern Ireland. It was a reflection
of wider UK policy so I should like to consult with our Whitehall
colleagues before responding to the Committee. [15]
12 Note: See Evidence, Appendix 1, page 16 (PAC 103). Back
13 Note:
Not reported (PAC 157B) (See also Evidence, Appendix 6, page 22
(PAC 246). Back
14 Note:
See Evidence, Appendix 5, page 21 (PAC 106). Back
15 Note:
See Evidence, Appendix 2, page 17 (PAC 107). Back
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