Examination of Witnesses (Questions 1
- 19)
MONDAY 7 NOVEMBER 2005
BBC
REPORT BY THE COMPTROLLER AND AUDITOR
GENERAL
THE BBC'S WHITE CITY DEVELOPMENT: THE
SECOND PHASE OF THE BUILDING PROJECT
Witnesses: Mr Mark
Thompson, Director-General, Mr Jeremy
Peat, Governor, Mr John Smith, Chief Operating Officer,
and Mr Chris Kane, Head of Corporate Real Estate, BBC,
examined.
Q1 Chairman: Good afternoon. Welcome
to the Committee of Public Accounts. Our hearing today is on the
Comptroller and Auditor General's review of the BBC's White City
property development in West London. This is the second review
to be completed under the arrangement introduced in 2003 by which
we are having an experimental regime in which we consider Reports
about the BBC without full access being allowed to the Comptroller
and Auditor General as in ordinary government departments. We
are pleased to welcome Mr Jeremy Peat, for the first time I think,
who is Chairman of the BBC Governors' Audit Committee and we welcome
back Mr Mark Thompson who is Director-General of the BBC. We also
have Mr John Smith, who is Chief Operating Officer and Mr Chris
Kane who is Head Corporate Real Estate. Welcome Mr Thompson. If
I may, I shall address my remarks to you, but if you want to pass
questions to anybody else, please feel free to do so. May I ask
you please to look at page 12 of the Comptroller and Auditor General's
Report and look at paragraph 32 onwards, particularly paragraph
34 under the heading "The BBC paid more in development costs
compared to alternative deals, but obtained wider benefits".
Perhaps you could start by explaining to us why you selected Land
Securities Trillium to develop White City 2, when the price for
construction in its bid was £31 million more than Foresite's?
Mr Thompson: May I first of all
say, just in two or three sentences, that this project should
be seen as part of a much larger strategic ambition by the BBC
to take what had been a rather rundown and higgledy-piggledy estate
across London, indeed across the UK, to rationalise it and also
modernise it so that the property portfolio would support the
BBC's overall mission in a digital age? So that was the point
of the deal. Those considering the deal at the time believed that
in the round Land Securities Trillium offered the best value for
money over the lifetime of the deal, even though it is true that
another bidder offered, in terms of construction, a slightly better
price. The overall judgment on value for money was that Land Securities
offered the best deal to the BBC. May I ask John Smith, who was
involved, to set it out in more detail?
Mr Smith: I shall build on those
points, if I may? The overall saving which Land Securities offered
to the BBC across its whole estate was the driving force behind
the desire to secure a partner in the first place. Land Securities
offered to us a whole range of other things, crucially including
greater certainty about the construction cost at White City and
a whole range of other things which are alluded to in the NAO
Report to do with risk transfer and other cost certainties. When
you are judging a deal of this scale in the round, it is very
important to take account of all of those other things; it is
not simply about the construction element of an overall bigger
financial relationship. The overall bigger financial relationship
was indeed the cheaper of the two options.
Q2 Chairman: If we look at page 15,
paragraph 41 under the heading "The BBC paid for some requirements
as an additional lump sum rather than spreading the cost through
the unitary charge", we see the project cost £60 million
more than the Governors approved. That throws some doubt over
it, does it not?
Mr Smith: Not really. The Report
talks about—
Q3 Chairman: But that is right, is
it not? The project cost £60 million more than the Governors
approved.
Mr Peat: The project cost £60
million more than the project approved at the date at which the
initial approval took place. There were subsequent approvals by
the Board of Governors of the other elements which make up the
additional funds you are talking about.
Q4 Chairman: I am not denying that
the Director-General came back for your approval, but I just want
to know why it was so much over budget. With a project costing
some £250 million, £60 million is quite a large chunk,
is it not?
Mr Smith: If I may, it is crucial
to say that the building construction cost came in on budget and
slightly early. This is a crucial, crucial point. The amount the
Governors were asked to approve and the Governors did then approve
for the building is what the building actually cost and it was
delivered slightly earlier than expected which, as far as we are
concerned, is a good achievement. In addition to the building,
there were then the fit-out and other costs which came later.
I think the point that is being made by the NAO is that in paragraph
is to do with furniture enhancement and other fit-out costs which
are not to do with the actual building itself. May I say that
of the £60 million referred to there, £40.3 million,
66%, was known about, budgeted and to do with the separate legal
entity known as BBC Broadcast Limited, which had been turned into
a commercial company providing broadcast services to private competitors
and which needed very specialist fit-out for things like play-out
suites, edit suites and so on, particularly for their needs and
would not be the kind of thing that you would see in a normal
office block.
