Examination of Witnesses (Questions 20-39)
INLAND REVENUE/HM
CUSTOMS & EXCISE
AND MAPELEY
WEDNESDAY 27 OCTOBER 2004
Q20 Chairman: What was this argument
about tripping you up? I do not understand that.
Mr Varney: As you rightly said,
after the event that was the feature of the deal which most people
have concentrated on.
Q21 Chairman: Can you look, please, Mr
Varney, at page 25, paragraph 3.14. You will see there that negotiations
were still ongoing at the time of the Report. Is that correct?
Mr Varney: Yes.
Q22 Chairman: How can this be a real
partnership if negotiations are still ongoing? These are very
prolonged negotiations, are they not?
Mr Varney: Yes.
Q23 Chairman: Is it a real partnership?
Mr Varney: I think we are trying
to get a real partnership. The nature of moving from owning your
own estate, which you managed through all sorts of different locations,
and pulling it together in order to bring in an outsider, you
have to change to being a customer. There are features of the
agreement which have not proved satisfactory from our point of
view and we are together with Mapeley STEPS trying to resolve
those in an agreeable way.
Q24 Chairman: It is not just the bad
publicity about being tied up with a tax avoider. It is also the
nature of this contract which we, as a committee concerned with
value for money, want to concentrate on. Would you please look
at paragraph 2.17, page 19, Mr Varney? It tells us there that
Mapeley STEPS' margins are very tight and they hope to win other
business to spread its cost. Did it not seem rather risky to you
to award such a large contract to a company operating on such
a basis?
Mr Varney: At the time the contract
was awarded, there was only one other provider that had been contracted
to the government. The difference between its bid and this bid
was £500 million, so there was a sizeable incentive to look
at this arrangement. If you look at the Report, you will find
that at each stage the Department tried to learn from the previous
DWP out-sourcing and tried to apply the lessons to see what the
risks were. There were particular elements of the deal where it
was felt that Mapeley were pricing very aggressively but there
were other aspects where Mapeley could take advantage of the contract
so in the round we had to make a judgment. The end result of this
arrangement is the inclusion of another provider of these services
so there could be beginnings of competition in the marketplace.
Q25 Jon Trickett: I want to briefly look
at the public sector comparator which in the past we have usually
concluded is to some extent a got up figure to provide a fig leaf
so that you can privatise things which you wanted to do in the
first place. The public sector comparator involves calculating
the amount of risk which would have been retained by the public
sector had the contract been handled in-house. This is detailed
on page 36 in appendix five. In there it says that the additional
amount of money added to the public sector comparator was £101
million. Is that right? The difference between the public sector
comparator price with and without risk, which would have been
retained had this been handled in-house, is £101 million.
Am I understanding that sentence correctly?
Mr Varney: I think it is covering
uncertainties.
Q26 Jon Trickett: The risk which would
have been retained by retaining the contract in-house rather than
privatising the contract.
Mr Varney: I think it is incredibly
difficult when you are in a situation where you have all of your
estate spread out and managed locally to pull it all back together,
and then you try and create artificially what might happen if
you were to manage it yourself. Given that, a lot of the incentive
for these sorts of arrangements are that running an estate is
not our major business. We do not have a competitive edge in it.
We wanted, as is said in the Report, to get the advantage of releasing
money that was tied up in that business and to bring in a professional
standard—
Q27 Jon Trickett: I do not think you
have achieved any of those objectives but I am just asking about
risk and the externalisation of risk by going through a PFI, which
is what this is talking about here. The whole of this appendix
deals with the public sector comparator. Allegedly, it would have
cost more money to retain the contract in-house than it would
have to go through a PFI. This paragraph seems to say that £101
million was the difference. The previous couple of sentences deal
with the fact that the contract failed to externalise the risk,
do they not?
Ms Ghosh: Surely what this paragraph
is doing is explaining that this was not a standard PFI. This
was not a design, build and operate PFI; this was a PFI where
the property was built and we were handing it over to Mapeley.
What they were doing here was making an assumption about what
value they therefore put in for the risk in this type of PFI which,
as they say here, was £101 million. That is still significantly—
Q28 Jon Trickett: We will come to that
in a minute because the contract is not running to the price that
was agreed, is it?
Ms Ghosh: It is actually.
Q29 Jon Trickett: It says in the previous
two sentences: ". . . the STEPS differs from a standard ...
DBFO PFI deal in that there is no construction of an asset, the
STEPS PSC had no risk adjustment for construction time or cost
overruns. This risk is usually the largest risk adjustment in
a standard PSC." Are you sure that you did externalise the
risk in this contract rather than retaining the risk in-house
as the rest of the document appears to demonstrate, does it not?
Since when the company got into trouble, as they did, basically
we have had to bail them out.
Ms Ghosh: We have not.
