Q61 Mr Rendel: If I may say so, you are using an artificial charging basis, this capital charge-and I understand how it is done and why it is done under resource accounting-but it seems to me that the real value of moving is going to be the value of that notional interest you could gain on the capital sum you receive when you sell the buildings rather than any notional capital charge which is a rather artificial figure in some ways. I am surprised you use that. I am therefore surprised in a sense: if that is the only capital cost you are putting in here, I now understand how you can work out whether it is worth moving or not without having the slightest idea what you are going to get back for the buildings you are intending to sell, or the freeholds of those sites. It struck me as very odd that you could work out which was the better value for money without knowing how much you were going to get back for those sites. I now understand why: because you have not actually included that in the calculation. It seems an odd way of doing it.
Mr Gieve: This comparison, which is a straight comparison of what we paid in 2001-02 and the estimate of the unitary payment, was not the basis of the value for money calculation. That was based on a projection of our costs over the 30 years of the contract, including the cost of refurbishment, decant and so on, which we will incur if we do not build a new building.
Q62 Mr Rendel: Half a second. When you were asked by the Chairman why you thought it was worth while, given that apparently the current costs were £33 million and the new costs £39 million, you said actually this £33 million goes up in future years and you did seem to be justifying the move on the basis of that comparison.
Mr Gieve: This particular figure is not part of the projection, but yes, absolutely, the point I am making is that we did model the cost on a comparable basis of getting AGP to build and then paying for the new building and being able to vacate other buildings, against the full costs of staying in those other buildings and that is the basis which is reported in this Report in paragraph 2.11.
Q63 Mr Rendel: Appendix 2, Figure 13, is saying that when you were doing that analysis that is a different analysis from the one in Figure 3 and in Figure 13 you included the actual cost of selling off the properties, as opposed to the notional capital charge.
Mr Gieve: Yes. May I just make that clear? Figure 13 compares the cost of building a new building on a conventional public sector procurement and a PFI deal. That was one comparison. There was also a comparison between getting a new building and sticking with the buildings we have. That is reported in here in paragraph 1.20 and the estimate of the net present cost is £578 million for not having a new building, compared with the cost of the PFI deal. That was based on calculations like the one you have pointed to, but for a different set of years.
Q64 Mr Rendel: May I move on to talk about the refinancing? What was the interest rate at which the financing was being done which was your basis for deciding how much the refinancing might be worth to you?
Ms Aldred: I am not sure I quite understood the question you want us to answer.
Q65 Mr Rendel: There is a financing cost for going ahead with the deal, which the company were presumably taking on, where you were financing it and there was then the possibility that they would do a refinancing, which presumably means that they would hope they might refinance at a lower interest rate. What was the interest rate you were using, that you were assuming they were taking on their original finance at?
Ms Aldred: I am not sure I do have that figure.
Chairman: It seems to be a pretty basic question.
Q66 Mr Rendel: The issue is clearly that you decided that it was worth putting into the contract a refinancing clause which says you are going to get 50% of the refinancing benefit, if there is such a benefit.
Mr Gieve: Yes.
Q67 Mr Rendel: Presumably, in order to work out whether that was worth it or not, you must have done a calculation as to the likely value of the 50% refinancing benefit you might get and in order to do that you must have known what the original financing was going to cost and what chance there was of that being refinanced at a lower value in order to balance that against the extra cost you were paying. To do that, you must have known what the original interest rate was and then you must have taken a guess as to what the most likely reduction in that interest rate was when a refinancing was done.
Mr Gieve: We do know what the debt charge was on the different tranches of debt and they are reported in this Report. Yes, we did model some variations. It is very difficult to foretell exactly which way the market is going to move, but we did do some illustrative models.
Q68 Mr Rendel: If it moves upwards, you have no refinancing gains.
Mr Gieve: That is right. You get a refinancing gain for two reasons: the market may move, but also, as the project becomes less risky than at the point of contract, the contractor may be able then to refinance at a lower margin. We did model that and there is a range of uncertainty and it was a judgment about whether it was worth paying a little bit more for a potential gain. Yes, we did do that modelling.
Q69 Mr Rendel: You said a moment ago that the cost of the refinancing deal was £2 million. We were told £275,000 per year but I suppose that is very faintly comparable. I guess it would be very interesting to see what you originally saw as the interest rate at which the original financing was done and thus what that would have had to fall to in order to make it worth while for you to go for 50% of the financing.
Mr Gieve: I will let you have a note.8
Q70 Mr Rendel: I should be grateful if you would and I should be grateful if you could prove to me that the likely refinancing gain you expected at the time was more than the £2 million you have spent on it. If it was not, I wonder why on earth you did it.
Mr Gieve: There is a range of possibilities.