3.2 A value for money assessment carried out in 2004 estimated EP's returns from the development of land on the Peninsula at £216.4 million in net present value terms in 2004 (Figure 12 on page 27). This represented the expected return to EP under the terms of the Land Disposal and Land Assembly Agreements and excluded returns arising from other agreements that EP was party to, such as a share of profits made from The O2 (see Figure 11). A financial model, created by MDL in 2002 to assist with its due diligence of the deal, provided the basis on which this assessment of EP's expected return from the deal was carried out.28
3.3 Just over half of EP's returns from the land-related portion of the project are based on a share of profits from the development of individual plots of land across the Peninsula. To be confident that it is getting its fair share of profits, EP has negotiated a good level of access to MDL's accounts. This will allow EP to scrutinise each line of expenditure and revenue against each plot of land. Figure 13 on page 27 illustrates the level of detailed scrutiny required to ensure that costs are reasonable and, where common costs are incurred (such as for building infrastructure common to several plots of land), they are allocated in ways that are consistent with the legal agreements.29 MDL provides updates on total project expenditure at each meeting of the Project Control Group and has to submit invoices above £25,000 for scrutiny. And under the terms of the Land Disposal Agreement, EP also receives annual audited accounts from MDL.
3.4 Nevertheless, constant vigilance and a thorough understanding of the deal are required to ensure that EP is getting its due returns under these complex profit sharing arrangements. This will include managing the transfer of knowledge very carefully, as personnel move to and from the project, to ensure that the proper level of scrutiny can be maintained for the duration of this long-term deal (see paragraph 1.20).
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28 The financial model was created to reflect the financial arrangements within the legal agreements. It also made a number of assumptions about what might happen within the market and wider economy for the duration of the deal e.g. the costs of construction and general inflation.
29 A new financial model was created by MDL in 2007 and should assist EP in its scrutiny of the profit-sharing arrangements. The financial model is not yet complete because it does not include the arrangements between EP and Quintain under the Land Assembly Agreement.