PFI: The STEPS Deal (HC 1211-i) Public Accounts Committee 27 Oct 2004

Evidence given by Mr David Varney, Executive Chairman, Ms Helen Ghosh, Director General (Corporate Services), Ms Siobhán Mary McHale, Director of Estates, Inland Revenue/HM Customs and Excise; and Mr Jamie Hopkins, Chief Executive Officer, Mapeley.

Q1 Chairman: Good afternoon. Welcome to the Committee of Public Accounts where today we are looking at PFI: the STEPS deal, and we are joined by witnesses from the Inland Revenue, HM Customs and Excise and a witness from Mapeley. Mr Varney is the executive chairman of the Inland Revenue/Customs and Excise. It is your first visit, I believe. You are very welcome. He is joined by Ms Helen Ghosh, director general, corporate services, and Ms Siobhán McHale, director of estates and, from Mapeley, Mr Jamie Hopkins who is the chief executive officer.

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Q73 Mr. Gerry Steinberg (City of Durham): Mr Varney, you remind me of all chief accounting officers. You are desperate for praise. You made a comment about it being a good report and you will learn as you come here over the next two or three years, I would suspect, that you will not get any praise whatsoever because it means that you are doing your job properly when you are being praised and that is what we would expect. It is the cock ups that we look at and you are responsible. Have you met Sir Nick recently?

Mr Varney: Not very recently. I saw him about a couple of months ago.

Q74 Mr. Gerry Steinberg (City of Durham): Did he say he had dropped you in the mire?

Mr Varney: He was not as precise as that. I thought I read the other day that you were saying that the Committee had a very positive relationship with most of the people who came in front of it.

Q75 Mr. Gerry Steinberg (City of Durham): We do. The department, I am told, expects to reduce the costs of running this estate by something like £344 million over the contract period of 20 years. Is that right?

Mr Varney: Yes, that was the public sector comparator.

Q76 Mr. Gerry Steinberg (City of Durham): I certainly would never get a job at the Inland Revenue but my simple arithmetic says that is something like £17 million a year savings? Is it really worth it?

Mr Varney: We free up in total £370 million up front. We thought and we still think that on the back of the contract we will be able to better procure services because we will be able to do it on a consistent basis. For example, utilities. That is why we see the value being greater than is in the model. The comparator put up by the NAO envisages that 40% of the estate will be reduced. With the pressures that are on both in terms of efficiency on the one side ----

Q77 Mr. Gerry Steinberg (City of Durham): It is a yes, is it?

Mr Varney: ---- and technical change. I think it is inconceivable that in 20 years' time Revenue and Customs will operate the way they operate today, which is with a lot of paper based systems.

Q78 Mr. Gerry Steinberg (City of Durham): I will take that as a yes. How much have you saved up to now?

Mr Varney: We can identify the values that we have saved in terms of the utilities fairly easily. We can do the 220 million each year. It is quite difficult because of the number of decisions to go back and see what you would have done had you not done this contract.

Q79 Mr. Gerry Steinberg (City of Durham): How much have you saved?

Mr Varney: It is very difficult to get to an answer. What we have done is ----

Q80 Mr. Gerry Steinberg (City of Durham): Surely you must know. If you are going to know whether the contract is successful or not, you have to know whether you have saved any money or not. You cannot wait 20 years to see whether you have saved the 344 million we are told you are going to. You must have some idea that you are saving money, or are you losing money at the moment?

Mr Varney: No. What you try and do in a situation like this is you try and work out what the alternative is at the point you make the decision. That was on the basis of the public sector comparator which is in this report. Because of new tax credits and law enforcement work, we have more office space now than we had when we signed the contract. If I want to give you a saving, I have to go back and recreate the public sector comparator and then do a comparison.

Q81 Mr. Gerry Steinberg (City of Durham): Are you telling us that you will never know how much you have saved?

Mr Varney: At the end of 20 years you will face the same problem. You have to think about what you would have done and what is the alternative. As time goes on, you make decisions. You either reflect them back or you say, "I make the right decision here for value for money ..." ----

Q82 Mr. Gerry Steinberg (City of Durham): In 20 years' time you will be asking these same questions.

Ms Ghosh: We are going to work with the NAO to try and pin down these issues rather more closely. The report is a snapshot of where we were at that moment. As the estate expands or contracts, the issues will be different. As the costs of utilities change, that will be different. We are about to embark on a piece of work with NAO colleagues and therefore we can map it and ----

Q83 Mr. Gerry Steinberg (City of Durham): I would suggest not to get in the habit of Sir Nick and try to talk us out. Jim talked a lot about consultants. How much did the consultants cost you?

Mr Varney: Since the contract was signed, 1.8 million.

Q84 Mr. Gerry Steinberg (City of Durham): What about before?

Mr Varney: 7.5 million.

Q85 Mr. Gerry Steinberg (City of Durham): Nine million quid?

Mr Varney: 8.8, yes.

