65. The Treasury building, which is on the corner
of Parliament and Great George Streets in Westminster, was designed
as a Government office, built between 1898 and 1917 and is a Grade
II* listed building. The Treasury did not move in until 1940 when
its old building was damaged by bombs. The Sub-committee visited
the building on 12 April 2000 and was left in no doubt of the
need for action. The problems seen during this visit are described
in the Treasury memorandum of 14 April 2000 where it states that
"the ... building remains largely as it was when built ...
and is inflexible and inefficient ... Extensive structural and
remedial work is needed to preserve and improve this historic
building ... there are problems with water penetration in the
basement areas, and the electrical and safety systems need replacing".
66. Mr Kenneth Clarke MP, the then Chancellor of
the Exchequer, announced on 24 January 1995 that the Treasury
building would be redeveloped under the Private Finance Initiative
(PFI) and on 13 September 1996 announced that Exchequer Partnership
plc had been appointed to undertake the redevelopment. Treasury
officials gave oral evidence to the Treasury Committee on the
PFI project on 25 November 1996, before which details were given
of the bidding process.
It was stated that 41 expressions of interest to redevelop had
been received, from which eight candidates were interviewed. The
best four were then selected but two of these dropped out. The
Treasury expected bids from the remaining two but only one, from
Exchequer Partnership plc, was received within the stipulated
time. During the evidence session,
the then Permanent Secretary, Sir Terence Burns, was asked how
only one final bid could give good value for money for the taxpayer.
He explained that discussions had been held with both of the organisations
that were left in the competition and both went to the stage of
best and final offer. He said that they had consulted with legal
advisers before deciding that the second bid was not compliant
within the time limit. Sir Terence was questioned further on the
normal presumption in PFI contracts that there will be competitive
He replied that it was competitively tendered right up to the
end and that the bidding party was unaware, when its bid was made,
that the other party would drop out.
67. Exchequer Partnership put forward two options.
Both involved the demolition and rebuilding of the core of the
St James' Park end of the building to provide offices for the
Treasury. Scheme A envisaged the remainder of the building being
used as offices while Scheme B envisaged new residential and hotel
provision in those parts not taken by the Treasury. On 16 January
1997 the Treasury announced that commercial heads of terms of
agreement had been signed with Exchequer Partnership on the basis
of Scheme B. During the redevelopment it was planned that there
would be arrangements to decant staff to Vauxhall.
68. On 31 July 1997, the Paymaster General in the
new Government announced that the Chancellor of the Exchequer
had decided to terminate negotiations with Exchequer Partnership.
In a letter to the Chairman of the Treasury Committee, the
Paymaster General stated that, at a time when all Departments
were undertaking comprehensive spending reviews and were subject
to extremely tight expenditure controls, the Chancellor was unwilling
to embark on a major construction project of this scale. He went
on to say that while the project represented good value for money
in its own terms, given wider considerations the deal should not
69. In July 1999, the Chief Secretary to the Treasury
announced that plans had been approved for the refurbishment of
the Treasury building under the terms of a new PFI deal with Exchequer
Under this scheme the Treasury would remain at the Whitehall end
of the building while its new accommodation at the St James's
Park end was refurbished. The move is scheduled to take place
in 2002, after which the Treasury will occupy just under half
of the building. Exchequer Partnership would be responsible for
letting the non-Treasury space to another public sector tenant.
On 4 May 2000, it was announced that the deal had reached financial
close and work began in summer 2000. In oral evidence to the Sub-committee
on 14 December 2000, Sir Andrew Turnbull said that construction
was "pretty close to schedule".
70. In oral evidence on 11 May 2000, Sir Andrew Turnbull
explained how the original scheme had been abandoned, and a new,
if not entirely dissimilar, scheme had been arrived at.
He told the Sub-committee that the agreement in 1996-97 involved
a choice of partner and a basic scheme followed by negotiations.
When the agreement of January 1997 was put to incoming Ministers
they raised a number of questions, particularly about the desirability
of private sector tenants renting the Parliament Street end of
the building, elements of the scheme which were "a bit gold
plated", and the mechanism for decanting staff which raised
the prospect of Ministers moving to Vauxhall. When it was realised
that refurbishment was essential, officials were asked to go back
to Exchequer Partnership and negotiate certain modifications to
the original deal. The arrangements for decanting staff were changed
and the new deal specified that the non-Treasury part of the building
had to be offered to public sector clients before it could be
offered to the private sector.
71. We also heard evidence from Mr Clarke, who was
Chancellor when the original deal was struck.
He thought that the real problems were the arrangements for decanting
staff, because a move to Vauxhall was not very popular with the
department, and "a little sensitivity about sharing with
a private sector tenant". The present Chancellor had been
persuaded to scrap the whole thing "whereupon," he continued,
"they found the water rising in the cellar and they have
got to do something about it".
72. The Treasury will pay Exchequer Partnership £14.037
million per annum, at March 1999 prices, the sum to be up-rated
annually in line with inflation, for 35 years for its refurbished
and fully serviced accommodation.
The department pointed out that it was difficult to compare the
cost of the present scheme with its predecessor because the new
scheme was a refurbishment rather than a more extensive redevelopment
and did not rely on a private sector tenant or involve complex
arrangements for decanting staff.
Nevertheless, the Treasury told us that, in terms of construction
costs, the present deal was cheaper than either the previous deal
or the rejected Scheme A and the discounted cost of the new deal
is significantly lower than the Public Sector Comparator (PSC).
The PSC was prepared independently of the bid under the supervision
of a senior Treasury economist, although it could not be sufficiently
detailed to provide a true comparison with a PFI option. A PSC
was prepared in 1996, although the guidance at the time did not
insist upon a PSC for projects which involved no public money
or which would not have gone ahead other than as PFI projects,
but was only used after Exchequer Partnership became the sole
bidder for the contract.
73. As we indicate above, there can be no doubt that
action was required both to improve the Treasury's working environment
and to remedy serious defects in the Treasury building. It is
surprising that the arrangements for the tendering process ended
with only one viable bid on the table. It was, of course, to be
expected that any new Government would wish to examine a project
of this kind inherited from a previous administration but the
main reasons for the abandonment of the original project were
a reluctance to see the private sector move into one half of the
building and for Ministers to move out to Vauxhall while the work
was undertaken. When it became clear that action had to be taken,
it was decided simply to revise the original scheme with the same
private sector partner as before without ensuring that a proper
tendering process was carried out, although we note the innovative
nature of the deal now in place.
The Treasury had an excellent opportunity in the refurbishment
of its own building to set an example of best practice in the
development of PFI projects. We invite the Treasury to take this
opportunity to explain why it revived a version of the original
PFI deal with the original private sector partner without a fresh
tendering process and to report on the progress of the project.