Examination of Witnesses (Questions 160-179)
INLAND REVENUE/HM
CUSTOMS & EXCISE
AND MAPELEY
WEDNESDAY 27 OCTOBER 2004
Q160 Mr Jenkins: I understand that but
surely it is not beyond the wit of even our departments to get
together and establish an estates team that looks after all government
buildings and can fix the size of the building as and when they
require it? We know we are going to downsize certain departments
as some departments run out and other departments grow up. Are
you saying we could not do this and we have to hand it over to
a contractor outside?
Mr Varney: It is a question of
what you think is value for money with the resources which you
have got. Outside the public sector people have decided that property
management or telephony or computer infrastructure is better served
by having a professional outsider do it and having the career
prospects of people working in it being professional rather than
doing one of the other tasks. In each case you have to ask yourself
whether there is a value for money for the public purse. That
is what I thought the Report in front of the Committee has tried
to establish.
Chairman: Your time is up, I am afraid,
Mr Jenkins. Mr Trickett?
Q161 Jon Trickett: I just wanted to ask
briefly about the corporate structure which Mapeley has adopted
because they have got two companies, have they not, one dealing
with the maintenance contract and the other one holding the property.
Of what benefit to the public sector is that corporate structure?
Mr Varney: Well, I think that
is a question of in the overall contract you have to say that
what Mapeley offered was a bid which was half a billion less than
the next bidder. They obviously took steps to put a structure
together which was presumably the way they valued their bid but
you will have to ask Mr Hopkins.
Q162 Jon Trickett: I am asking you because
you are the public sector and that is what I am interested in
looking at as part of the Committee of Public Accounts. It strikes
me that the answer that Mapeley have offered us is that the asset
portfolio enhancement in value which has taken place as a result
of market changes has been helpful to them in the overall picture
but that the revenue contract, if you like the maintenance, has
been a struggle. You are still trying (in the jargon that you
are using) to bed down. Supposing the contractor runs into trouble?
What implications does that have for the asset-holding company?
Mr Varney: If the company is in
trouble then the provisions of the deal are that they would be
in trouble with the banks and therefore the banks would step in
because the banks—
Q163 Jon Trickett: What steps did you
take as the public sector to secure the assets because clearly
they have set up two companies? What I am trying to get at is
supposing they default on the operating contract what charge do
you have then against the asset-holding company?
Ms McHale: We contract with one
entity so if there is a problem with another entity it impacts
the whole contract. We have a protection for the run off of the
assets which is the £150 million deferred consideration for
the first ten years of the life of the contract. So if anything
happens during that time the compromises Mapeley's viability then
we are entitled to a payment back from them as a first charge
on the assets for this deferred consideration.
Q164 Jon Trickett: So there would be
a charge on the assets by the government effectively, by the institution
you represent even though the assets are held in a separate company
to the operating company?
Ms Ghosh: We would have the first
charge sufficient to cover so that in the end we would not only
have our £220 million up front, we would have the proportion
remaining of the additional £150 million which was part of
the total valuation, so we would get our total valuation.
Q165 Jon Trickett: Okay. As I understand
Mapeley's answer—and I think the Chairman will stop me if
I go into this too much further because of my time—the enhancement
in asset values has helped to protect the corporate structure
which they have established. Was that enhancement in value in
some way part of the evaluation process at the time the contract
was being evaluated, since it is clear that property values have
increased? In a property portfolio it is clearly a factor to be
taken into account in evaluating values, is it not?
Mr Varney: The bid from Mapeley,
as we rightly said, was thin on operating profit and relied on
capital profits at the end. The response of the two departments
was to respond to that uncertainty by looking at getting a high
level of equity into the contract, getting as much value as they
thought they could up-front and getting a protection for the £150
million that they did not get over the first ten years of the
contract, so they went for a risk mitigation strategy in face
of that potential uncertainty.
Q166 Jon Trickett: If the property market
suddenly collapses then Mapeley are in deep trouble really. What
happens under those circumstances? I am not asking you, Mr Hopkins,
I am asking the public sector.
Mr Varney: We have already had
one set of negotiations against that background and we have been
fairly robust. As we have said, we have not parted with any money.
Q167 Jon Trickett: Against the background
of a collapse in property values?
Mr Varney: That is a matter for
Mapeley.
Chairman: In terms of plan B we are going
to go into private session. There are one or two other supplementary
questions from Mr Steinberg and Mr Jenkins.
Mr Steinberg: Just very quickly on two
issues on whether or not you got a good deal. Jon has been discussing
the £220 million that Mapeley paid to you. How do you know
that was the correct figure? How do you know it should not have
been more? Why was it not more? That is the first question. The
second question is that they claim they are £500 million
cheaper than anybody else. They claimed they were able to do this
because they were going to save £55 million through tax evasion
by going offshore. You are tax inspectors, you know exactly how
much you charge me and I get a bill every year. How do you know
it is not more than £55 million? It could be more than £55
million. That is maybe why they did it in the first place because
they knew that they are going to make much more than £55
million. Have you done any calculations to find out whether £55
million is a true figure? Finally, the last question is do you
find it embarrassing that the Inland Revenue and Customs and Excise
are now being run from a country that is offshore and other people
use for tax evasion?
Chairman: To be fair, I did ask this
question right at the beginning and I think their answer was that
they have apologised.
Mr Steinberg: That is a different question.
I am asking do they find it embarrassing.
Q168 Chairman: I did ask was it a matter
of shame which is even stronger. Do you want to add anything to
your earlier answer?
