1.18 After suffering from losses on the NPL contract and other construction projects, notably the Millennium Stadium, Cardiff, in October 2001, John Laing plc sold its construction business, including JLC Ltd, to a competitor for £1. It retained liabilities for thirteen contracts, including the NPL design and build contract.
7 | Laser had access to nearly £100 million | |||
| Laser's sources of funds |
| Use of funds |
|
Prepayment - The Government's proceeds from the sale of land to Laing Homes Ltd | £8.8 million | Fixed price contract for the design and construction of the new facilities | £82.0 million | |
Senior debt - The majority of the funds Laser needed to construct the new laboratories. Bank of America, NA provided 10 per cent of the senior debt facility and Abbey National Treasury Services plc provided the remainder. | £81.8 million | Fees for construction advisers, capital expenditure in preparation for the provision of facilities management services, debt interest payments, working capital and contingency. | £17.6 million | |
Junior debt - Provided by Abbey National Treasury Services plc, this form of funding is more secure than equity but less secure than senior debt. | £4.6 million |
|
| |
Shareholders' equity - Serco Group plc and John Laing plc each held 50 per cent of the stock in Laser. | £4.4 million |
|
| |
Total | £99.6 million |
| £99.6 million | |
Source: National Audit Office and the Department | ||||
1.19 John Laing plc then renegotiated JLC Ltd's contract with Laser. It did so because:
■ It had already incurred considerable losses on the contract. John Laing plc singled out the NPL contract as being a major contributory source of the reported £56 million gross loss in JLC Ltd's activities for the year ending December 2000.
■ It faced further losses under the design and build contract. In September 2001, John Laing plc estimated that the cost to complete the new facilities would be about £45 million, with the potential to be even more because John Laing plc retained responsibility for ensuring that the design would meet the Department's output specification. JLC Ltd had already been paid £76 million against the agreed fixed price of £82 million, so could earn only a further £6 million.
■ Its projected future losses from honouring its obligations, together with the £10 million it had already paid Laser in liquidated damages, would considerably exceed the £31 million contractual limit to its liability to Laser.
1.20 Against this background and under pressure from its bankers to obtain cost certainty by "whatever means", John Laing plc threatened to walk away from the project. Laser and the Lenders advised the Department that the threat was real. The ensuing discussions and negotiations concluded in November 2001 when Laser signed a Supplemental Deed with JLC Ltd. Under the deed, Laser agreed to relax its performance requirements, so that JLC Ltd would complete construction on the basis of specified inputs rather than performance outputs, and so would no longer bear final responsibility for ensuring that the design met the Department's requirements. For those construction phases that did not meet the Department's output specification after JLC Ltd had completed its work under the deed, Laser arranged for Serco Limited to project manage outstanding works.
1.21 The Department refused to accept any relaxation of the performance requirements and did not recognise the Supplemental Deed. However, Laser considered that had it not concluded the deed with JLC Ltd, John Laing plc would have pulled out of the project, an intention that John Laing plc confirmed to us was indeed the case. In Laser's view, the consequences to the project would have been very serious and for the Department could have included:
■ A legal dispute with John Laing plc, Laser and the Lenders, with an uncertain outcome.
■ A lengthy delay while it assessed and re-tendered the unfinished work.
■ The likelihood that no replacement contractor would accept the output specification.