Examination of Witnesses (Questions 20
- 39)
MONDAY 7 NOVEMBER 2005
BBC
Q20 Mr Williams: What about the others?
They would have had costs. This is one of the most fundamental
flaws which we have pointed out time and time and time again to
the Ministry of Defence and to various Departments: you avoid
making design changes mid-contract.
Mr Smith: Yes, but it would be
absolutely wrong to characterise these as design changes, especially
with the implication that they were expensive design changes,
which were unbudgeted. Of the 300 contract variations, 129 carried
no extra cost whatsoever since they were simply confirmations
of details or information which were in the original contract.
Q21 Mr Williams: They were so simple
that the National Audit Office tells us that contract variations
process turned out to be time consuming and overly complicated.
Perhaps you did not notice that.
Mr Smith: That is not the same
thing as saying that the contract variations were undue or somehow
wrong or somehow led to increased costs, because they did not.
Q22 Mr Williams: Let us move on then
to the financial side. We are told that the bid also included
a provision to restrict the return to shareholders to 30%. That
is correct, is it? Yes or no.
Mr Smith: Yes.
Q23 Mr Williams: In previous PFI
projects, 16% has been seen to be a more than healthy return on
a safe project and yet here, you are conceding 30%. This is not
just extravagant in the context of what is an ultra safe project,
it is actually almost usurious, in that it would give re-financing
in just over three years. That is venture capital spending, is
it not?
Mr Smith: There is no suggestion
in the Report that our partner got a 30% return. It talks about
putting an absolute cap on the amount of return they could get.
A big difference; a very big difference.
Q24 Mr Williams: So what is the percentage?
Mr Smith: We would need to work
it out precisely.
Q25 Mr Williams: I would have thought
you would do that, would you not? Since it is known that 16% is
the going rate for such projects, surely you know the figure?
Mr Smith: Let us talk about the
re-financing. This is a £321 million re-financing where I
think Land Securities' profit was £23 million out of £321
million. So that gives a feel for what the actual return was and
the Report puts a ceiling on it, but it does not give an actual
return of the 30%.
Q26 Mr Williams: But you should be
able to tell us what the rate of return is.
Mr Smith: I have just told you:
£23 million on £321 million.
Q27 Mr Williams: That is over the
whole lifetime? C&AG, do you agree with those figures?
Sir John Bourn: Yes we do.
Q28 Mr Williams: But what about the
30%, how did that enter into the deal?
Sir John Bourn: It entered into
it as the possibility that might have been achieved.
Q29 Mr Williams: Which would have
been unsatisfactory from the licence payers' point of view, would
it not?
Sir John Bourn: It certainly would
have been higher than the generality of PFI projects.
Q30 Mr Williams: Is that not a rather
modest assessment of higher? It is considerably higher.
Sir John Bourn: Yes, it was considerably
higher.
Q31 Mr Williams: Nearly double, and
yet they were willing to contemplate it. So much do they care
for looking after their licence payers' money—
Mr Smith: I am sorry to interrupt,
but I need to argue about this because it is just not right. Forgive
me, Chairman, but I do feel the need to make sure the Committee
is clear about this. This is a point in the Report which is comparing
the bid from Land Securities Trillium with the bid from the other
organisation. We have already explored at the start of the meeting
why the Land Securities bid overall was better. It is also describing
a situation where there was an absolute cap on the return that
Land Securities could earn versus the bid from the other company,
where there was less clarity about what the absolute return was.
Irrespective of that provision, separately, as the Report says
elsewhere, a very specific price was agreed with Land Securities
for the building of the building. In the re-financing of that
building recently, £321 million, their return was agreed
at £23 million. So that tells you what the actual return
was. It is just not right to say that because there was an absolute
ceiling on it of 30% that was the return that they were getting.
They were not.
Q32 Mr Williams: It is unbelievable
that you even contemplated it. Why did the figure arise? If it
arose, it was something you were obviously willing to consider.
Let us move on, because we are time limited; let us move on to
the next point. One of the consequences of not having done the
design section properly, particularly in relation to the company
which was going to carry out the construction, is that you build
an energy centre which takes up a substantial amount of space.
You then decide you cannot afford to go ahead with the project
of using that energy centre, so that space now remains unused
and to some extent is unusable in any practical sense, is it not?
Mr Peat: May I just give a first
response on that? The first point to note is that at the time
of the initial construction there were proposals for the use of
these buildings by BBC Broadcast, which would have involved much
greater use of energy, in which context the energy centre would
have been well utilised. That changed over the construction period.
Subsequently, when occupation began it was not entirely clear
where we were going next on the White City area and therefore
the capability to produce a combined heat and power plant or whatever
has been retained for the next few months to determine whether
it is needed in the new context which now arises.
Q33 Mr Williams: But as a result
of this failure to design the project properly in relation to
your need, you now have extensive basement areas and large places
for plant and machinery, which cannot be used at the moment, or
are not being used at the moment, and that also means that a lower
proportion of the building can be used for office space than would
be the case in a typical office development. That is a fact, is
it not?
Mr Thompson: No. That figure I
quoted, the figure of 6.5% of vacant space across the site, includes
the energy centre.
Q34 Mr Williams: So what is the space
being used for?
Mr Smith: Car parking. It is a
car park.
Q35 Mr Williams: I see. That is a
very high rate of return on your investment, is it not?
Mr Smith: It is very important
to have it in an area where there are not any car parks.
Q36 Mr Williams: But it was not intended
to be a car park.
Mr Smith: Yes, of course it was
intended to be a car park.
Q37 Mr Williams: If you needed a
car park, why did you not have one designed in in the first place?
Mr Smith: We did.
Mr Peat: There are two elements.
One is the basement, which was designed for car parking. The other
is the other space, which was the energy centre, part of which,
we accept, is unutilised. It may be used for additional office
accommodation when we know the future better but at the moment
we are waiting to see what is needed, given what happens next
on the overall site. As I said earlier, at the time of the initial
design, the energy centre would have been needed in the context
of BBC Broadcast and that requirement changed during the construction
process.
Q38 Mr Williams: May I say, Chairman,
in conclusion, that I hope when we draw up our Report that we
will include in it a recommendation to the Chancellor or whoever
is the appropriate person, that this is a clear case which vindicates
our claim that the National Audit Office should have full access,
because the BBC does not seem to be capable of controlling its
finances adequately itself.
Mr Peat: May I just make one further
comment? As the Report states, the project was completed on budget
and on time; indeed one of the three buildings was completed ahead
of time and none of them was late. It is flexible in delivery
of value for money, slightly above average cost because of the
requirement for additional flexibility, it has won awards, it
is environmentally friendly and it is much enjoyed by the staff;
they very much appreciate it. I do not think it is all negative.
Q39 Mr Williams: Despite the fact
that attention had been drawn previously to the need to provide
for shares in re-financing, you did not make an initial arrangement
to have re-financing. You then made a purchase in order to get
access to some of the re-financing benefits, but you would almost
certainly have had to pay a premium price, because they were expecting
the high rates of interest.
Mr Peat: I do not think that is
right, with respect. At the initial time, it was not possible
to go down the route we have now gone down.
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