Select Committee on Public Accounts Minutes of Evidence

APPENDIX 1

Supplementary memorandum submitted by HM Treasury in response to additional questions from the Committee

Q1: Assuming no inflation, what would be the total amount of cash paid by the Treasury to Exchequer Partnership over the lifetime of the Treasury Building PFI deal?

The Unitary Payment (UP) is set at £14.037 million per annum in March 1999 prices, to be indexed annually by the RPI. Assuming no inflation, therefore, the Treasury would pay £491.3 million over the 35 year contract term.

Q2: What assumptions have been made about inflation in the Treasury Building PFI deal?

The Base case assumption was a constant 2.5 per cent annual increase in the RPI All Items index.

Q3: Using these inflation assumptions, what would be the total amount of cash paid by the Treasury to Exchequer Partnership over the lifetime of the Treasury Building PFI deal?

£838.154 million. This equates to £169.3 million in Net Present Cost terms, discounted at 6 per cent in real terms and assuming 2.5 per cent inflation.

Q4: What would be the total amount of case paid by the Treasury to Exchequer Partnership overe the lifetime of the Treasury Building PFI deal, assuming a constant inflation rate of: (i) 2 per cent, (ii) 2.25 per cent, (iii) 2.5 per cent, (iv) 2.75 per cent, (v) 3 per cent, (vi) 4 per cent, (vii) 5 per cent?

These calculations have no bearing on the value for money assessment since the project appraisal is conducted in real terms and the real terms value of each calculation is the same as that given in the answer to Q3.

Q5: Prior to the PFI deal, how much has the Treasury paid in annual rent (notionally or otherwise) for the Treasury Building?

Q6: When the PFI deal ends, how much at current prices will the Treasury have to pay in annual rent?

At the end of the PFI deal in 2037 ownership of the building reverts to the Treasury. We then have a choice whether to negotiate a new deal with Exchequer Partnership, or another supplier, or to take responsibility for running the building ourselves once again.

Q7: What were the total annual operating costs for the Treasury Building in each of the four years prior to the PFI deal?

The Treasury Building is a Crown freehold so has not been subject to conventional rents. For the four years prior to the PFI deal a capital charge (an intra-Government transfer payment) has been payable on the Treasury Building. The Treasury has another building—Allington Towers (AT) in Victoria Street—which is a leasehold building so subject to rental payments to a landlord. The intention is to surrender the Allington Towers lease when the staff there have moved into the refurbished Treasury Building this summer. While the refurbishment of the west end of the Treasury Building is going ahead, some two thirds of our staff remain in the east end of the building while the remaining third are housed at Allington Towers. The total costs of running the two buildings are set out in the table below.

 1996-97 1997-98 1998-99 1999-00 £m £m £m £m Items including in Unitary Payment: (i)Rent/Capital Charge 4.71 4.91 4.69 6.66 (ii)Cleaning/Security/maintenance 2.1 3.03 2.62 2.21 Items not included in the Unitary Payment: Rates, Utilities' costs, copying, furniture and fittings 3.114 2.861 2.897 2.985

Q8: What are the total refurbishment costs of the Treasury Building? (please provide a breakdown and a total)

As at financial close (5 May 2000), the total prjected costs to the start of operations were:

 Funding Requirement Total Total £m % Net VAT paid/received 0.115 0.1 Construction cost 118.659 84.2 Pre-operating costs 7.578 5.4 Senior debt service reserve 4.392 3.1 Change in law reserve 2.419 1.7 Cash 0.608 0.4 Interest and fees: Mezzanine Debt 0.800 0.6 Bond (net of interest received) 6.394 4.5 Total 140.965 100

Q9: What are the total operating costs for the refurbished Treasury Building? (please provide a breakdown and a total)

The annual service costs payable to EP form part of the single Unitary Payment payable by HMT. These costs are expressed in March 1999 prices and are subject to indexation:

 £'000s Hard Services 1,504 Soft Services 1,930 Total Services 3,434 Capital Charges 10,603 Total Unitary Payment 14,037

Q10: What was the total capital sum involved in the Treasury Building PFI deal? (Please provide a breakdown into equity and the different layers of debt)

 Total Total Sources of Funding £m % Ordinary Shares 0.500 0.4 Shareholder Loan stock 6.425 4.5 Mezzanine Debt 6.250 4.4 Bond 127.790 90.7 Total 140.965 100

The equity comprises the ordinary shares and the shareholder loan stock, a total of £6.925 million, of 4.9 per cent of the total funding.

