Examination of Witnesses (Questions 140
- 151)
WEDNESDAY 10 DECEMBER 1997
MR R SPENCE,
MR R WARBURTON,
and MR E TRACEY
MR S QUINN
140. I am not talking about the clawback.
We understand that you do have a number of clawbacks. The question
we are asking, coming back to the answers you have given in the
past, is that you have accepted without demurring in any way the
Treasury guidance you were given, yet you, as the Accounting Officer,
have discretion in this matter. Do you feel that you did not use
that discretion as perhaps you should have done?
(Mr Spence) Looking back at the situation in 1994,
we were right to obey the Treasury guidelines. The advice that
our advisers were giving us in terms of the impact the clawback
might have on the sale price and on the likelihood of being able
to extract money in the clawback period was still right. Those
were the circumstances in 1994 and that is why it is important
that government as a whole looks at all this in the light of experience
with this particular case where there was a quite dramatic change
in the price over two years.
141. That is right but your Department has
to do that as well and I hope that is a process which is a learning
process for all of us. There was a hint there that one of the
reasons why the price did go up so much was increased profitability.
You abandoned an independent efficiency study which could have
been carried out which would have given you some indication of
any efficiency savings which could be made after privatisation,
which would have allowed you to make a better judgement. Why was
that done?
(Mr Spence) We were satisfied on the advice of
our consultants that the airport company had squeezed out a very
large amount of inefficiencies in the period before privatisation.
They had for example managed to reduce manpower by something like
25 per cent and they had squeezed out all the inefficiencies.
Our advisers said that they did not see any room for further significant
change.
142. We have just been told by Mr Tracey
that an explanation for the increased valuation on the second
sale was that there was an increased level of profitability, a
significantly increased level of profitability. I do not know
whether you have any figures for 1995.
(Mr Spence) Mr Tracey can keep me right in this
but some of the increased profitability was because the privatised
airport was able to attract more business and was able to persuade
people going through the airport to spend more money in the shops
and these are two factors which increased profitability in the
period after privatisation.
143. Would the opportunities which were
available under privatisation not have been something which would
have been encapsulated within an efficiency report? I know that
it is not directly associated but would that have been something
you would have entirely set aside in an efficiency report?
(Mr Tracey) All of our concerns at the time about
uncertainty were downside uncertainties. We were very concerned
about things like British Airways pulling out, shift of troop
movements to Belfast City Airport. Those were the circumstances
at the time. Clearly had there been significant upward uncertainty,
you are correct absolutely, that would have been taken into account.
144. It does seem to me that the advice
you have been giving all the way through here has been less than
100 per cent and therefore, coming to an issue which others have
raised about professional advisers' costs, do you not think that
it would have been sensible to have put a limit, a fixed charge,
on those advisers' fees rather than just allowing them to charge
an hourly rate which effectively did not cap it in any way?
(Mr Spence) This is a point which the Audit Office
suggest, but we were being guided by the experience of other privatisation
exercises and were guided by Treasury and DFP advice on this.
The idea of trying to break up the consultancy advice into a number
of self-contained exercises, each with its own terms of reference
and each with its own budget, would have been very difficult in
the circumstances because there were scores of separate exercises
going on here which overlapped, which had to be carried out simultaneously.
It would have been very difficult to split the whole process up
into self-contained exercises like that each with its own budget.
Our experience is that if we had done that we would have ended
up paying more for consultancy advice rather than the figure we
paid here. We had arrangements to control, to monitor the expenditure
on consultancy fees and we had our own mechanisms for checking
any expenditure which we thought was doubtful.
145. From memory, the Northern Ireland Audit
Office suggested that they spent £900,000 over the indicative
figures for the overall sale value.
(Mr Dowdall) Yes; that is right.
146. Did you not keep that sort of overall
tally that you should be keeping the expenditure within that sort
of percentage range?
(Mr Spence) Yes.
147. And when you went over that did alarm
bells not ring?
