132. Coming so late in the proceedings most of the questions I had pending have already been asked.
(Sir Kevin Tebbit) But they may not have been answered. I can try again.
133. Mr Jones just mentioned a point which I have always found rather strange and no-one has come up with an answer yet. When you look at providing Office space in central London, which is one of the most expensive and difficult places to refurbish anything, why do we do it and why have we not relocated something like this to Coventry or Plymouth or somewhere outside? Why are we still pouring money into central London when we know how expensive it is to get the work done in central London?
(Sir Kevin Tebbit) I take the point. We will always need our headquarters in central London as long as we need to have very close links with Number 10, the Foreign Office, central Whitehall buildings. We are an international department. A lot of visitors come to see us. We are having visitors either way, whether it is in the Department of State or whether it is in the Chiefs of staff Headquarters which are in the one building, we are co-located. Also our crisis management facilities are in the basement of the building which are continuing throughout this period. Therefore it is not really an option for us not to be in central London. It is where we do need to be. However, you are quite right, 10 years ago we had 32 buildings in London; now we are coming down to three. We do deserve some marks for effort. We had more than 13,000 staff in central London: we are now coming down to 5,000. I see this as a moving picture. We have made major relocations outside London, Bath, Bristol, York, which was the most recent place. We are located throughout the country. We still have 91,000 civil servants; we used to have 100,000. With the change in the role of DERA, that has gone down to 91,000. The number in London, 5,000 of those 91,000, and they are just the civil servants. With the Armed Forces it is many more, so this is not a high proportion.
134. This is a break point, this is where you could have made the final decision. You still have the Old War Office building for your PR and your entertainment. I have a thing on my desk now which is quite marvellous. I switch it on and I receive a letter on the screen which has been typed in my constituency. I can adjust it, press a button and it is printed for me to sign and send off. I have this other thing on my desk as well which I can pick up and talk to somebody. I am in constant communication and they do not need to be here, in fact I would not want them to be here because I can get a much higher calibre of labour for the money I pay out of London than I could in London.
(Sir Kevin Tebbit) You are right; we are finding the same thing. We are doing it-we are doing it-but I am not able to promise that we shall be able to leave London completely, especially as Parliament is likely to be here for a while as well.
135. This was a point where you could have taken an extra building out of London and I think we could have got much better value for money, yet I see no figures to show you evaluated that possibility. Did you do the exercise?
(Sir Kevin Tebbit) We did an investment appraisal for that third building in St George's Court and we found that it was better value for money to stay where we are, as it happens in central London, but we got a very good deal on the building. That makes it worth while. Over a five-year period, we are getting £17 million value by staying in that building. It is a very, very advantageous renegotiation of the lease. The St George's Court building is there purely and simply because it is more cost effective to be there in London as it happens, notwithstanding the security argument I have also made, which helps. It is better value for money than it would be to have it anywhere else in the country.
136. So you did not actually do it for the Main Building.
(Sir Kevin Tebbit) No, not for the main headquarters. We could not move our crisis management facilities without major, major, very big cost implications. That is underneath the building. We need to have a central staff somewhere and central London happens to be where we need to be.
137. Are you refurbishing this underground crisis centre?
(Sir Kevin Tebbit) No, not as part of this project. We have done that separately. I really would not want you to get the impression that we have not been moving out of London. We have been doing it in a big way.
Mr Jenkins: Mr Mitchell has been sitting very quietly there at the end. I do not like anyone to feel they have wasted their time coming here. I bet you are quite glad you do not have to go through this on a regular basis. What would you think is an acceptable rate of return on a project like this one?
(Mr Mitchell) At the time this deal was entered into it was about 17%. That is about where the market was at that time.
138. 17% was the rate of return. Is that normal in this type of project?
(Mr Mitchell) It has probably dropped off a little bit since then, but it has been higher than that in the very early stages.
139. If it ran substantially over 17%, at what point would you feel you were in a position where you are totally embarrassed and you feel you would have to give some back to these people who negotiated this deal?
(Mr Mitchell) One does not embarrass very easily about these things.
140. I bet not.
(Mr Mitchell) It has been mentioned that there is this clause around year 15 that if the terms go up beyond a certain point then there is an automatic sharing with the authority.
141. If in the first 15 years you made 40% return, but after year 15, due to the refurbishment of the building, the return dropped to 20%, you would not be too embarrassed about that.
(Mr Mitchell) In year 15 one would recalculate the total return, taking into account the past as well, that is how the mechanics work.
142. So there are expectations then, hypothetically of course.
(Mr Mitchell) We would hope so and we would have to share it with you if we do make these super returns.
