Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 20-39)

HOME OFFICE, BOUYGUES BÂTIMENT INTERNATIONAL AND HSBC INFRASTRUCTURE LTD

WEDNESDAY 12 NOVEMBER 2003

  Q20  Chairman: How much did you pay for it?

  Mr Gieve: I am told it was £2 million.

  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 to do.

  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 still possible.

  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.[2]

  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 matter?

  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 sector version.

  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 diligence—and I have asked for this before and I have not received the information yet—which 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.[3]

  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?[4] 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 people in.[5]



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