Examination of Witnesses (Questions 20-39)|
HSBC INFRASTRUCTURE LTD
WEDNESDAY 12 NOVEMBER 2003
Q20 Chairman: How much did you pay
Mr Gieve: I am told it was £2
Q21 Chairman: The truth of it is
that having paid for it, which is not something other people have
felt it necessary to do, because interest rates were so low at
the time, it is very likely, contrary to what you said, that there
will be no refinancing gain at all. So you have paid for a pup,
have you not?
Mr Gieve: You cannot win on that.
The very strong recommendation from this Committee, I thought,
and the Treasury, was that we should aim to get 50% at least of
any refinancing gains. At the time we had done our original deal,
we were being offered 20% and therefore we had to re-open the
deal in order to get that up to 50%. We were not starting from
scratch. We paid a little for that. Yes, there is a certain cost,
but on the other hand there is a potential benefit and we thought
that having half the potential gain on balance was the right thing
Q22 Jon Trickett: Mr Racine, I understand
you are the builder, is that right? Could I ask what you felt
at the time of bidding for this were the risks in the construction
process which you were taking on? What were the risks, having
submitted your bid?
Mr Racine: On this project, as
for any PFI project, there are two levels of risk: one is to make
sure we deliver a building which is to the client's purpose, control
through the design development process and all the iterative meetings
we have with the Home Office to make sure what we design fits
with what they want and that we stick to what we offered when
we submitted our bid. The second major risk for such a project
is obviously to deliver the project on time, because it has huge
implications for the Home Office. This is critical to us. We have
done a very detailed analysis of this risk to make sure we can
deliver on time and hand over the building to the Home Office
at the time the Home Office requires the building.
Q23 Jon Trickett: I am interested
in the construction and demolition and associated risks of the
actual building project itself and the comment you made about
running to time. Any builder knows that projects can go out of
control once you get on site. How do you insure yourself against
such a risk becoming an eventuality? What do you do to prevent
such an event? Do you defray your risk on the marketplace by insuring,
or what do you do?
Mr Racine: No, we have not insured
any particular risk associated with demolition. What we did during
the bidding process, before and after the preferred bidder, was
work out some Plan Bs in case we were delayed on the demolition.
It is in fact what happened, because we were quite delayed in
the demolition of the rotundas and we were able to reorganise
the site to ensure we started the construction of the superstructure
in parallel with the completion of the demolition and we also
have other ways to make sure we can start the trades inside the
buildings earlier to compensate for any delay in demolition. Our
solutions are purely technical.
Q24 Jon Trickett: Do you use a process
of due diligence in relation to the financiers in this particular
matter? Do the financiers require you to do some kind of due diligence
in terms of the timing so that things do not slip too badly?
Mr Racine: During the bidding
stage, before the deal is closed, the financiers undertake a very
detailed technical due diligence and they analyse all our programme
for demolition. In fact, at the time we closed this deal all our
method statements had been agreed, all the relations with the
environment were agreed with Westminster, so we knew exactly what
we had to do. This was done. During the works we had detailed
reporting to the Home Office on the one hand, the financiers on
the other hand, to make sure that demolition was on track.
Q25 Jon Trickett: Mr de la Monneraye,
you were nodding in agreement when I was asking about this due
diligence process, so probably you were more familiar with the
financiers' requirements in relation to this matter.
Mr de la Monneraye: Yes.
Q26 Jon Trickett: I am specifically
interested in the risk that the demolition or construction project
might have gone badly wrong.
Mr de la Monneraye: To pay the
sub-contractor Bouygues and the others I am helped by other consultants
in checking the work each month to be sure that we are on time
and we are paying the right amount of money and to ensure the
funders that completion of the building within the programme is
Q27 Jon Trickett: So you employ technical
consultants who do a due diligence process and then satisfy your
sources of finance that the building will be delivered to time.
Mr de la Monneraye: Yes; exactly.
Q28 Jon Trickett: If the builder
were to fail, you could take out an action against the people
who had given you technical advice.
Mr de la Monneraye: Exactly.
