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Official Report (Hansard)

Session: 2007/2008

Date: 18 June 2008

COMMITTEE FOR FINANCE AND PERSONNEL

OFFICIAL REPORT
(Hansard)

Evidence on Workplace 2010

18 June 2008

Members present for all or part of the proceedings:

Mr Simon Hamilton (Deputy Chairperson)
Mr Roy Beggs
Dr Stephen Farry 
Mr Fra McCann
Ms Jennifer McCann
Mr Adrian McQuillan
Mr Declan O’Loan
Mr Peter Weir

Witnesses:

Mr Philip Irwin ) Department of Finance and Personnel
Mr David Orr )

The Deputy Chairperson (Mr Hamilton):

We proceed to the evidence session on Workplace 2010. I declare the meeting closed. There is nobody in the Public Gallery. The evidence session will be reported by Hansard. Therefore, mobile phones must be turned off so that they do not interfere with the recording equipment.

Members’ packs contain the Minister’s response to issues raised by the Committee after the Northern Ireland Public Service Alliance (NIPSA) briefing on Workplace 2010, and information from the Department of Finance and Personnel on the invitations on the best and final offers and on the Workplace 2010 plans for greater Belfast.

The Department was advised that the two remaining bidders for the Workplace 2010 contract — Lands Securities Trillium and Telereal — submitted their best and final offers on 2 June 2008. Those offers are subject to a detailed evaluation, and in the autumn — after the evaluation — the Department will seek to appoint a preferred bidder with a view to finalising the contract in the first quarter of 2009. I have been told that the Department will engage fully with the Executive before moving to the final stages of the procurement.

The Department’s paper, which NIPSA sent to the Committee last week, has been tabled again. Due to the commercially sensitive nature of the paper’s content, it should be returned at the end of the meeting — as was the case last week.

From the Department of Finance and Personnel, I welcome David Orr, the director of the corporate services group, and Philip Irwin, the head of properties division, and I invite Mr Orr to make his presentation to the Committee.

Mr David Orr (Department of Finance and Personnel):

I took over from Chris Thompson on 1 May, and Philip Irwin is the programme director.

With the Committee’s agreement, I shall make a short presentation, which should last no longer than five minutes, to give the background to the issues being discussed. Procurement for Workplace 2010 is being undertaken using the negotiation procedure in the EU procurement directive. In January 2008, two bidders were invited to submit best and final offers — Land Securities Trillium and Telereal, which is owned by the William Pears Group.

Towards the end of April 2008, the Department was advised that Land Securities either wanted to float Trillium on the Stock Exchange, put it up for sale or go for a demerger. The Department understands that there are three potential purchasers: Goldman Sachs, Charterhouse Capital Partners and the William Pears Group.

The best-and-final-offer bids for Workplace 2010 were reviewed on 2 June. Initially, Land Securities had suggested that it would receive offers for Trillium on 16 June. If the William Pears Group, through Telereal, is the preferred bidder for Trillium, competitive tension in the Workplace 2010 process could be lost.

The Department’s actions are outlined in Peter Robinson’s letter to the Committee dated 30 May. It is important that the best-and-final-offer bids are evaluated and that the Department seeks clarification and conducts substantive negotiations, as far as possible, before Land Securities receives offers for Trillium. Land Securities was asked to put back the receipt date for Trillium offers until the end of June, and it has agreed to do so. That gives more time to evaluate, seek clarification and negotiate. That is a prudent move in the face of external factors over which the Department has little or no control. Those external factors are in the hands of Land Securities.

I assure the Committee — to avoid any confusion — that the Department is not rushing to sign the Workplace 2010 contract by the end of June. That is not the case. In the original timescale, the contract is not due to be signed until the first quarter of 2009. There is much work to be done before that contract is signed, and the proposed terms for Workplace 2010 will have to be subject to a full business case approval — the Office of Government Commerce Gateway Review 3 process. The terms will have to be discussed by the Executive, and I have no doubt that the Committee will want to hear about the preferred bidder. Therefore, the Workplace 2010 contract simply will not proceed unless it is affordable and provides value for money for the Northern Ireland taxpayer.

That is an overview. I realise that this is a complex issue, and Philip and I will be delighted to take any questions.

Mr O’Loan:

I am concerned that this matter was first drawn to our attention by NIPSA, and that should not have been the case. Clearly, this is a serious issue, and it is perceived as such by the Department, which should have at once recognised it as being of interest to the Committee. The first party to approach the Committee and say that there was an issue ought to have been the Department of Finance and Personnel. That is a matter of serious concern.

