Examination of Witnesses (Questions 80-99)
DEPARTMENT OF
TRADE AND
INDUSTRY AND
BRITISH ENERGY
27 MARCH 2007
Q80 Mr Bacon: It would be quite interesting
to see.
Ms Diggle: You are absolutely
right that we need to know.
Q81 Mr Bacon: Okay, that is fine;
I shall move on. Sir Brian, Sir Adrian made a very interesting
point when he said that once it is in administration, administrators
have duties to all the creditors not to Government, not to health
and safety. This may be a better question for Sir Adrian to answer,
who I understand is a lawyer. Is it the case in company law that
health and safety law is suspended in administration and that
the administrators do not have duties to health and safety, because
that is what you said?
Sir Adrian Montague: I do not
believe so. I am a renegade lawyer of no current standing, so
you must not take my word as gospel on this, but I believe it
is correct.
Q82 Mr Bacon: That there are circumstances
in which health and safety law is, at it were, suspended?
Sir Adrian Montague: No, the way
that this works is that health and safety law must continue. To
be honest, in operating the power stations safety is the paramount
concern but in the financial implications of an administration,
the administrator's duty is to the creditors as a whole. I was
not party to these discussions, but I could imagine that NII could
possibly have had some concerns about the reliance on administrators
to operate these stations.
Sir Brian Bender: That is my understanding.
It was essentially an expression of NII concern about the uncertainties,
if it went into administration, for nuclear safety. It was not
a certainty; it was a concern on their part that that was one
of the risks that the Government took into account in going down
the road, all other things being equal, of restructuring versus
administration.
Q83 Mr Bacon: What slightly surprises
me is that when the analysis and the risk assessment were done
in the first place, when the company was first sold, no-one asked
the obvious due diligence question in this circumstance "What
happens if it goes bust?" or did they?
Sir Brian Bender: I cannot answer
that beyond the hearing this Committee had a couple of years ago
that looked at the circumstances up to that. I have read the transcript
of that hearing, I have read the Committee's Report and the Treasury
Minute, but I have not looked at that particular question.
Q84 Mr Bacon: I should like to ask
about the professional fees. On page 29 there is a chart which
explains the amount paid to different professional advisers. This
is figure 15. Could you say why the Department is not able to
appoint all its advisers using competition?
Sir Brian Bender: If I may say
so, I think that the NAO recommendation here is quite right. The
Department should have had a competition and the recommendation
here is something we shall need to implement as soon as we can.
I am advised there may be a question in relation to what is described
as the magic circle of legal advisers, who have some doubts about
whether they want to be on such a list because it might rule them
out of other business. My general point is that we should not
have been in this position and I accept the NAO recommendation
on this point.
Q85 Mr Bacon: You only reviewed the
fees once between September 2002 and January 2005. Why did you
not review the fees more regularly and what savings did you make
as a result of the reviews you did make?
Sir Brian Bender: We did have
a new risk-sharing arrangement with Slaughter and May in early
2004 when that review happened. We did, of course, get a recovery
from British Energy of a large part—
Q86 Mr Bacon: I was going to come
onto that in a minute. Could you talk about the savings from the
advisers? The British Energy compensation is a separate matter.
Sir Brian Bender: I understand
that. I do not have data with me on what savings we did obtain,
but we had contracts by monthly fees and success criteria that
we built in, or hourly rates for Deloitte and Slaughter and May,
and we did carry out the review as described. For example, Slaughter
and May were reviewed in early 2004, but I do not have with me
the data of what saving that brought about. Again, I can provide
material for the Committee, if that is helpful.[4]
Q87 Mr Bacon: Is it the case that you
now have professional panels in place, rather like framework agreements
for consultants in other departments?
Sir Brian Bender: We have in most
cases. On this particular area, this is still work in progress
and it needs to be completed quickly.
Q88 Mr Bacon: Why did you not reclaim
all of the professional fees for external advisers used by British
Energy?
Mr Robson: It was a matter for
negotiation with British Energy at the start of the process and
an amount of £15 million was negotiated with British Energy
as what would be covered. All of the costs of managing the credit
facility, the £6.5 million, were recovered in full.
Q89 Mr Bacon: In paragraph 2.28 it
says: "The original contract with Credit Suisse First Boston
was capped at £5 million". It says in the next sentence
that the actual value of the work undertaken was £11.1 million.
It is possible to read from that that therefore Credit Suisse
First Boston did £6.1 million of work for free. Am I right
in supposing that Credit Suisse First Boston does nothing for
free and indeed you paid them the £11 million?
