4.6 The project team advised ministers that justification was weak for some of the figures in the Department's opening position because the team had taken the most favourable view wherever there was any doubt. A more realistic settlement range lay between £73 million and £86 million. In September 2004, ministers authorised the team to negotiate termination of the contract providing the termination sum did not exceed £73 million. To keep pressure on Laser and the Lenders, ministers instructed the team to refer two disputes to adjudication: the first sought to overturn the Independent Certifier's completion certificate for the modules housing laboratories that failed to meet the most stringent sub-audible noise requirements (paragraph 1.11); the second sought to overturn the completion certificate for Construction Phase 9 (Module 8), in which the Department considered the gas extract system to be in breach of health and safety requirements.
13 | The Department estimated that, at most, the Lenders' liabilities amounted to £93 million | |
|
| £ millions |
Senior debt | 81 | |
Junior debt | 4 | |
Cost to break agreements that hedged movements in interest rates | 8 | |
Total Lenders' liabilities | 93 | |
Source: The Department |
| |
4.7 Negotiations started in mid October. The Department informed Laser and the Lenders that it was prepared to pay £54 million, the lowest bound of the Department's range. The Lenders declared that they wanted full recovery of their liabilities, £93 million.
4.8 Initially, neither the Department nor the Lenders displayed much willingness to compromise on their opening positions. Also, while the Lenders complied with their contractual obligations to Laser, they were not prepared to release funds so that Laser could meet unsecured creditor demands and insurances. Any release of cash from these accounts to pay unsecured creditors would have reduced the Lenders' recovery on a pound for pound basis. When Laser reported the Lenders' action to the Department, it instructed Laser to demonstrate that it was complying with its obligations and was solvent. As an interim solution, Serco Limited insured the works, but threatened to initiate termination of the Support Services Agreement (Figure 1) because of an outstanding £1.4 million bill for facility management services.
4.9 By mid November, the Lenders were prepared to settle for £80 million, £13 million less than their liabilities. The reduction was based on a mixture of the Lenders accepting some of the Department's arguments (£10 million), and writing off some of the cost of breaking hedging arrangements behind Laser's debt (£3 million). At this stage, the Department decided to concede the weakest areas in its opening position and increased its offer to £67 million.
14 | The Department estimated that Laser's costs, less the Department's liabilities, ranged between £54 million and £86 million | |||
|
| The department's estimates for the range of Laser's budgeted construction costs, "A" (£ millions) | ||
|
| Opening position | Lower bound of likely outcome | Upper bound of likely outcome |
Design and build contract | 82 | 82 | 82 | |
Construction advisers | 1 | 1 | 1 | |
Capital expenditure for facilities management services | 0 | 1 | 1 | |
Construction element of set up costs | 3 | 3 | 3 | |
Debt interest and bank fees | 9 | 9 | 9 | |
Design costs prior to contract signature | 0 | 0 | 3 | |
Revenue from the Department for space that it did not occupy because of concerns about non-performance and health and safety | (9) | (1) | 0 | |
Variations ordered by the Department | 0 | 4 | 4 | |
Total construction cost, "A" | 86 | 981 | 103 | |
| The department's estimates for the range of its recoverable liabilities and entitlements, "B" (£ millions) | |||
| Opening position | Lower bound of likely outcome | Upper bound of likely outcome | |
Costs to complete the NPL facilities to meet the Department's output specification | 15 | 13 | 5 | |
Fees incurred as a result of the termination | <1 | <1 | <1 | |
Unpaid liquidated damages | 3 | 2 | 2 | |
Receipts from the property sale to Laing Homes Ltd which was invested into Laser | 9 | 9 | 9 | |
Costs to re-tender the construction contract and manage contractors | 2 | 0 | 0 | |
Total "B" | 30 | 24 | 16 | |
| The department's range for the termination sum, | |||
| Opening position | Lower bound of likely outcome | Upper bound of likely outcome | |
Laser's budgeted construction cost less 105 per cent of the Department's liabilities and entitlements | 54 | 73 | 86 | |
Source: National Audit Office and the Department | ||||
NOTE | ||||
1 Minor rounding errors corrected in totals. | ||||
4.10 With some weaknesses in its arguments still remaining and a desire to conclude the negotiations before positions became entrenched, the Department opted to try and reach a common agreement based, not on arguments of contractual entitlements, but on a figure mutually acceptable to the two parties. It therefore offered £73 million less outstanding obligations to creditors, estimated to be £1.4 million. The Lenders responded by reducing their demanded termination sum to £77 million.
4.11 The project team informed ministers and received authority to negotiate a termination sum up to £76 million. During a further meeting at the end of November 2004, the parties settled on a termination sum of £75 million. The Lenders also relaxed Laser's access to cash reserves which were sufficient to meet all unsecured third party creditor claims against the company.
On 20 December 2004, the Department and Laser signed a termination agreement. The Department stepped into the facilities management contract with Serco Limited to ensure that operations would continue at the NPL.