Q141 Mr Williams: Yes.
Ms Ghosh: I do not know the answer to that but we would be happy to talk to colleagues who were in the private office at the time.
Q142 Mr Williams: That is rather unfortunate. I would have thought there would be some anecdotal evidence within the Department as to what went on. I would have anticipated some modicum of expression of interest or concern or questioning, would you not?
Ms Ghosh: I would not speculate but I am sure we can find some evidence for you if you would like to have it.8
Q143 Mr Williams: I look forward to reading it. I would look forward even more to reading the source evidence you collect before I read which of it you care to let us see! I think most of the interesting questions have been asked. You are still negotiating a number of claims. Is your contract robust enough? Time and again with PFI we have had permanent secretaries come here thinking they had built protection in and then finding that the contract does not stand up and on the first possible occasion the private sector says, "No, I am not paying up." How robust is your contract?
Mr Varney: I think we have put a lot of effort into trying to make sure that it is robust and we did that firstly by requiring quite a high level of equity for these sorts of deals. The NAO Report indicates that there is a high level of equity. In the discussions which we had with Mapeley when they felt they were in the trouble that led to Mapeley shareholders putting more equity into the business, we have tried to do a business continuity programme to learn from other people. I do not think one can ever say everything is 100% certain but we have certainly struggled to make it as comprehensive and as coherent a programme of risk management as we can. It is interesting that what the NAO Report talks about for us is things that we are actually doing.
Q144 Mr Williams: If the contract is so robust why are the negotiations so protracted? If the contract is robust, one would have expected easy resolution to the problem, would one not?
Mr Varney: I think there is a difference between being robust and being completely satisfactory. This is not a completely satisfactory contract. That is what we are negotiating. On the question of whether it is robust we think we have taken measures and you have cross-questioned Mr Hopkins about the robustness of Mapeley's stance and he has given you assurances.
Q145 Mr Williams: I understand, Mr Hopkins, that your company felt that the performance measurement system was punitive?
Mr Hopkins: That is right.
Q146 Mr Williams: Who was irresponsible enough to sign up to that then?
Mr Hopkins: As I said earlier, we knew exactly what we were signing up to and its punitive nature is not necessarily just financial, rather that the punishment does not really reflect the crime. There are things which I think we can do working in partnership with the departments to make the PMS system work better in practice. We have signed up to it and we will live with that. I think developing it to make it better is a sensible thing for both parties.
Q147 Mr Williams: What if they do not agree to make changes?
Mr Hopkins: Then we live with what we have signed up to.
Mr Williams: Could we have an outline of the nature of these problems in a note, not an outline here and now but if the three of you could put a note in to explain to us precisely what it is.9 I think that is all I have to ask.
Chairman: Thank you very much. Mr Jenkins?
Q148 Mr Jenkins: Mr Varney, coming so late in the proceedings most of the questions have already been asked so there are just one or two brief things. Firstly, let me say that when I read this I thought it was a very good Report. I did, I thought it was a very good Report. I came here quite relaxed thinking it was going to be an easy session but I have got to tell you now that the Report is much better than your answers because I am getting more and more doubts as I listen to you. The longer it goes on the more doubts there are in my mind. When you signed up to this Report -I know you are going to answer me one or two simple questions because I have only got simple questions -on page 2 in paragraph 4 it says there in summary "the deal has delivered benefits and more are expected; the Departments got a good price; and good risk management will be essential." I bet when you signed that off you felt excellent and you ticked it off and signed it, but the paragraph above it 3(b) says one thing which I do not understand. It outlines the fact that there was an average annual charge of £170 million, equating to some £1,500 million over the period of the contract over 20 years. At the bottom it says in real costs £3.4 billion, and that is the figure you used. I thought that I had understood that and I understand that the average will not be £170 million every year because it will go up and it will go down. In the figures can you explain to a simple soul like me why the figures given by the Treasury show that we have paid £234 million in the first year, £305 million in the second year and £311 million in the third year, when the contract was averaged at £170 million? What does this mean? Does this mean that we are front-end loading and after ten years we will be rent free for ten years because that is the point when we hit 3,400 or does it mean that there is a variance in the contract, and if there is a variance in the contract why is it so large?
Mr Varney: I think we can cover this on both sides. I think it is very important to note that the numbers you refer to, as you rightly say, are real and the note on the 170 says: "This charge reflects the Departments most likely requirements for accommodation . . ." So part of answer lies, as I said earlier, in procuring other services as well as the buildings. We have obviously gone through the stage of having this audited to make sure that we can actually say we are not paying anything that is not in line with the contract. I will ask the contract manager and then Mapeley to comment.
Q149 Mr Jenkins: You explain this. We all want to know the answer to this one.
Ms McHale: By nature these contracts provide a framework where the Departments can have their relatively stable and predictable costs, the facility price which is indexed over the life of the contract, and then buy in other services as required. It is the other services that are creating this cost effect that you see where it perhaps looks as though we are paying a lot for the facility price. It is total costs and there are a number of other facilities services which the department has bought before the contract and we are incurring as cost layers before contract which are still coming through the cost layers. It is a confusion about what the facility price means. The NAO very helpfully qualifies this in the Report and says it is an accommodation charge which can go up and down in line with the departments' requirements, but it is the other cost layers that go through as a result of the buying power we have acquired through the contract with Mapeley.
Ms Ghosh: In a simple person's terms the kinds of things that make up the difference are things like utility costs which we pass through to Mapeley and Mapeley pass them on, things such as major or minor new works or if we want childcare provision. It is things that are not covered by the basic rent and accommodation costs.
Chairman: We will have to break there for a division.
The Committee suspended from 4.48 pm to
4.56 pm for a division in the House.
Chairman: Order, order.
Q150 Mr Jenkins: So in essence what we are saying is that we have two elements here. The first element is the contract which is averaged and will be paid at some £170 million a year. On top of that there is a flexible element which you are paying to the contractor over and above either the original contract concept or which you understood to be part and parcel of the contract originally but you could not quantify it at that stage?
Mr Hopkins: Can I have a little go. We signed up to provide a certain amount of services for 20 years. The base cost of that service (with full risk transferred to us) is the £170 million number. On top of that at the full discretion of departments there are other things that they can ask us to do or they can ask the rest of the market place to do which we bid for and then we win that business. In certain instances like utilities, which we have talked about, which is the £20 million number that passes through our company, we do not make any margin on that. The base contract of risk transfer is that £170 million.
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