Supplementary memorandum submitted by the Home Office

Question 12 (Chairman):

Around 80% of Home Office staff in central London are employed in policy areas, with around 20% in support functions, including finance, HR and IT. For the Review of Public Sector Relocation being undertaken by Sir Michael Lyons, it was estimated that up to 1,300 members of core Home Office staff potentially might need regular contact with Ministers or Parliament. The precise members of this group who at any one time would need such regular contact will vary as Ministers and Parliament focus on different issues. The survey did not investigate the number of staff in direct support of the group with regular contact with Ministers and Parliament. However, consideration of the functions needed, including administrative and secretarial help, the preparation and collation of research and statistics and corporate strategy and planning, suggests a requirement for perhaps [at least as] as many staff again. Nor did the survey provide any detailed information about the number of other staff whose work requires them to have frequent contact with other Government Departments or the Home Office's major stakeholders, many of which are based in London.

In the context of the Lyons Review, we are currently considering which functions from the core Office could be relocated out of London and the South East. These include around 5-600 posts engaged in various forms of caseworking. The decision whether to relocate any of these functions will of course depend on a full examination of the case for doing so, including value for money, affordability, and the wider balance of advantages and disadvantages.

Question 28 (Jon Trickett):

Clarification: The technical due diligence consultants would be liable to the funders to the extent of any failure in their duty of care in monitoring the project. They have no contractual duty of care to the PFI supplier AGP. AGP's main remedy would be against the builder Bouygues UK responsible for construction of the new building. Bouygues' performance is underwritten by their parent company Bouygues Construction SA. Bouygues also have warranties from their design consultants, sub-contractors and other suppliers.

Question 33 (Jon Trickett):

The due diligence process seeks to give the funders assurance that the project assumptions are robust, that there is no undue "optimum bias" in the consortium's plans and that all potential project risks have properly been taken into account. Due diligence will not provide certainty in the outcome of a building project-it is a mechanism for the funders to assess the risks associated with a deal.

It is possible for a department to commission due diligence on a preferred bidder's proposals before finalising a PFI deal. In the funding competition held for the redevelopment of the Treasury building in 1999, Exchequer Partnerships, the preferred bidder, in consultation with the Treasury, commissioned its own due diligence advisers. All the funding institutions involved in the competition agreed to use this one set of advisers.

Departments have a choice following the due diligence process. They can proceed with private funding with the associated risk transfer. Alternatively, they can decide to finance the senior debt themselves but still retain the risk that the due diligence process has not identified all risks and that the project cost overruns the project sponsor's assumptions.

Question 37 (Jon Cruddas):

At financial close, density of the Home Office estate was about 19.4m2 per person. Since then, the estate has reduced in size by 5% and more staff have been housed. Density for the estate has reduced to about 16.2m2 per person. Current conditions are cramped in places, with too little suitable support space. The 2MS design makes more efficient use of space, with improved amenities for staff such as more meeting space, a multi-faith prayer room and provision for breakout areas.

Question 39 (Jon Cruddas):

Clarification: The building size is fixed by planning consent, but the internal area is designed for flexible use. The number of deskspaces allocated is at its maximum size of 3,450 consistent with our other requirements for the building. The agreed maximum building capacity is 4,200 staff; should the type of work change and reduce the need for meeting space and other support space. In future we will increasingly look at hot-desking and other techniques for making good use of our space, which we will do in the context of overall effectiveness and delivery.

Question 40 (Jim Sheridan):

In 1999-2000 there were potentially three suitable sites available close to Parliament and other Ministerial HQs. These were Stag Place in Victoria, Elizabeth House site adjoining Waterloo Station, and 2 Marsham Street. Stag Place was more expensive and slightly smaller but we allowed the PFI bidders to consider it if they wished. Elizabeth House was ruled out by the then Home Secretary as being too inaccessible to Parliament and the rest of Whitehall. This is as mentioned in the NAO Report section 1.5.

We were aware that sites of suitable size but not suitable location were potentially available in London Docklands, Paddington and elsewhere. Precise site identification was not taken further than a list of suitable planning consents provided by our property advisers.

Questions 59-60 (Mr Rendel):

The capital receipts for disposal of the surplus buildings are excluded from Figure 3 Page 11 which compared running costs of the existing estate with the PFI estate. The calculated financial benefit of the capital receipts of the surplus property was included in the comparison of options in the business case in accordance with the Treasury Green Book guidance. The business case also took into account the possibility of a substantial under receipt from the sales owing to any fall in property values.

Question 69 (Mr Rendel):

The NPC of the agreement for sharing 50% of re-financing gain was close to £2.75 million. The respective costs of the financing at financial close were:

- Blended equity and sub-debt-16.1%.

- Sub-debt-14.75%.

- Fixed rate bond-£100 million at 5.66%.

- Indexed bond-£144 million at 3.24% (subject to the addition of RPI).

In considering potential re-financing profit, it was judged that there was a low probability of re-financing the bonds owing to the excessively high cost of keeping the bond holders whole (ie the breakage costs of buying out the bondholders). If the bonds were re-financed, the deal would have to have an interest rate reduction of 0.33% after breakage costs to clear the overall cost of £2.75 million on the basis of a 50% share. The costs of breaking the bonds can only be ascertained at the time of re-financing.

