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.
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.