Q5 Chairman: I shall stop you there,
because you have to appreciate that you have to be quite snappy
in the answers you give because Members are time limited in this
Committee. It does raise questions does it not, Mr Peat, as to
why the governors did not insist on the whole life costs of the
new buildings at the beginning. Would that not have been a wise
thing to have done?
Mr Peat: We accept the NAO recommendation
that there should be fuller consideration of the whole life cost
and indeed for the Pacific Quay building, which was the next major
project, there was further identification of those extra cost
elements at the time that the project first went to governors.
However, I repeat that the extra costs were approved by the Governors
subsequently and it was implicit in the initial papers, albeit
not as explicit as it might have been.
Q6 Chairman: If you look at figure
12, which you can find on page 17, and at the footnote at the
bottom of that "Across the site as a whole, 22% of office
space was not occupied at 31 January 2005". Why was a fifth
of the office space still unused a year after the buildings were
completed?
Mr Thompson: The current figure
for the site, as of today, is around 6.5% so there has been a
very significant improvement in this number since the NAO Report.
I think it is fair to say that full occupation of the site did
not take place as quickly as would be ideal, but you have to see
this in the context of quite complex property moves around London
and also wider change in the BBC over the period. Occupancy is
up now in the 94.5% range, which I think does compare well with
industry standards. I hope that we can get occupancy even higher
very quickly; very close to 100%.
Q7 Chairman: That is fine; thank
you very much. Could you now look at the paragraph on page 16
headed "The BBC is not currently using White City's full
potential"? You have made this media centre, which is apparently
very expensive, which can be used as studios and also by staff,
but it is really just being used to house staff at the moment,
is it not? Really you have spent all this money to not much effect,
have you not?
Mr Thompson: As you know, our
plan sees the BBC moving from, frankly, a very large number of
ill-suited buildings to two to three major sites. As we rationalise
our London properties our plan is that these White City buildings
will indeed by heavily used by programme makers and that therefore,
the enhanced capabilities of these buildings will be used. This
is part of a long-run strategy which will play out over a number
of years. It includes, for example, the ending of the Bush House
lease and the concentration of our journalism in the W1 site.
We also see rationalisation in our West London site with a number
of properties being disposed of and programme making, television
programme making in particular, concentrated on these White City
buildings and on Television Centre. I am confident that over the
next few years, you will see these buildings being used to their
full capability.
Q8 Chairman: All right; that is fine,
thank you. You talked about rationalisation a moment ago. You
are shedding 4,000 staff are you not? You are moving others out
of London. What impact is that going to have on the need for accommodation
at White City?
Mr Thompson: We expect the London
portfolio, the square footage required in London, to reduce significantly
over the coming years and our plans will allow that to take place.
We expect, in the light of the value for money plans and if the
Manchester project goes ahead, which is still subject to the issue
of the forthcoming licence fee settlement, our London property
to reduce from 3.4 million square feet to around 2.75 million
square feet and our strategy, including the strategy of disposals,
will allow that to take place. In other words, despite the move
to Manchester and despite the fact that the headcount at the BBC
is reducing over this period, our plans for our property portfolio
will allow us to dispose of space and indeed to improve the efficiency
of the use of space in terms of the number of square feet per
member of staff.
Q9 Chairman: But is it right that
you are shedding 4,000 staff?
Mr Thompson: Yes; broadly.
Q10 Chairman: May I just ask a broad
question as you are sitting in front of us? In Charter Renewal,
you are telling us you are going to do more with less. All sorts
of new things you are going to do and you will do it with less.
What does that say about your inefficiency in the past, if you
can do more with 4,000 less staff? As a relatively new Director-General,
give us your honest opinion about inefficiency at the BBC in the
past and why you feel it is necessary to shed 4,000 staff and
apparently do more with less staff?
Mr Thompson: The key point to
make here is the way in which our industry is changing and the
opportunities which technology now gives us to make content in
television and radio with fewer inputs, with more multi-skilling
and therefore with greater efficiency. This process of technology
allowing for greater productivity is not unique to the BBC; it
is happening throughout the audio-visual sector. We set quite
challenging targets within the BBC in terms of efficiency, but
that is because we believe, and it is absolutely laid out in Building
Public Value and in our subsequent submissions to the charter
renewal process, indeed the Government's Green Paper suggests
this as well, that there are many new ways in which the Government
believe the BBC can and should serve the British public. Although
we believe that we cannot meet all of our future requirements
ourselves, we think we should go as far as we can to use self-help
measures and greater productivity to do as many of the future
services and as much of the planning of the BBC as we can.
