Supplementary memorandum from HM Treasury
ANALYSIS OF
THE FINANCIAL
ASPECTS OF
THE REFURBISHMENT
OF THE
TREASURY BUILDING
INTRODUCTION AND
SUMMARY
1. The Committee has asked for a full analysis
of the PFI deal to refurbish the Treasury's main building, as
specified in Q108 of the evidence given by Treasury officials
on 11 May.
2. The annual Unitary Payment for
the provision of serviced accommodation in a refurbished building
was finally settled at £14.037 million per annum at March
1999 prices. This sum will be uprated annually in line with the
RPI.
The Net present Value of the EP bid amounted
to £169.348 million, discounted at 6 per cent in real terms,
on the assumption of an annual RPI increase of 2.5 per cent throughout
the life of the contract. This is over £20 million cheaper
than the Net Present Value of the Public Sector Comparator.
The construction costs to EP implicit
in their bid were calculated to be £90.218 million. This
was £6.2 million less than Exchequer Partnership's preferred
option put forward in 1996, and £4.7 million less than their
alternative.
The key figures are summarised in the following
table:
COMPARISON OF COSTS (ALL AT 31 MARCH 1999
PRICES)
| Unitary Payment | Agreed final price £14.037m pa
|
| Net Present Value | EP BID
£169.348m
| Public Sector Comparator
£189.810m
|
| | Exchequer Partnership bids
|
| Construction Costs | 1996
| May 1999 Bid |
| | Scheme A
| Scheme B |
|
| | £94.900m
| £96.457m | £90.218m
|
BACKGROUND
3. Exchequer Partnership plc (EP) were appointed in September
1996 to redevelop the Treasury building under the PFI. Negotiations
on EP's bid were suspended in July 1997 because incoming Ministers
wished to take stock. Ministers authorised the resumption of negotiations
with EP in October 1998, and on 27 July 1999 informed Parliament
that they had approved plans for the refurbishment. Details of
the 1996 and 1999 design schemes are set out in Annex A. Work
will start on site in July 2000 and be complete in August 2002.
The Treasury will not occupy the whole building, and it is EP's
risk to let the rest of the space to other public sector bodies.
4. Extensive structural and remedial work is required
to preserve and improve this important and historic Grade II*
listed building and more flexible and efficient use needs to be
made of the space within the building. This will be its first
major refurbishment in almost 100 years and will provide modern,
efficient office accommodation to meet the Treasury's business
needs. The project is designed to secure value for money for the
taxpayer, which we believe the finally agreed bid does.
5. In return for refurbished and fully serviced accommodation
to standards specified in advance, the Treasury will make an annual
payment to EP starting in August 2002. The terms of this annual
unitary payment were announced to Parliament on 5 May 2000. The
contract is structured to incentivise EP to deliver the required
standards and EP is responsible for ensuring the building operates
to those standards.
ANALYSIS
6. No single comparison encompassed all the factors which
needed to be considered, so in order to analyse the bid, it was
compared with:
— a Public Sector Comparator (PSC). This
showed a saving of around £20 million on the Net Present
Value, or around £2 million on construction costs (see Annex
B).
— EP's previous bids. The final bid is £6.2
million lower than EP's preferred option (Scheme B) and £4.7
million lower than their alternative (Scheme A) when each was
uprated in line with inflation.
— Current market construction and services costs.
These were considered competitive.
— Market rents. EP's bid was broadly inline
with market rents.
CURRENT MARKET
CONSTRUCTION AND
SERVICE COSTS
7. Our project managers, Gardiner and Theobald Management
Services (GTMS), compared the construction and operating costs
of EP's bid with market norms and concluded that the cost represented
a competitive price.
MARKET RENTALS
8. To provide a broad benchmark, EP's bid was also compared
with market rents, based on advice from our property consultants,
CB Hillier Parker. This comparison was inevitably artificial,
for several reasons. First, the amount of space the Treasury required
would not necessarily be available in the same part of London.
Second, because the building is old and in need of major refurbishment,
it would not be comparing like with like. Finally, this comparison
could only serve as a benchmark because if the Treasury had moved
elsewhere in London, the Government would still be left with the
considerable costs of maintaining and ultimately redeveloping
GOGGS. The analysis showed EP's proposals to be broadly in line
with market rents.
FUNDING COMPETITION
9. The project represented a first for PFI projects as
it separated out the negotiations over the cost and design of
the construction from the competition from funding. It is estimated
that this process saved just under a £1 million on the Unitary
Payment.
CONCLUSION
10. Overall, the Treasury concluded in June 1999 that
EP's bid was competitively priced and represented good value for
money, and the funding competition further reduced the price.
As a result, the outcome is cheaper than the 1996 scheme and cheaper
than the Public Sector Comparator.
The funding competition has also had wider benefits in persuading
a significant proportion of the funding market to accept the Treasury
Taskforce Standardisation. This has already had a beneficial impact
on other Government PFI transactions.
July 2000
| 