143. When you were beaten down on the last day by £4 million just to come under the figure already set, did you know that figure?
(Mr Mitchell) I was not with Modus on the day the deal was signed. I have joined since, so I cannot comment on that.
144. Did Modus have access to that figure before they got the price down to that level?
Chairman: There is a lady in the second row shaking her head.
Mr Jenkins: I am obviously talking to the wrong person here.
(Sir Kevin Tebbit) I am all in favour of you cross-checking what I said with the company. We did not share this information with them until that very, very last endgame moment.
(Mr Webber) I was there and did not know specifically what the figure was which we had to beat. We were told that unless we reduced our prices the deal would not close that day. We contemplated going away that day, but at that point the sponsors had spent four, five, six years working on the transaction and had spent at least £10 million if not more, therefore after four or five hours of discussion amongst the shareholders, we decided that although we did not particularly like that tactic, on the day, having completed all that work, we did give back some value to the MOD.
145. I ask because in the briefing paper we receive-and you probably do not have access to it-the NAO say that this emphasis enabled the MOD to negotiate a price reduction of £4 million on the day the deal was closed as they insisted the final price should be below the £746.2 million benchmark.
(Mr Hoyle) It was myself and the lady in the second row who engineered this. We did not actually give them a figure to beat. We just invited them to reduce their price on the final day. They made one offer after several hours. It was not quite sufficient and we thought we could get a bit more so we asked them to try again.
146. I can understand that you can give signals without intending to, but as long as they did not have access to that figure . . . We needed to clarify that and you have clarified it. The only other point I was to labour is the risk. I should like to identify what the risk is which you undertake. As has been established, you have borrowed all the money now, so there is no risk on borrowing the money for the next 30 years. He has put that in his bank account and he is going to pay it out as the project goes on. The cost of the building is a risk and there is a possible cost of overruns on the building. Are you familiar with the PFI deals which have been done in the Health Service?
(Mr Mitchell) Yes.
147. You are well aware that we almost have a PFI consortium now where builders get together.
(Mr Mitchell) I am not aware of that.
148. What it basically boils down to is that in the past when there was a contract, when you had a problem you sent for the architect and told the architect that it looked quite nice but if you had it wood panelled and gold plated it would take a little longer and cost a little more and of course the architect who was being paid a percentage of the final cost, said it was a good idea, he had not thought of that and the price went up and time went on. The more they could load on, the better. The architect nodded it through and off they went. Now you have to come in on time. All our PFIs are coming in on time because it costs the firm money if they do not make it. There is very little risk with regard to the overruns. Unless you have underestimated the structural elements, you are going to come in on time, are you not?
(Mr Mitchell) Yes, we would expect to come in on time giving that risk to our contractor and making sure that he manages that risk. That is where the change is from traditional procurement. The PFI contractor is able to manage the risk and it is his own responsibility to sort out the problems.
149. The contract runs over 30 years, so you have to maintain this for 30 years.
(Mr Mitchell) Yes.
150. We do not know what wage rates are going to be for 30 years, so that is a bit of a risk, is it not?
(Mr Mitchell) It is a risk.
151. You have to accept there is that risk. I understand that now. Technology changes, but technology changes normally result in the reduction of operatives in any location, so you may have some extra space and you are going to have to re-let that space.
(Mr Mitchell) Yes, if it is not required by the authority.
152. That is a good risk, is it not, to re-let space in a secure environment? Do you think you can let that space readily?
(Mr Mitchell) The only other prospective tenants are likely to be Government Departments, so it is not a free market letting situation because of the security impacts.
153. It is dependent on other Government Departments coming in.
(Mr Mitchell) The tenants would have to be approved and it is unlikely that the authority would wish to share its Main Building with people who are not secure.
154. May I suggest, hypothetically of course, that if I were in a position as your letting agent and I could let it to someone but the Department said no, I must let it to a secure individual such as a Government Department, I would hold my hands up and say it was not part of the original deal. This is a risk which was not my risk. It was not calculated. I could not calculate this risk. You have imposed this risk on me so I want compensation to accept that condition now.
(Mr Mitchell) That is highly unlikely. The contract is clear that we can only sub-let this to people approved by the authority. We entered into this contract with that clear in our minds.
155. So there is a definite risk on you.
(Mr Mitchell) Yes, there would be risk there.
156. This partnership has to work as far as you are concerned.
(Mr Mitchell) Yes.
157. If you mess them about in the early years, they can mess you about later on.
(Mr Mitchell) In order for this to work we have to trust each other, be open with each other and not mess each other around otherwise it becomes impossible.