Sir Brian Bender: You are correct
in the last part.
Q90 Mr Bacon: How did you go from
having a cap of £5 million to paying them £11 million?
Sir Brian Bender: Looking at the
Report again, there is something that comes across as slightly
misleading. The cap related to a contract they already had for
working for the Department on British Nuclear Fuel's matters and
we used those contractual arrangements—
Q91 Mr Bacon: It says: "...extended
an existing contract".
Sir Brian Bender: Exactly. So
we had the arrangements that were in place for BNFL that we then
brought across to apply to this restructuring, and early on it
became clear that this would be a long project and we needed to
negotiate new contractual terms. We then negotiated a new contract
with Credit Suisse to cover the British Energy work and it had
fixed monthly fees and success fees as part of it. The £11
million was entirely subject to the new contract and unrelated
to the capped fees.
Q92 Mr Bacon: What lessons have you
learned from this and how will these be applied in the future?
Sir Brian Bender: There are two
main lessons. One is the one we touched on earlier, that we do
need to have panels and have companies on those lists that we
can draw from. Secondly, we do need to have methods of benchmarking
which we do have in the Department; we need to make sure we use
benchmarking.
Q93 Mr Bacon: You have them, but
you just have to make sure you use them.
Sir Brian Bender: Correct.
Q94 Mr Bacon: It is the case is it
not, that many big consulting firms and law firms and banks have
done very well out of Government in recent years through all kinds
of projects, including PFI/PPP. I am thinking particularly of
London Underground where the fees were over £450 million
from recollection. In fact this £29 million total here, from
memory, was exactly the same as Freshfields got in total, so compared
with London Underground you are doing very well on this, but it
is still a lot of money. I have met people who say that when they
are negotiating with Government, compared with when they are negotiating
to provide professional services to the private sector, it is
usually a lot easier; they do not encounter the same reluctance
to pay their high professional fees as they do from private sector
clients and there is less of a negotiation than has to be had
with the public sector client to get the public sector to pay
what they want.
Sir Brian Bender: Well I am sorry
to hear that. I have some data with me which say that when Telewest,
the cable company, was restructured, there was a total of £110
million in adviser fees for a £3.8 billion rescue and for
Marconi the legal costs alone were £56 million. This was
one of the most complicated restructuring packages in British
commercial history. It is therefore not surprising that the fees
were high and the NAO Report does talk about the importance of
us having the right sort of professional advice. Nonetheless,
there are plainly lessons about how we can make sure that we do
not pay over the odds for that advice.
Q95 Mr Bacon: Finally, if I might
return to my second question about being in administration and
the legal framework, you say this is something that is currently
being considered. Obviously a policy matter is not really an issue
for this Committee, but at the same time, getting this right or
wrong could have considerable implications for the taxpayer and
I was surprised you were unable to answer Mr Clark's question
about whether any legal changes would be put in place before the
sale of shares.
Sir Brian Bender: I cannot answer
that. If there is any more we can say when I have gone back and
provided a note subsequently, I shall cover it in that, but that
is the present position.
Q96 Mr Bacon: In what sort of timescale,
roughly, without signing your name in blood, do you think you
are looking at before shares are sold?
Sir Brian Bender: I really do
not want to be drawn and it would be unwise of me to speculate
on the timing. It is market- sensitive and I simply do not know.
The only commitment the Chancellor gave last week was that it
would not be before the Energy Review report was published and
the public timetable for that is the summer.
Q97 Mr Khan: Sir Adrian, are you
pleased with the way the restructuring has gone?
Sir Adrian Montague: There are
two parts to our restructuring process: firstly, arriving at a
stable financial framework, which is what the restructuring itself
delivered; then secondly, there is, as the Report says, work to
do on the operational side.
Q98 Mr Khan: So happy with the first
and reasonably happy with the second.
Sir Adrian Montague: We are making
good progress on the second and the first has delivered a stable
framework.
Q99 Mr Khan: Sir Brian, could I ask
you whether you think that the Department has achieved an equitable
sharing of the costs, the benefits and the risks of restructuring?
Sir Brian Bender: In what was
an extraordinarily difficult position that we were discussing
in response to earlier questions, and given the importance of
nuclear safety and security of supply, and given that we shall
not actually know for certain the answer to that for many tens
of years, the answer is that it is a reasonable outcome. We now
need to make sure that we monitor the situation closely and secure
the best return for the taxpayer as well as the policy objective
in the period ahead.
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