Mr Orr:

As I understand it, the Department first became aware of the sale offers for Trillium towards the end of April. I believe that the Committee first heard at the end of May. I will take that point on board.

Mr O’Loan:

I understand what you said about the alteration of timetables because of the danger of competitive tension being lost. If a sale had gone ahead before the Department had the opportunity to assess the two offers, how would that have affected your process? I put that hypothetical question because I am far from convinced that competitive tension remains when those two companies are actively engaging with each other, with a view to one perhaps acquiring part of the other — the "other" being the other bidder.

Mr Orr:

If the William Pears Group were to buy Trillium, that would be a significant complication, and the whole process would need to be treated with the utmost care, because competitive tension, in those circumstances, would be lost.

With regard to the process up to the point when Land Securities receives offers for Trillium, there is some due diligence that the potential purchasers of Trillium have to undertake. The Department secured agreement from Land Securities and Telereal that there would be no discussion of the Workplace 2010 bid during those due diligence processes for Trillium. Those agreements were signed in discussion and consultation with our legal advisers.

Mr O’Loan:

That is an important assurance. These are matters of very serious concern, to which we may have to return and examine further.

Mr F McCann:

I also share the concerns about how the Committee learnt about this matter. If the William Pears Group goes ahead with the purchase of Trillium, does that mean that this entire process comes to an end? In addition, what legal advice is the Department being given on how we tread water on this matter?

Mr Orr:

I want to be open with the Committee: that eventuality would be a serious complication for the entire process, and I would want to come back to the Committee if that happened.

However, there is a fair bit to go before we reach that position. It may be that Telereal is not the preferred bidder for Trillium, or it may be that none of the bids for Trillium is acceptable to Land Securities, which may decide to float Trillium on the Stock Exchange.

The Department must remain agile and alert to the risks that are inherent in those external circumstances. It wants to act wisely and prudently in the interests of public money.

Mr F McCann:

I know that we are being careful with the words that we use, but when you talk about a "serious complication", does that mean that the tender process would come to an end?

Mr Orr:

The best and final offers are in and have been submitted in an atmosphere of competitive tension. If people stood over those offers and the Department were able to get the clarifications that it wants, perhaps we could progress, having decided that that was value for money. However, we are not there yet, which is why it is difficult for me to give you the full explanation that you seek.

Mr F McCann:

There will be a difference between the tender prices that we might currently receive and those that would have been submitted a year ago. At some stage during the process, will we be able to gauge how much the price has dropped in the past year to 18 months? That would have an impact on issues that we might deal with over the next couple of years.

Mr Orr:

Those figures will be available once the procurement process is complete.

Ms J McCann:

The sale of Trillium is at a final stage, and if the preferred bidder is the William Pears Group, that would put a spanner in the works. There is a possibility that Trillium could be taken off the market now, the Department would sign a contract and the sale could go ahead next year. A company could put a sale on standby, wait until everything is running smoothly and then reactivate the sale. Are there safeguards against such a scenario?

Mr Orr:

Let us say that the sale of Trillium does not go ahead at the moment, we sign up to a Workplace 2010 contract and then the William Pears Group buys Trillium at a future point. There are safeguards at that stage: the Department will have entered into a binding legal contract, and those contractual obligations will transfer to the winning contractor’s successors.

Ms J McCann:

Effectively, the fact that this issue has been flagged up and brought out into the open could mean that the sale of Trillium is put to one side until the Workplace 2010 contract has been signed off and is legally binding. However, in a year or so, that sale could happen anyway.

Mr Orr:

The sale could happen anyway, but at that stage — provided competitive tension had been maintained — the Workplace 2010 contract would have been signed, provided it delivers value for money. The obligations on the contractor would then transfer. However, that can happen with any contract.

Ms J McCann:

Given that the issue has been raised previously and has actually gone through the process, it is, perhaps, slightly different.

Dr Farry:

This is potentially the biggest private-finance-initiative contract ever issued in the public sector in the United Kingdom. In a sense, we have bottled up one huge contract in anticipation of maximising public-purse gains in Northern Ireland. However, in doing so, we maximise the risk in the event of any difficulties, and even minor errors will have dramatic financial consequences.

