Examination of Witnesses (Questions 260
- 279)
WEDNESDAY 28 JANUARY 1998
SIR RICHARD
MOTTRAM, KCB
260. I am sure they do.
(Sir Richard Mottram) What is interesting is that
if it was such a marvellous deal for them why were the other people
who were bidding not thinking it was an even more marvellous deal?
I do not really understand that.
261. Perhaps they were better businessmen
than the others or they happened to have the amount of money available.
(Sir Richard Mottram) May I just answer your question
about maintenance? The calculation in relation to maintenance
which one has in a sense to make is that we have swopped a 28
per cent discount on the maintenance against a requirement for
us to pay it.
262. Yes; that is right. Over the time you
would have been paying them £3 billion if it had not been
for the maintenance. That is self-evident, is it not?
(Sir Richard Mottram) Yes.
263. That is all I was asking you. I was
trying to get at the figures. That is the nature of the deal you
have. In addition to that what about these 2,300-odd freehold
houses? They were vacant possession, were they not?
(Sir Richard Mottram) Yes, they were given to
them on the basis that they could onsell them.
264. They can onsell them straightaway.
(Sir Richard Mottram) Yes.
265. The average price of these houses on
the deal overall, if we just divide the 57,000 into it, is £29,000.
If they sold those immediately or fairly immediately they would
at the £29,000, which is probably an underestimate for these
particular houses, get another £67 million in cash, assuming
they only got their money back.
(Sir Richard Mottram) I will believe your calculations.
266. That is £67 million they are getting
and there is a matter of dispute with the Treasury as to whether
or not they had a bonus of £27 million in the benefit they
had from holding on to the second tranche of their money for an
extra 12 months. It has been discussed before. Treasury cannot
prove that they did not get the benefit. I cannot prove they did.
It is at least possible. It must be 50:50 possible that they got
the benefit of it.
(Sir Richard Mottram) I would not have thought
it was 50:50 but I do not want to dispute this with you. The key
point about paying in two tranches is quite clearly that if they
had not known when they bid that that was what we were going to
ask for then we would have bestowed upon them a benefit of £27
million. But they did know. They could therefore calculate, using
all the models which they have used, which we have all used to
reach all these benchmarks, that if they paid the second tranche
as the Treasury wanted there was a £27 million benefit which
they could afford to put into their bid.
267. All I am trying to get is a picture
of the deal you have done. We are in agreement that you have entered
into a cash commitment equivalent to £3 billion over the
time for the rent and the maintenance.
(Sir Richard Mottram) I have not entered into
any commitment with Annington about the maintenance.
268. In effect they are getting the benefit
of it; it will be far higher than that because that will be at
real prices.
(Sir Richard Mottram) They are not getting the
benefit of it.
The Committee suspended from 7.00 p.m.
to 7.10 p.m. for a division in the House.
269. We established the £3 billion,
in effective terms, cash flow benefit to them either in rentals
they are receiving and maintenance they are not having to incur.
That maintenance in fact is likely to go on increasing at the
rate of inflation at least. Building costs have gone up above
the cost of inflation. During the span of this graph here, it
is quite conceivable, in fact it is more than conceivable, it
is highly likely, that the cost of the maintenance is even going
to exceed the rents you are actually receiving although you have
some provision for clawing back the maintenance you are incurring.
That is going to go on, at least in real terms, is it not?
(Sir Richard Mottram) Yes; obviously. We are required to
pay the maintenance.
270. What provision have you made for the
fact that that will be going up in real terms while their rent
is coming down in cash terms? They are on a winner to nothing.
(Sir Richard Mottram) If we take the maintenance
first, they are taking a rental stream with a set of risks which
they have valued and the rental stream is discounted for the fact
that they are not supplying the maintenance.
271. We have been through that. The maintenance
cost is going to escalate; the rent is in cash. The maintenance
is inevitably going to increase in real terms.
(Sir Richard Mottram) So is the rent very likely
going to increase in real terms.
272. What would be helpful, to save time
now, would be if you would let us have a more detailed note of
how you see each of these elements progressing over this time
span. Are you able to do that?
(Sir Richard Mottram) Yes, we could probably give
you the base case we are assuming.[19]
273. Including the maintenance cost.
(Sir Richard Mottram) Yes, we could do that. All
I would say is that we have to have constantly in mind that some
of these numbers are net present values.
274. Yes, I realise that.
(Sir Richard Mottram) We have sold the estate
for a calculation in relation to their forecast of its net present
value to them.
275. In addition to this cash flow, in addition
to this maintenance cost they do not have to incur, in addition
to the potential of at least £67 million worth of housing
they could unload already, they will still own 55,000 housing
assets.
(Sir Richard Mottram) Yes, they will have the
opportunity to deploy those we do not need and they will have
the chance of the rent for those we do need.
276. If we look at Figure 12 on page 39
that shows three possible alternatives. One is the guaranteed
surrender, one is the guaranteed payments and the other is implied
by guaranteed payments, assuming a one per cent real growth. You
can see that their benefit from realisation of assets could be
very, very substantial indeed if scenario three, the lower one,
the solid green line, were the one which became effective. Again,
taking together the cash assessments I have made, I cannot understand
why you do not accept that they had a very good deal. Let us take
you to the question of clawback. Here you said that clawback would
apply at purchase price plus 15 per cent. Is that right?
(Sir Richard Mottram) Yes, I did.
277. What is purchase price? Did you set
a price for each of those 57,000 houses?
(Sir Richard Mottram) We have an assumed value
for each of the houses in relation to each of the sites, so we
have a notion of what that house is worth should it be disposed
of and we add a margin of 15 per cent to that.
278. Is that margin real or is that at current
fair prices?
(Sir Richard Mottram) The provision allows for
adjustment for the RPI as well.
279. It is 15 per cent on top of RPI before
you get anything.
(Sir Richard Mottram) Yes.
19 Note: See Evidence, Appendix 1, page 30 (PAC 172). Back
| 