Q11: What were the gross proceeds from the Exchequer Partnership bond issue?

£127.790 million.

Q12: What were the net proceeds from the Exchequer Partnership bond issue?

£123.639 million.

Q13: What were the total fees paid to banks and to professional advisers in relation to the Treasury Building PFI deal? (please provide a breakdown showing each amount and the payers (ie HM Treasury, Exchequer Partnership etc) and the payees—and also an overall total)
(i)  Fees paid by EP up to and including financial close (May 2000), as shown in the financial model, were:

 £m SG Financial advice to EP 1.250 SG Mezzanine underwriting 0.100 Chesterton Property/letting advice to EP 0.900 PwC Tax and accounting advice to EP 0.100 Ashurst Morris Crisp Legal Advice to EP 0.800 C E Heath Insurance advice to EP 0.060 Marsh Bankrisk Insurance due diligence for funders 0.030 Failthfull & Gould Technical due diligence for funders 0.150 Allen & Overy Legal due diligence for funders 0.532 PKF Model Audit 0.070 Rating Agencies Bond rating costs 0.200 UBS Warburg Bond arrangement fee 0.799 Ambac Initial credit enhancement premium 1.845 Ambac Mezzanine arrangement fee 0.132 6.968

(ii)  Fees paid by HMT up to and including financial close were:

 £m GTMS Project Management and technical advice 0.462 Berwin Leighton Legal Advice 1.355 Dresdner Kleinwort Benson Financial Advice 0.645 Cecil Denny Highton Advice on Accommodation requirements 0.101 CB Hillier Parker Specialist property-related advice 0.013 Roger Preston & Partners Mechanical and Electrical Engineering Advice 0.043 Willis Corroon Insurance Advice 0.006 PricewaterhouseCoopers Accountancy Advice 0.012 2.637

Q14: Under the terms of the Treasury Building PFI deal who owns the freehold Treasury Building?

The Building remains a Crown freehold throughout the term of the deal. Exchequer Partnership plc will be granted a headlease for the whole site on completion of the refurbishment of the Treasury accommodation at the west end in the summer. They will then grant the Treasury a sub-lease for our accommodation for the 35 year operating period. Once the eastern end is refurbished, Exchequer Partnership will grant similar sub-leases to the tenants there.

Q15: Other things equal, what would have been the total net present cost of the annual unitary payments by the Treasury to Exchequer Partnership over the lifetime of the Treasury Building PFI deal if the discount rate had been: (i) 3.75 per cent, (ii) 4 per cent, (iii) 4.25 per cent, (iv) 4.50 per cent, (v) 4.75 per cent, (vi) 5 per cent?

Under current Treasury guidance to Departments on the carrying out of investment appraisals (the "Green Book") the discount rate to be used is 6 per cent in real terms. Were the guidance to be changed in the future, other parts of the methodology might also vary. So simply changing one variable, in this case the discount rate, is not valid.

Q16: Other things equal, what would have been the total amount of cash paid by the Treasury to Exchequer Partnership over the lifetime of the Treasury Building PFI deal if the discount rate had been: (i) 3.50 per cent, (ii) 3.75 per cent, (iii) 4 per cent, (iv) 4.25 per cent, (v) 4.50 per cent, (vi) 4.75 per cent, (vii) 5 per cent?

Q17: At the time of issuing the bond, what would have been the total extra cash paid by the Treasury to Exchequer Partnership over the lifetime of the Treasury Building PFI deal for every change of 0.1 per cent in the bond spread?

The total additional payment over the lifetime of the project would have been £6.568 million per 0.1 per cent increase in the bond spread. The NPC impact of 0.1 per cent increase is £1.329 million (discounted at 6 per cent real), and the annual increase in the Unitary Payment would have been £110,000 as at 31 March 1999.

Q18: By how much would the bond spread have had to widen before the project had become unviable?

The contract with EP provided for a cap of £14.2 million on the Unitary Payment (ie 13.981 at the time the contract was signed in August 1999) if funding was subsequently secured through the bond route. If the cap had been exceeded, then it would have been for the Treasury to decide whether a new, higher figure would still have provided good VFM.

HM Treasury

February 2002