Q29 Jon Trickett: Thank you very
much for that help. This is a theme which I have constantly tried
to understand in successive meetings about PFI. I feel that the
public sector comparator is consistently manipulated so it looks
higher than the private sector bid. I believe that has happened
in this particular case. Appendix 2 refers to the cost of the
building contract and the additional costs which were added to
the public sector comparator. Members will no doubt have noticed
that £47 million of risk has been added, which by chance
happens to make the public sector comparator bid higher than the
private sector bid. May I ask Mr Gieve to confirm that actually
the two directly comparable figures are the PFI cost and the public
sector comparator cost and the public sector comparator would
have been lower had it not been for the fact that the risk element
was added to it.
Mr Gieve: Yes, that is right.
Q30 Jon Trickett: During the morning
I contacted the C&AG, because I was interested to see that
nowhere in here was there a reference to the financing costs,
which is something this Committee has been interested in. The
financing costs are often as high as or higher than the building
and other related costs. It might be as well to ask the C&AG
give us an indication. I asked two questions really. One was:
what was the interest which might have been charged if we had
used conventional public sources of finance and what was the interest
being charged on the PFI, neither of which figure appears in this
Report? Then I asked what the difference was in the financing
costs in the aggregate between the public sector model and the
private sector model. I wonder whether the C&AG could give
us the response. I know there are several caveats to the
analysis, but nevertheless I think it is instructive to get it
on the record.
Mr Airey: That is a very good
question. The figures I gave you are indeed very "caveated".
What we have here is a deal which is funded by the private sector
at about 0.7% above a gilt rate. Doing a simple calculation on
those terms and adding in the costs of fees for the private sector
finance, we have come up with a very provisional figure of a maximum
of £33 million additional cost for doing this deal as a PFI
project rather than a conventionally funded project.
Q31 Jon Trickett: My understanding
is that if we had used conventional public sector finance, it
would have been in the ballpark of just above £30 million
less than the private sector are charging us, but that is at present
day prices. We then came back to ask you what the actual costs
would be exceeded by between the two forms of funding. I think
you gave us that figure as well. I just want to get that on the
record, if you would not mind giving us that, please.
Mr Airey: Obviously the £33
million figure is a net present cost figure. We are dealing with
cash flows going out 30 years from now, so the cash figures do
not give you quite the right answer. It is a larger figure and
I do not have it easily to hand. It is about £60 million.
Q32 Jon Trickett: Yes, £60 million
was the figure I was given. It will cost more to finance through
the PFI than it will to do through the public sector comparator,
given all the equivocations which I do not want to spend time
putting down. There are certainly some equivocations. I think
it is in the order of £60 million additional cost and a £47
million figure which has been added as risk; maybe in the order
of £100 million difference. On some of the matters, as I
have just indicated by the discussions I had with the constructor,
it seemed to me that the risk could actually have been defrayed
in the way the private sector did. Had you considered that to
a Member such as myself, it might well appear that the public
sector comparator figure has been deliberately manipulated to
make it appear higher than the PFI figure in order to justify
you going out, perhaps for other reasons, to a private finance
initiative? What would your comments be to me in relation to that
Mr Gieve: It had occurred to me
that you might think that, but it is not right. We have, the Treasury
in particular, undertaken a large number of studies about the
costs of doing public sector construction projects and the figures
I have seen most recently, which were presented to this Committee,
have shown that the average overrun has been 47% in capital cost
and 17% in time. You are absolutely right that the PFI company,
because it is a company not the government, has to pay a higher
cost for finance than we do, but in return the reason for us going
into private finance is that broadly we get a greater certainty
on timing and cost overruns than we think we would with the public
Q33 Jon Trickett: I do not know how
to achieve this, but could we get someone to provide us with a
note as to whether the mechanisms on due diligenceand I
have asked for this before and I have not received the information
yetwhich the private sector financiers use to secure certainty
in the building projects might well be the same kind of tools
which would be available to the public sector, thereby securing
delivery on time and lower financing costs?
Sir John Bourn: I should be happy
to provide that note and do it in consultation with the Treasury
as well as with the Home Office in this particular case.
Q34 Jon Cruddas: May I go back to
one of the initial questions as regards staffing levels and the
projections which have been worked on at different stages of the
process? On reading the Report, as I understand it, in 1998 it
was estimated that the head count, including the Prison Service,
would be 3,200. That was revised down to 2,920. At the time, the
head count for the new building was assumed to be 2,950 and that
was revised up in the year 2000 to 3,450. So far that is correct.
