Select Committee on Treasury Minutes of Evidence

Supplementary memorandum from HM Treasury



  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:


Unitary Payment
Agreed final price £14.037m pa
Net Present Value
Public Sector Comparator
Exchequer Partnership bids
Construction Costs
May 1999 Bid
Scheme A
Scheme B


  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.


  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.


  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.


  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.


  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.


  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

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