Q86 Mr. Gerry Steinberg (City of Durham): That is nearly £9 million out of the first year's profits?

Mr Varney: Yes, and it is out of a £3.4 billion contract.

Q87 Mr. Gerry Steinberg (City of Durham): We are talking about whether the taxpayer is getting a fair deal. Mr Hopkins, have you come back for any money yet? You will, will you not?

Mr Hopkins: We initially did.

Q88 Mr. Gerry Steinberg (City of Durham): How much was that?

Mr Hopkins: It was around £27 million a year.

Q89 Mr. Gerry Steinberg (City of Durham): You have asked for another £27 million a year. That is the profit gone. We are now minus £10 million a year.

Mr Hopkins: We did originally. That was based around some of the changes that you find on an estate of that size. Subsequently we have funded that ourselves and we are in conversations now over variations and changes, so there has been no additional money paid.

Q90 Mr. Gerry Steinberg (City of Durham): Are you going to give us a guarantee this afternoon that your company will not come back to the taxpayer and ask for more money at the length of this contract, other than what you have signed for?

Mr Hopkins: Apart from where they change the service delivery or they are in buildings where they said they were not, absolutely.

Q91 Mr. Gerry Steinberg (City of Durham): If you do come back, you are on the record so you will not want that money.

Mr Hopkins: As I said, apart from where things are changing and we are owed money for variations, that is absolutely the case.

Q92 Mr. Gerry Steinberg (City of Durham): You have no proven record, have you, as a company in property management?

Mr Hopkins: Prior to this transaction, no.

Q93 Mr. Gerry Steinberg (City of Durham): Why did you go to them? Purely financially?

Mr Varney: £500 million to reinforce ----

Q94 Mr. Gerry Steinberg (City of Durham): You were prepared to gamble the whole of the Inland Revenue estate on the basis of £500 million which they may at the end of the day cock up?

Mr Varney: The NAO report makes very clear we followed all the lessons from DWP. We tried to look at how we minimised the risk in this contract. The public purse is better off to the extent of 500 million, plus it has competition and flexibility. That is not a gamble. That is a sensible decision.

Q95 Mr. Gerry Steinberg (City of Durham): I would have been very suspicious when a company comes along and they can undercut everybody by half a billion pounds. Are you not suspicious at all about that? They do not have a record in property management and they can come along and undercut everybody by half a billion pounds and you think you are on a safe deal, do you?

Mr Varney: I think you do the due diligence which is described in the NAO report but I do not see my job as trying to maximise the revenue of service providers.

Mr Hopkins: I think it is also fair to say, when you are asked a question of experience, you are talking about ----

Chairman: I did not quite hear what he said.

Q96 Mr. Gerry Steinberg (City of Durham): I heard what he said.

Mr Varney: I do not think it is my job to maximise the revenue of private sector service providers.

Q97 Mr. Gerry Steinberg (City of Durham): What you are saying is you take the cheapest one, regardless?

Mr Varney: No, not regardless. The report is absolutely clear that we tried to learn all the lessons of the DWP procurement and apply them, look at the risks and see if they were reasonable. That is why we used some of the consultants.

Mr Hopkins: You asked a question about the experience of Mapeley. The PFI out-sourcing property market is a new market in the UK. The first transaction which took place was the PRIME transaction. There has not been anything since in the public sector. Whilst Mapeley have not had experience, the shareholders of Mapeley are vastly experienced in property management service delivery in various guises throughout other platforms throughout the world.

Q98 Mr. Gerry Steinberg (City of Durham): I bet you do an Oliver Twist. I will give you three years and you will be doing an Oliver Twist, coming back with the begging bowl.

Mr Hopkins: We have been three and a half years into this contract already.

Q99 Mr. Gerry Steinberg (City of Durham): You are confident that you gave them the exact price, the correct price? You did not undercut deliberately, did you, to make sure you got the contract?

Mr Varney: We made it very clear, as it says in here, that we bid at very, very low operational margins. One of the things it is worth pointing out to the Committee is that ----

Q100 Mr. Gerry Steinberg (City of Durham): I read the report and I think it was in paragraph 2.83 where it said the data that had been given by the Inland Revenue was not sufficient to make any decision on. Yet you, as a new company, did not have the data that you were able to make that decision on, a valid decision. Yet you were still able to undercut by £500 million. Perhaps it was a good thing because if you had had the data maybe you would not have gone for the £500 million cut.

Mr Hopkins: Data on a portfolio of this size changes throughout the process because constantly departments were moving in and out of properties and service delivery levels were changing. There were some inaccuracies in the data and that was made clear from both sides. I think both parties went into the transaction with that in mind, with a view to levelling off those variations. As we have seen so far, there have not been any paths crossed of payments for those variations.

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Mr. Gerry Steinberg (City of Durham): 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. Gerry Steinberg (City of Durham): 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 judgement 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. Gerry Steinberg (City of Durham): 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. Gerry Steinberg (City of Durham): I could go down a different line there.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee. Neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.