(Mr Spence) Yes, indeed. However, do not forget
that that original figure of £2.5 million was based on a
very shaky foundation. It was not a proper scientific estimate.
It was looking at the experience of other privatisation exercises
which suggest that a figure of about 10 per cent of the proceeds
would be the amount of money you would expect to spend. As money
was spent we were monitoring it and at appropriate stages we talked
to the Department of Finance about whether it was reasonable to
increase our budget for those costs. They agreed that it was.
Chairman
148. May I ask a few questions before we
finish? I do not want to give an unfair judgement on you. Were
any bidders excluded for policy reasons or any other reasons from
this process? I am not going to ask you to name them.
(Mr Warburton) Some businesses excluded themselves,
but we did not at the time exclude anyone.
149. May I talk for a second about the tactics
of negotiating clawback arrangements? The normal way of dealing
with this is to look very firmly at the point you raised which
is the motivation of the principal negotiator on the other side
and to assess whether or not the clawback would impinge on his
returns. In other words, if you set a clawback at a level after
he has already made, let us say, £6 million per person, it
is unlikely to impinge on his negotiating enthusiasm, or even
after he has made £2 million, given the investment is £50,000.
Was any calculation done at the time of reviewing clawback as
to what the returns would be to the principal negotiators in the
MEBO on the basis of a range of assumptions, including hopefully
ones that actually transpired and at what point it would be considered
that a clawback would not take away their enthusiasm for the deal?
(Mr Tracey) I am not aware that was done.
(Mr Warburton) The answer is no, we did not do
that calculation in those terms.
150. You made the presumption that the clawback
arrangement, what is known as a top-slicing clawback arrangement,
would take away the interest of the negotiators in this without
actually calculating the effect. Is that true?
(Mr Spence) We have a very specific example here
of what we tried to do. We tried initially to have a strategic
premium clawback in relation to any future amalgamation between
Belfast City Airport and Belfast International Airport. Our original
thought was to have a clawback arrangement of £15 million
if that eventuality occurred. The bidders were so horrified by
this that they could not live with that level of clawback in that
circumstance. We had to reduce that from £15 million to £5
million. That was an example of how they would have reacted to
a clawback suggestion.
Chairman: I would think horror is
a rather easy emotion to precipitate in a negotiation, if you
will forgive me for saying so. I should like you to think about
the question I have just put to you-it is a very straightforward
way of assessing the effect on the negotiating position of a top-sliced
clawback arrangement, very straightforward-and tell me for sure.
It sounds as though you did not do it, but I should like that
to be one of the points in the notes you return to us at the end.
[16]You
have three notes to send to us: that; the one on the facts of
the capital programme; [17]and
a detailed note on fees. [18]This
has been a briefer than usual hearing. I am afraid the prima facie
position is that this is an example which gives a good policy
a bad name. Unusually I am going to say to you that when you send
us those notes, if you feel there is anything that has been misunderstood
by the Committee you may incorporate that in. I am not going to
give you very much time to do that, but you may incorporate that
if you feel, because of time constraints, we have done that. Otherwise,
thank you for coming, thank you for giving your evidence; it has
been a long way to come.
Mr Wardle
151. On a point of order, if I might. I
get the impression that a number of people in the audience who
have been listening very carefully are in fact officials. Would
it be possible for the Committee to know how many officials from
the Northern Ireland Office, both from London and from Northern
Ireland itself, have attended this meeting? There are nine officials
listed on our piece of paper for the two sessions. Would it be
possible to get the answer?
(Mr Spence) Besides Mr Warburton and myself, there
are two other officials from the Department of the Environment
supporting us; four officials from DOE.
(Mr Dowdall) A number of my staff are present.
We were keen to get a group over to see the new Committee at work.
Chairman: I hope we have not given
them indigestion.
16 Note: See Evidence, Appendix 3, page 17 (PAC 104). Back
17 Note:
See Evidence, Appendix 4, page 18 (PAC 105). Back
18 Not
reported. (PAC 106). Back
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