Executive Summary
1 The Government Offices, Great George Street is a grade II* listed building, constructed about a century ago. It forms an important part of the Government's freehold estate, occupying a prominent position in Whitehall close to the Houses of Parliament and overlooking Parliament Square and St. James's Park. By the early 1990s, after many years when only essential maintenance had been undertaken, the fabric of the building required extensive remedial work. In May 2000 the Treasury completed a deal with Exchequer Partnership1 to refurbish and then maintain the building for a period of 35 years. Once the Treasury is able to occupy the refurbished building it will pay Exchequer Partnership an annual unitary payment of £14 million (in March 1999 prices). The total net present cost of the unitary payments over the lifetime of the deal is £170 million.
2 Exchequer Partnership was selected as the preferred bidder for the project in September 1996, after a competitive procurement process. Subject to final negotiations, the key terms of the deal had been agreed and funding commitments from financial institutions had been agreed in principle by Exchequer Partnership, as is usual in PFI deals. Following the 1997 General Election, however, negotiations were terminated. The Government considered it inappropriate to go ahead with this major project at a time when all departments were undertaking comprehensive spending reviews.
3 The Treasury reviewed the project to re-assess the extent of the remedial work required and the priority of the project in relation to other expenditure demands. The review confirmed that the building was in need of substantial refurbishment if it was to become a flexible and efficient office, suitable for the future needs of the Treasury. On the basis of a revised specification, Ministers agreed that the project should go ahead.
4 The Treasury decided to retain Exchequer Partnership as its preferred bidder rather than hold a second competition for the entire project. However, when negotiations were resumed in October 1998 thinking had advanced and a fresh element of competition was introduced into the process. Negotiations were reopened with Exchequer Partnership on the condition that the external project funding was obtained via a separate competition. This was to be the first time that project funding had been secured this way in a public sector procurement. The Treasury had two objectives in requiring such a competition:
a) to persuade banks and other project funders to accept standard contract terms for future PFI projects
Whilst the Treasury was negotiating the project agreement, the Treasury Taskforce2 was developing a set of standard terms and conditions for future PFI contracts. This was intended to streamline the procurement process and reduce costs for both the public and private sectors. The Taskforce agreed with the Treasury PFI project team that the project should be used to test how the standard terms and conditions worked in practice. It was hoped that this would lead to their general acceptance by PFI project funders.
b) to obtain the best available price from a transparently competitive process
The Treasury recognised that the suspension of the project and the subsequent renegotiations with Exchequer Partnership after such a long delay would raise doubts whether the deal in its entirety reflected the best value the market had to offer. Holding a funding competition was seen as a way of getting the best price for the project funding and demonstrating that this was the case.
5 This report is about the funding competition. It examines whether the Treasury achieved its objectives and how such competitions might be run effectively in the future. Our methodology is summarised at Appendix 1.
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1 A consortium consisting of Bovis Lend Lease Holdings Ltd, Stanhope plc and Chesterton International plc
2 The projects and policy teams of the Taskforce were set up within Treasury to support Departments on PFI transactions and to develop PFI guidance. All future references to the Treasury or the Treasury project team, unless otherwise stated, can be assumed to include the Taskforce from whom close assistance and support was received.