Mr Varney: No, I am quite happy
to rest—well, I am not happy but I am content to rest with
my earlier answer.
Q169 Chairman: You are not happy with
your earlier answer or you are not happy with the situation?
Mr Varney: Not happy with the
situation, as I explained right at the beginning. Can I deal with
the two issues. The £220 million estate was independently
valued by property specialists and they established a value of
£370 million. We felt, in consultation, that £220 million
was the amount up-front that we could get which would keep bidders
in the contract. So it was a judgment figure and it was consistent
also with the deal that DWP had done. It is about the same percentage.
Then on the issue of the £55 million, which is the Mapeley
evaluation of the capitals gains that they will make, that gain
is based on a series of assumptions, that first of all UK tax
will not change in terms of capital gains tax legislation; secondly,
it is an assessment on Mapeley's behalf of the relative rates
of inflation of office buildings and the Retail Price Index. That
is how the £55 million comes about. In broad terms the £55
million rise is assuming that properties will increase in value
over the next 20 years at about twice the rate of inflation.
Q170 Mr Steinberg: So you think that
the £55 million is an accurate sum?
Mr Varney: In the last ten years
the rate of property increase has been somewhat less than the
rate of inflation. I am in no position to judge what is going
to happen over the next 20 years. I can only tell you what the
assumptions are.
Mr Steinberg: I could go down a different
line there.
Chairman: Mr Jenkins?
Q171 Mr Jenkins: I want to go back to
the 160 estate staff and the skill base they have within them.
I know they must be doing jobs and contracts and evaluating what
work is going to be put to Mapeley, et cetera. I would
like to develop that and see what they actually do and how you
see their future. Also I do not believe it when Mr Varney said,
"We are not experts in estate management we should get out
of it and do our own work," because you do have to have a
pool of skilled labour there in the real word to evaluate contracts.
On your contract compliance officers; who is responsible for the
health and safety aspects of the staff insofar as do you have
a proactive process on this and there is the perception (not true
in any way, shape or form) that if there is a worn carpet or a
problem in the area that Mapeley is not going to want to come
along and lay a new carpet, they want to cut costs to make more
profit on their estate. So how do you get this balance between
heath and safety in the workplace? Who is responsible for it,
who is going to force it through? As an individual worker is it
clearly laid out who I go to, who I see, who is responsible for
it and what action is being taken, because I think we need to
answer the question in that area?
Ms McHale: Can I start off with
a head count of the estates team. It is 152 at the moment—
Q172 Mr Jenkins: The Report says 160.
We go on this Report; it is our Bible.
Ms McHale: The Report says 160.
We are taking advantage now with a static head count as it stands
at the moment of 152, as I have just said. We are experiencing
further benefits as the contract beds in and we are beginning
to deal with things which are currently deemed not to be functioning
well in the contract, we are improving the change mechanism and
working towards PMS. We are developing these processes with Mapeley
at the moment but that is more labour intensive than it will be
once the contract is fully bedded down. We expect that we will
have a team of specialists managing the contract which is correctly
targeted but delivering that in a more efficient fashion and working
with our provider to do that. On the health and safety question,
if I may, we are working with Mapeley again to look at the incidence
of health and safety reports and review this across the organisations.
We have had a degree of union inspection notices. We are also
raising issues ourselves across the contract and Mapeley, as they
look in their own audit process, are picking up issues. At the
moment we are working on a comprehensive strategy compliance audit
across the contract to review health and safety arrangements.
Q173 Mr Jenkins: Is there a clearly laid
out channel that an individual knows who to go to to get it sorted
out?
Ms McHale: Yes, there are business
contacts for health and safety, there are contract management
contacts, and there is the Mapeley help desk for raising these
issues, so there are several channels available to employees.
I also have regular meetings with employee representatives to
test that.
Q174 Chairman: Thank you. Before we move
into private session one or two questions from me. Paragraph 1.12
on page 13 deals with the fact that we have alluded to, that you
can vacate up to 60% of the estate over the next 20 years. Quite
apart from the fact that you cannot predict what your needs will
be in 20 years' time, you have paid for it up-front anyway, have
you not, so what is this flexibility worth in reality?
Mr Varney: We have exercised some
of the flexibility already. We have released about 70,000 square
metres of space already although our total requirement has gone
up, and we expect that as we put Inland Revenue and Customs and
Excise together, should that find favour with the House, then
we will be looking to rationalise the estate.
Q175 Chairman: What I was asking about
is the way the original contract was drawn up. Why did you not
just pay the costs of vacating the property as they arise? Would
that not be easier?
Mr Varney: If we were faced with
the situation we are faced with today, which is a flat cash settlement,
releasing property would cost us money which we would have to
pay. Mapeley will take some of that property back. They will be
able to review whether they can do something else with it, which
we could not do, so we have a flexibility against the drivers
of where the Revenue and Customs are going to go which will turn
out to be very valuable.
Q176 Chairman: That is a fair answer.
Mr Hopkins, what incentives do you have to minimise your finance
costs when they are simply passed on?
Mr Hopkins: Minimise our finance
costs?
Q177 Chairman: Yes to your banks.
Mr Hopkins: To our banks when
they are passed on?
Q178 Chairman: Yes, to the Revenue.
Mr Hopkins: I am not sure I understand
the question, sorry.
Q179 Chairman: Well, it is in the contract,
is it not, that your re-financing with the banks will be passed
on?
Mr Hopkins: Refinancing? Sorry,
the question?
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