Q21 Chairman: Can you look, please, Mr Varney, at page 25, paragraph 3.14. You will see there that negotiations were still ongoing at the time of the Report. Is that correct?
Mr Varney: Yes.
Q22 Chairman: How can this be a real partnership if negotiations are still ongoing? These are very prolonged negotiations, are they not?
Mr Varney: Yes.
Q23 Chairman: Is it a real partnership?
Mr Varney: I think we are trying to get a real partnership. The nature of moving from owning your own estate, which you managed through all sorts of different locations, and pulling it together in order to bring in an outsider, you have to change to being a customer. There are features of the agreement which have not proved satisfactory from our point of view and we are together with Mapeley STEPS trying to resolve those in an agreeable way.
Q24 Chairman: It is not just the bad publicity about being tied up with a tax avoider. It is also the nature of this contract which we, as a committee concerned with value for money, want to concentrate on. Would you please look at paragraph 2.17, page 19, Mr Varney? It tells us there that Mapeley STEPS' margins are very tight and they hope to win other business to spread its cost. Did it not seem rather risky to you to award such a large contract to a company operating on such a basis?
Mr Varney: At the time the contract was awarded, there was only one other provider that had been contracted to the government. The difference between its bid and this bid was £500 million, so there was a sizeable incentive to look at this arrangement. If you look at the Report, you will find that at each stage the Department tried to learn from the previous DWP out-sourcing and tried to apply the lessons to see what the risks were. There were particular elements of the deal where it was felt that Mapeley were pricing very aggressively but there were other aspects where Mapeley could take advantage of the contract so in the round we had to make a judgment. The end result of this arrangement is the inclusion of another provider of these services so there could be beginnings of competition in the marketplace.
Q25 Jon Trickett: I want to briefly look at the public sector comparator which in the past we have usually concluded is to some extent a got up figure to provide a fig leaf so that you can privatise things which you wanted to do in the first place. The public sector comparator involves calculating the amount of risk which would have been retained by the public sector had the contract been handled in-house. This is detailed on page 36 in appendix five. In there it says that the additional amount of money added to the public sector comparator was £101 million. Is that right? The difference between the public sector comparator price with and without risk, which would have been retained had this been handled in-house, is £101 million. Am I understanding that sentence correctly?
Mr Varney: I think it is covering uncertainties.
Q26 Jon Trickett: The risk which would have been retained by retaining the contract in-house rather than privatising the contract.
Mr Varney: I think it is incredibly difficult when you are in a situation where you have all of your estate spread out and managed locally to pull it all back together, and then you try and create artificially what might happen if you were to manage it yourself. Given that, a lot of the incentive for these sorts of arrangements are that running an estate is not our major business. We do not have a competitive edge in it. We wanted, as is said in the Report, to get the advantage of releasing money that was tied up in that business and to bring in a professional standard -
Q27 Jon Trickett: I do not think you have achieved any of those objectives but I am just asking about risk and the externalisation of risk by going through a PFI, which is what this is talking about here. The whole of this appendix deals with the public sector comparator. Allegedly, it would have cost more money to retain the contract in-house than it would have to go through a PFI. This paragraph seems to say that £101 million was the difference. The previous couple of sentences deal with the fact that the contract failed to externalise the risk, do they not?
Ms Ghosh: Surely what this paragraph is doing is explaining that this was not a standard PFI. This was not a design, build and operate PFI; this was a PFI where the property was built and we were handing it over to Mapeley. What they were doing here was making an assumption about what value they therefore put in for the risk in this type of PFI which, as they say here, was £101 million. That is still significantly -
Q28 Jon Trickett: We will come to that in a minute because the contract is not running to the price that was agreed, is it?
Ms Ghosh: It is actually.
Q29 Jon Trickett: It says in the previous two sentences: "… the STEPS differs from a standard … DBFO PFI deal in that there is no construction of an asset, the STEPS PSC had no risk adjustment for construction time or cost overruns. This risk is usually the largest risk adjustment in a standard PSC." Are you sure that you did externalise the risk in this contract rather than retaining the risk in-house as the rest of the document appears to demonstrate, does it not? Since when the company got into trouble, as they did, basically we have had to bail them out.
Ms Ghosh: We have not.
Q30 Jon Trickett: That is how I read the paper and, with all due respect, I think I am entitled to make that judgment. Obviously you may disagree but I am simply asking you this: are you convinced that you did externalise all the risk that you could so that the public sector was protected?
Mr Varney: We did to the best of our ability try to use the techniques which had been used -