2.49 The Contributions Agency and NEP reached Commercial Close, agreement on the key commercial and contractual issues, in August 1997. NEP needed to secure finance from external financial institutions to undertake the construction phase of the project and to operate the buildings over the following 25 years. Once this support was obtained, the project would reach Financial Close, and all parties would sign binding contracts. At this time the Contributions Agency expected to sign the contracts in late November or early December 1997.
Figure 11 |
|
Changes in the cost of the deal during the 18 months that NEP were preferred bidder |
The estimated net present cost of the deal changed during the negotiation period as a result of changes in the nature of the accommodation provided, concessions to NEP and changes in interest rates. The Agency estimated when signing the deal that the overall cost, including costs to be borne by the Department such as travel costs for relocated staff, amounted to £241 million. NEP also made some concessions to the Agency during procurement. | ||
| Net Present Cost (£m) | Comment |
Net present cost at best and final offer | 219.3 | This was NEP's bid when in competition. |
Price movements attributable to the project Increase in availability charges as a result of earlier than planned occupation of premises | 14.8 | Decision made by the Department for operational reasons. Earlier occupation means important risks will be transferred to NEP sooner than originally expected. |
Increase in availability charges as a result of concession to NEP on inflation during construction period | 3.8 | Concession made to NEP by the Contributions Agency in exchange for other mostly unquantified concessions by NEP. |
Increases in availability charges as a result of changes in construction costs | 13.4 | Result both of changes in the Department's requirements and of rectification of design problems with NEP's Best and Final Offer. |
Increases in condition payments resulting from changes in building design | 4.2 | The maintenance consequences of the above. |
Revised cost at original interest rates | 255.5 |
|
Price movement for external reasons | (29.4) | External factor beyond the control of either party. |
Revised net present cost at actual interest rates | 226.1 |
|
Increase in Net Present Cost as a result of factors within the Department's control | 36.2 |
|
Increase in Net Present Cost as a result of all factors | 6.8 |
|
Note: The gross increase of £36.2 million is based on interest rates quoted by NEP in their Best and Final Offer. The net increase of £6.8 million reflects the lower interest rates obtained by NEP at the time of signature of the contract. | ||
Source: Ernst & Young, Post Completion Report to the Department | ||
2.50 NEP had put forward, as part of their final bid, an innovative funding package through Royal Bank of Scotland. During the negotiations period, NEP had explored the possibility of using three banks to deliver this option: Royal Bank of Scotland, Midland Bank and Bankers Trust. In September 1997, NEP replaced Bankers Trust as a funding provider because they were not sufficiently confident that Bankers Trust could provide the finance in time for contract signature in December 1997. NEP then reverted to a more conventional funding package provided solely by the Royal Bank of Scotland, who were already familiar with the proposed deal. This change extended the time taken to close the deal by about one month. The deal was closed with guaranteed funding on 8 January 1998.
2.51 The agreed funding package was as follows:
■ £1 million of equity, provided on a 50:50 basis by AMEC Developments Limited and Building and Property Group;
■ a subordinated loan of up to £15.3 million from AMEC plc; and
■ a loan facility of up to £169.8 million from Royal Bank of Scotland.
2.52 As regards the estimated rates of return of these investors, the equity and subordinated debt would earn an estimated rate of return of 14 per cent before tax if the Department exercises its maximum flexibility to vacate space. This is a relatively low return by the standards of other Private Finance projects we have examined and NEP confirmed to us that their intention is to encourage the Department not to vacate space, by building discounts into the prices of flexible space.