Q11 Chairman: Do you think that we
would be right in drawing the conclusion that perhaps you were
not as sharp commercially as you might have been? For instance,
this Committee has made great play of the importance of re-financing
in the past, sharing in re-financing gains, the public sector
sharing in the re-financing gains with the private sector. Yet
here you drew up a contract and the end result of it has been
that you are not going to share re-financing gains and you have
now apparently abandoned your partnership with Land Securities
Trillium less than five years into a deal which was supposed to
last 30 years. What does that say about your commercial acumen,
Mr Thompson, or that of your predecessors?
Mr Smith: Let us just get the
facts Chairman, if I may. We do absolutely have the re-financing
benefits which you would want us to get from securing access to
the bond capital markets at an historic low point in bond yields.
We issued a bond to re-finance this site after the NAO's field
work was done on the audit here, the net effect of which was to
take our cost of debt down to 5.6% fixed for 30 years and saving
us £63 million over and above what we were paying before
that re-financing took place. Although the NAO Report says that
it would be potentially difficult to get the re-financing benefits,
it does not say it is impossible and indeed we did subsequently
get those re-financing benefits.
Q12 Chairman: National Audit Office,
do you think this is a correct answer? Are they going to share
re-financing benefits?
Mr Sinclair: It is certainly true
that the mechanism which Mr Smith describes is one way of achieving
the re-financing benefits. Our concern was the narrow point that
within the contract itself it was difficult for that contract
to continue with the benefits which it offered and secure the
re-financing gains. The point is that the BBC had effectively
to get out of the contract it had in order to secure those benefits.
Without the benefit of looking at that in detail, I am sure Mr
Smith is correct that that was an effective way of doing it. However,
we were not able to look at that particular aspect of the deal.
Q13 Mr Williams: May I say, having
read this Report, that I now well understand why you resisted
and still resist the National Audit Office having full access?
As far as I can see, this project is both profligate and irresponsible
and you are trying to salvage something out of a very badly conceived
commitment. Do you agree that good practice is to integrate design
and construction?
Mr Thompson: To your first point,
may I just say that the Report reflects this very clearly. The
effect of this deal was initially to save the BBC £33 million,
a cost that it would otherwise have incurred.
Q14 Mr Williams: Yes, but it is a
botch-up.
Mr Thompson: The re-financing,
which the BBC did enjoy the benefits of, will make an additional
£63 million.
Q15 Mr Williams: That was an after-thought,
which you should have anticipated anyhow because there had already
been warnings. I am coming on to all of those, so can we take
them step by step?
Mr Thompson: Just to be clear.
Each stage of this deal has saved the public significant amounts
of money.
Q16 Mr Williams: And you are wasting
an enormous amount of money and that is what I want to demonstrate.
I do not want answers to questions I have not asked: I want answers
to questions I am asking. Do you accept it is good practice to
integrate design and construction?
Mr Thompson: I think the circumstances
vary.
Q17 Mr Williams: Is it, or is it
not?
Mr Smith: The circumstances vary
according to the particular needs of the client. I must say that
in our particular case, not only do we have a role to play, as
a cultural institution, in producing buildings of high architectural
value—and I hope the Committee would agree, they are very
definitely that—but in addition to that, because we in this
particular case and in most of our other redevelopments control
the appointment of the architect at the start of the process in
order to make sure we get an architect who is going to produce
the kind of building that we want, we then "novate"
the architect over to the PFI or the PPP partner.
Q18 Mr Williams: With respect, that
is hardly an answer to the point that is involved. The appointment
of a good architect does not necessarily ensure that the proper
assessments are made before the contract is placed.
Mr Smith: I am suggesting to you
that they were.
Q19 Mr Williams: Let me finish what
I am saying. What is abundantly clear here is that you have entered
into a contract for space that you do not need and space that
you cannot use. Not only did you do that, but you were so ill-prepared
that you made 300 variations in the process of the project. Is
that true or false? The National Audit Office tells us. You are
shaking your head. Did you or did you not make 300 design changes?
Mr Smith: We had 300 variations,
of which 129 were simply confirmations at no cost of design features
which were in the original scheme.
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