Between 1998 and 2003, the head count was revised up therefore
from 2,950 to 4,900. Could you just give us a flavour of why there
was such a dramatic increase in the staff of the Home Office?
Mr Gieve: Yes. Starting with the
figure of 2,900, that was a projection at that stage which was
based on estimates by Derek Lewis when he was head of the Prison
Service, among others, that we would see a further reduction from
an actual figure of around 3,500 at the end of 1997-98 to a figure
first of 3,200 in 1998-99 and then on down to 2,900. In fact,
as far as I can find, we never got as low as 3,200. We stuck around
3,500 at 1998. What has happened since then? There have been some
changes in boundaries and we have been given some new tasks. If
I might just run through the main increases, we have created a
National Probation Service with a National Probation Directorate
in the Home Office; that accounts for about 300 of the difference.
We have created a trilateral criminal justice team working to
three ministers: the Department for Constitutional Affairs, the
Attorney General and the Home Office. It is in the Home Office
and has about 150 people in it. The prison population has gone
up and so has the headquarters, by about 150. We have taken in
the Drug Co-ordination Directorate from the Cabinet Office; that
is about 200. We have increased our numbers both on policing and
crime reduction. The Home Office has been given specific targets
to reduce crime and we did not have many people working on that,
as opposed to policing, before 1998, so we have increased those
numbers and also the numbers working on terrorism. Those are the
big increases I can give you, but there has been an expansion.
Q35 Jon Cruddas: From 1998 you were
anticipating that the building would accommodate some 2,950.
Mr Gieve: Yes.
Q36 Jon Cruddas: Then in the year
2000, the specification was renegotiated to hold an extra 500.
Figure 5, page 15, talks about planned space per person in 2 Marsham
Street, compared with other public sector benchmarks. I assume
that this table is now on the basis of the anticipated population
of 3,450. Have you got a figure for the density or person per
square metre of the initial 2,950? Would that have exceeded these
benchmarks rather than come under? What I am saying is that I
want to get into how these changes have been made in terms of
the extra 500, in terms of the density of the people in the building.
The initial objective behind the new build was a better working
environment. What are the implications here, given that the densities
here are quite significantly under the benchmarks for MoD Main
Building refurbishment and HQs in other sectors, the DTI and the
like? What do you think are the implications, for example, for
staff morale or the nature of the work environment here compared
with how you initially envisaged it?
Mr Gieve: The answer to your first
question is that it would be just over 17 square metres. So it
was anyway below the MoD and some other headquarters buildings.
Buildings like the MoD or the Treasury are very spacious buildings
and cannot but be given the historic design. The answer to that
I suppose is that they are more generous because of their historic
design. At 15.5 square metres, we think the building will still
offer a massive improvement in staff conditions compared with
the buildings we are currently occupying.
Q37 Jon Cruddas: Do you have an estimate
for what the present Home Office density would be, because it
is notoriously cramped, is it not?
Mr Gieve: We are spread over quite
a number of different buildings and they all have different square
metres. May I send you a note on that?
It is not just the space surround that matters, it is also the
lighting, the atmosphere, whether it is hot when you want it to
be hot and so on.
Q38 Jon Cruddas: Going back to the
forecast in terms of employment levels in the Home Office, the
actual growth exceeded the projected growth, or the decline you
initially touched on, in both 2000 and 2001. Do you have a fixed
projected head count for 2005?
Mr Gieve: No. We are currently
working on a strategic plan for the whole Home Office group for
five years. We hope to have that finished by the end of this year
as the basis for our spending review bid. As part of that exercise,
we are reviewing all our headquarters numbers, not just for the
Lyons' review on relocation but also to see whether we can streamline
the headquarters and shift more resource into the front line.
I do not have a fixed projection. I would expect that to come
down substantially, but I do not know by how much.
Q39 Jon Cruddas: In all of those
three periods, the actual has exceeded the forecast quite dramatically.
Do you anticipate any eventuality where you would have to get
more people inside the new build in 2005 than the 3,450, which
is 500 more than the initial estimate itself?
Mr Gieve: The capacity of the
building at 3,450 is pretty fixed by the planning consents, as
well as by the design of the building. I do not know about the
margins around this, but I do not see us shoving more and more
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