Q30 Jon Trickett: That is how I read
the paper and, with all due respect, I think I am entitled to
make that judgment. Obviously you may disagree but I am simply
asking you this: are you convinced that you did externalise all
the risk that you could so that the public sector was protected?
Mr Varney: We did to the best
of our ability try to use the techniques which had been used—
Q31 Jon Trickett: I am asking you not
whether you used the best of your ability but whether or not you
protected the public sector from the risks which were inherent
in externalising the contract. It is a simple question.
Mr Varney: I think that is what
we tried to do.
Q32 Jon Trickett: Did you achieve it?
Mr Varney: I think we did because
what we have done and what this paragraph talks about is taking
a public sector comparison and, £101 million is the difference
between the mean cost and the minimum likely cost, so there was
a range of cost outcomes. What it says is it took the mean cost
as the comparator and in other words added back the £101
million.
Q33 Jon Trickett: I am not sure you are
addressing the point I am making. I want to move on to the questions
which were tabled by the Member for Llanelli, responded to by
Dawn Primarolo, which I think you are probably aware of. The contract
was supposed to be running at £170 million a year, was it
not?
Mr Varney: No.
Q34 Jon Trickett: The document here seems
to say that.
Mr Varney: No, that is not what
it says.
Q35 Jon Trickett: The facts are here,
are they not: £234 million, £305 million and then the
£311 million? They are the three sets of annual costs. I
do not have the paragraph in front of me but the document elsewhere
talks about £170 million a year. Why am I misunderstanding
what the document says?
Mr Varney: Members can go to point
four, paragraph 3(b)(iii), which is the £170 million. The
£170 million comes from the cost of the total contract, which
is estimated at £3.4 billion, divided by 20 which is £170
million. That number is a net number because it includes the £220
million we were paid up front. If you add that back, you get to
£3.6 billion, which is about £180 million a year. That
is the result of a model which assumes we will reduce our estate
over 20 years by 40%. It is a model which gives you an average.
It is not the price we will pay each and every year. We have audited
what we paid to Mapeley. We are paying them in accordance with
the contract. We have not bailed them out. We are paying for costs
including utility costs, pass through costs and various other
elements which we wanted to procure from them when it is value
for money.
Q36 Jon Trickett: Given the fact that
you have agreed this Report yourself personally, do you feel that
that paragraph which you have just referred to gives an accurate
picture of what is happening, given the fact that we are running
in the last two years at over £300 million a year? Can you
give us an estimate as to what the total value of the contract
will be then?
Mr Varney: No, I cannot. We have
obviously worried about how to do this and how to present this.
When the Accounting Officers accepted this Report, it was accepted
it on the basis that this was helpful information but it is not
the basis of a comparison, year by year, of what is expected.
In order to do that, we have to model two things which are unknown:
the extent to which the estate is going to be reduced and passed
back to Mapeley which is one of the flexibilities we have; and
whether we procure through Mapeley services, building works or
minor building works. Each time we procure through Mapeley anything
that is of a service nature, there is a value for money test and
that is why I cannot predict how much money, in the end, will
go to Mapeley.
Q37 Jon Trickett: There is a prediction
in this paper and it would be reasonable for a Member of this
Committee to draw the conclusion that that was the likely sum
of money which would be spent and that it would average out at
£170 million, given that that is what is in the text. If
you are saying that that is not the whole picture—it may
be accurate in and of itself—are you able to provide us
with a note telling us what your latest estimate of the annual
costs is likely to be and what the aggregated costs at the end
of the contract will have been?
Mr Varney: I can provide the Committee
with a breakdown of what we have spent money on so far. I can
then indicate the range of uncertainty that we will face as we
make decisions going forward.[1]
Q38 Jon Trickett: I think the Report
is inadequate to that extent, if that is the case. We have had
a note from the PCS,[2]
one of the trade unions, that describes a number of matters which
I do not have time to go into. One of the things that gives concern
is the extent to which the management within the Civil Service
no longer has control of what is happening inside the buildings.
Are you aware of concerns in management at very senior level that
some of the decision making procedures now are handled by Mapeley
as to what goes on inside the buildings? Are you aware that there
is frustration at senior level?
Mr Varney: Yes. I receive letters
from time to time about the state of buildings and we take that
up with Mapeley. I think that is a big issue for us but I do not
think we should paint a picture that everything in the past was
incredibly rosy and every office worked absolutely perfectly at
all times.
Q39 Jon Trickett: I am asking about this
contract. Are you aware, for example, that Mapeley have refused
permission for staff to have third parties onto some of the buildings
from time to time?
Mr Varney: That has not specifically
been addressed to me in a letter.
Ms McHale: That is part of Mapeley's
role as a landlord in this situation and on certain occasions
they have provided permission for third parties to visit the sites.
1 Ev 19-20 Back
2
Ev 17-19 Back
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