There was considered to be a greater prospect of re-financing by means of replacing more expensive sub-debt with cheaper junior debt. This could particularly arise if the market perceives a reduction in project risk and would therefore be likely to occur in the period after a successful construction completion. The process would have to be agreed by the bond insurers, AMBAC, on the bond holders' behalf, specifically in respect of the relationship between all the financing parties. In return for agreeing to a 50% share of re-financing gain the sub-debt interest rate increased from 13% to 14.75%. (This in turn increased the blended equity and sub-debt by 1.1% to 16.1%.) It was this change that led to the increase in cost.

In replacing sub-debt with junior debt, we considered at the time that re-financing would need to achieve a reduction in interest rate of around 4% to cover £2.75 million. We judged that a refinancing gain at this level or greater was possible. The potential gain was not incorporated in AGP's financial model and so would have been a receipt in excess of the modelled tendered financial proposal. Although AGP had oVered a 20% share of any refinancing gain in their bid (AGP was nominated preferred bidder in July 2000), the essential legal terms of this were not fully clear. The detailed negotiations in autumn 2001 secured the 50% share with a robust legal mechanism supported by PUK. NAO noted at Section 2.8 that the approach taken by the Home Office was prudent.

Questions 78-80 (Mr Bacon):

The inflation assumption used was 2.5%. Funding is mainly by means of indexed gilts, but with an element of fixed rate gilts. The effect of the fixed rate gilt is that 24% of the combined charge does not increase with inflation. Overall the charge will therefore increase by about 76% of RPI, or 1.9% per annum if the RPI increases by 2.5% per annum.

Questions 83-84 (Mr Bacon):

The total cash with inflation was modelled at financial close at £1,088.1 million.

Questions 85-86 (Mr Bacon):

Clarification: The questions imply that the Treasury Discount Rate (TDR) of 6% was part of the contract. This discount rate is not in the contract. The 6% TDR was applied to the Home Office's business case, which is an internal mechanism used to assess the options. Government has since adopted a 3.5% TDR (since April 2002).

Question 91 (Mr Bacon):

Clarification: Figure 6 on page 17 covers fees on the project up to January 2003. The fees for February 2003 to occupation in April 2005 are expected to be £6.0 million. External specialist advisers, such as Turner & Townsend, the monitoring surveyors, will continue to support the project on Home Office's behalf until the building has been accepted and is fully occupied. The extent of that support will depend to some degree on events, but we expect it to diminish over time.

Question 100 (Mr Bacon):

AGP advises the following:

The above total includes all consultants' fees but may not be comparable with other PFIs, because AGP's construction and FM sub-contractors (Bouygues UK and Ecovert FM) carry out a significant amount of professional work in-house.

Question 104 (Mr Bacon):

The following table re-works the figures in Figure 14, page 31 to show base costs as in the MoD report page 24:

Note 1: This risk includes under-estimation of running costs, under-estimation of specification of service quality, and risk of wage inflation being above RPI.

Note 2: This risk was applied equally to the PFI and the PSC as it was allocated to the Home Office under both scenarios

Note 3: This represents the value of the insurance risk allocation to AGP. Under the PSC self-insurance by the Home Office is not modelled as a cash cost.

Questions 112-113 (Mr Bacon):

The non-Agency Home Office provides its corporate IT and telephony through a service agreement with Sirius, a consortium consisting of Fujitsu services, IBM Business Consulting Services (previously PricewaterhouseCoopers Consulting) and Global Crossing. The Home Office pays an annual charge under this agreement, and does not own the IT or telephony provided. We expect to pay Sirius £67 million for delivering IT and telephony services to the Home Office in 2003-04. Of this, £36 million is for the Immigration & National Directorate (IND). The total service covers 12,500 users across 150 sites around the country (which includes users in the London, Croydon and Liverpool offices, Government Offices for the Regions (GOFRs), and IND offices at ports/airports).

Question 114 (Mr Bacon):

Clarification: The Home Office is not paying separately for the ICT infrastructure: It is included within the overall construction costs and being paid for through the combined charge. AGP have advised us that the underlying element of the construction costs attributable to the ICT infrastructure is £6.3 million. This includes an electronic patch system which has a higher capital cost than a manually operated patch panel, but will reduce the charges for moves and changes within 2 Marsham Street by our ICT supplier.

Question 140 (Mr Rendel):

Demolition was substantively completed in August 2003, as the Home Office told NAO in September 2003.

The last phase of demolition (the north rotunda) was scheduled to complete in mid-October, according to the indicative programme set out in the Project Agreement. As earlier phases of the demolition progressed very well AGP developed a detailed project programme with an earlier demolition completion date. While demolishing the north and south rotundas took longer than AGP's post-contract detailed programme allowed for, demolition of the former 2 Marsham Street was still completed ahead of the indicative programme in the Project Agreement. AGP is obliged to adhere to key milestone dates in the indicative programme but in complying with this requirement, has the commercial freedom to develop their detailed development programme as they choose.

Some non-demolition works, to prepare foundations and carry out excavations, were also carried out by the demolition sub-contractor Brown and Mason from August to November 2003. These were excavation, not demolition works.

22 December 2003