Q161 Jon Trickett: I just wanted to ask briefly about the corporate structure which Mapeley has adopted because they have got two companies, have they not, one dealing with the maintenance contract and the other one holding the property. Of what benefit to the public sector is that corporate structure?
Mr Varney: Well, I think that is a question of in the overall contract you have to say that what Mapeley offered was a bid which was half a billion less than the next bidder. They obviously took steps to put a structure together which was presumably the way they valued their bid but you will have to ask Mr Hopkins.
Q162 Jon Trickett: I am asking you because you are the public sector and that is what I am interested in looking at as part of the Committee of Public Accounts. It strikes me that the answer that Mapeley have offered us is that the asset portfolio enhancement in value which has taken place as a result of market changes has been helpful to them in the overall picture but that the revenue contract, if you like the maintenance, has been a struggle. You are still trying (in the jargon that you are using) to bed down. Supposing the contractor runs into trouble? What implications does that have for the asset-holding company?
Mr Varney: If the company is in trouble then the provisions of the deal are that they would be in trouble with the banks and therefore the banks would step in because the banks -
Q163 Jon Trickett: What steps did you take as the public sector to secure the assets because clearly they have set up two companies? What I am trying to get at is supposing they default on the operating contract what charge do you have then against the asset-holding company?
Ms McHale: We contract with one entity so if there is a problem with another entity it impacts the whole contract. We have a protection for the run off of the assets which is the £150 million deferred consideration for the first ten years of the life of the contract. So if anything happens during that time the compromises Mapeley's viability then we are entitled to a payment back from them as a first charge on the assets for this deferred consideration.
Q164 Jon Trickett: So there would be a charge on the assets by the government effectively, by the institution you represent even though the assets are held in a separate company to the operating company?
Ms Ghosh: We would have the first charge sufficient to cover so that in the end we would not only have our £220 million up front, we would have the proportion remaining of the additional £150 million which was part of the total valuation, so we would get our total valuation.
Q165 Jon Trickett: Okay. As I understand Mapeley's answer -and I think the Chairman will stop me if I go into this too much further because of my time -the enhancement in asset values has helped to protect the corporate structure which they have established. Was that enhancement in value in some way part of the evaluation process at the time the contract was being evaluated, since it is clear that property values have increased? In a property portfolio it is clearly a factor to be taken into account in evaluating values, is it not?
Mr Varney: The bid from Mapeley, as we rightly said, was thin on operating profit and relied on capital profits at the end. The response of the two departments was to respond to that uncertainty by looking at getting a high level of equity into the contract, getting as much value as they thought they could up-front and getting a protection for the £150 million that they did not get over the first ten years of the contract, so they went for a risk mitigation strategy in face of that potential uncertainty.
Q166 Jon Trickett: If the property market suddenly collapses then Mapeley are in deep trouble really. What happens under those circumstances? I am not asking you, Mr Hopkins, I am asking the public sector.
Mr Varney: We have already had one set of negotiations against that background and we have been fairly robust. As we have said, we have not parted with any money.
Q167 Jon Trickett: Against the background of a collapse in property values?
Mr Varney: That is a matter for Mapeley.
Chairman: In terms of plan B we are going to go into private session. There are one or two other supplementary questions from Mr Steinberg and Mr Jenkins.
Mr Steinberg: Just very quickly on two issues on whether or not you got a good deal. Jon has been discussing the £220 million that Mapeley paid to you. How do you know that was the correct figure? How do you know it should not have been more? Why was it not more? That is the first question. The second question is that they claim they are £500 million cheaper than anybody else. They claimed they were able to do this because they were going to save £55 million through tax evasion by going offshore. You are tax inspectors, you know exactly how much you charge me and I get a bill every year. How do you know it is not more than £55 million? It could be more than £55 million. That is maybe why they did it in the first place because they knew that they are going to make much more than £55 million. Have you done any calculations to find out whether £55 million is a true figure? Finally, the last question is do you find it embarrassing that the Inland Revenue and Customs and Excise are now being run from a country that is offshore and other people use for tax evasion?
Chairman: To be fair, I did ask this question right at the beginning and I think their answer was that they have apologised.
Mr Steinberg: That is a different question. I am asking do they find it embarrassing.
Q168 Chairman: I did ask was it a matter of shame which is even stronger. Do you want to add anything to your earlier answer?
Mr Varney: No, I am quite happy to rest -well, I am not happy but I am content to rest with my earlier answer.
Q169 Chairman: You are not happy with your earlier answer or you are not happy with the situation?
Mr Varney: Not happy with the situation, as I explained right at the beginning. Can I deal with the two issues. The £220 million estate was independently valued by property specialists and they established a value of £370 million. We felt, in consultation, that £220 million was the amount up-front that we could get which would keep bidders in the contract. So it was a judgment figure and it was consistent also with the deal that DWP had done. It is about the same percentage. Then on the issue of the £55 million, which is the Mapeley evaluation of the capitals gains that they will make, that gain is based on a series of assumptions, that first of all UK tax will not change in terms of capital gains tax legislation; secondly, it is an assessment on Mapeley's behalf of the relative rates of inflation of office buildings and the Retail Price Index. That is how the £55 million comes about. In broad terms the £55 million rise is assuming that properties will increase in value over the next 20 years at about twice the rate of inflation.
Q170 Mr Steinberg: So you think that the £55 million is an accurate sum?
Mr Varney: In the last ten years the rate of property increase has been somewhat less than the rate of inflation. I am in no position to judge what is going to happen over the next 20 years. I can only tell you what the assumptions are.
Mr Steinberg: I could go down a different line there.
Chairman: Mr Jenkins?