I want to reiterate Jennifer’s points — we have not hammered those out. If the two companies are engaged in any monopolistic or cartel behaviour, they are likely, in order to maximise the benefit, to postpone any sale or merger until the Workplace 2010 contract is disposed of. If they make that sale, it would, in essence, represent a clean basis on which to go back several stages in the process. Therefore, it makes no sense for the companies to do that before the contract sale is resolved, and we are left in a situation where we will, potentially, have two separate companies.

How can we — aside from the current situation where the potential sale has come to light — protect ourselves against monopolistic behaviour or the creation of a cartel by two companies? The system will always be vulnerable to such a threat.

Mr Orr:

Dr Farry is correct; this is the largest private-finance-initiative property deal in the UK at the moment. However, it is not the largest private finance initiative ever in the UK — the project to widen the M25 was significantly larger.

The question tackles the root of propriety in public tendering. One of the fundamentals of public tendering is that there should be no collusion between tenderers competing for Government business. That is a criminal offence for which the Office of Fair Trading occasionally takes people to task. The two tenderers for Workplace 2010 must abide by that basic principle, and to the best of my knowledge, they are abiding by it at the minute.

Mr Beggs:

Will you highlight again why you are so certain that competitive tension will continue until the end of the bidding process?

Mr Orr:

Until bids are received for Trillium, Telereal has no idea whether it will be successful in that sale. As I have already said, this is an attractive contract opportunity and, therefore, Telereal will want to ensure that it submits a competitive bid. Similarly, Land Securities do not know the identity of the successful bidder for Trillium. Furthermore, if Trillium wins the Workplace 2010 contract, its value will increase. Therefore, competitive tension remains.

Mr Philip Irwin (Department of Finance and Personnel):

That is a valid point. It could be argued that Land Securities, in particular, will be keen to win the contract because it would increase the value of Trillium. Therefore, from a competitive point of view, it adds to the interest from its perspective.

Mr Beggs:

Were Trillium to get the contract, how significant a part of its business would it be? I am trying to understand how winning or not winning the contract may affect its value.

Mr P Irwin:

It is a big contract. However, it would not be hugely significant for Trillium compared with its overall interests. There has been speculation in the press about the value of Trillium, and figures of up to £1·4 billion have been quoted. As I said, it is a big contract, but the profit margin that it would make from the contract would not form a significant percentage of the value of its business.

To be fair, the demerger issue for Land Securities is a more significant strategic issue than winning the contract. It is not going to make or break the sale of Trillium; the sale will come first. However, it is still an important contract for the company.

Mr Beggs:

When the preferred bidder stage is reached, what degree of flexibility will remain should any issues of concern come to light? For example, there could be significant changes in the estimated bids, and so on. People are nervous because, although documents may have been signed, there could be other issues that no one knows about. There is a huge risk that both companies may have increased their potential profits from the contract.

Mr Orr:

The Department is not committed to anything until the contract is signed, which is scheduled for the first quarter of 2009. If the Department is not satisfied that it is receiving value for money and that it is affordable, it can walk away from the deal at that stage.

Mr McQuillan:

Can any safeguards be included in the contract for the future should the two companies merge? There could be a perception that some sort of cartel was in operation in the background.

Mr Orr:

We could ask our legal advisers that question. I suspect that two big companies that are interested in competing for the contract would not sign a legal agreement that would bind their future business opportunities and that would restrict them from mergers, and so on. However, as I said, we can consider that issue with our legal advisers.

Mr McQuillan:

I am not referring to legal agreements. I am trying to find out whether any safeguards will be built into the contract should an investigation in three or four years’ time find that some sort of cartel had been in operation.

Mr Orr:

Absolutely. That would be extremely serious for the firms involved. Some investigations conducted by the Office of Fair Trading demonstrate how seriously collusive tendering is treated.

Mr McQuillan:

There was an issue about such practices in England recently. I fear that something similar could happen here.

The Deputy Chairperson:

David, thank you very much. Politicians are always advised not to answer hypothetical questions, but you have been faced with a few of them this morning. Although we are advised not to answer them, sometimes that does not stop us from asking them.

Philip said that, although Workplace 2010 is a significant contract, it would not be a hugely significant contract to Trillium, given its overall size and scale. I am speculating, but is there any evidence that Workplace 2010 is having an influence on the bidding for Trillium, given the involvement of other companies? We are concentrating on two firms — one that is being bought, and another that is a potential buyer. We sometimes forget that two other firms are involved. If one of those firms obtains Trillium, there is no issue. However, will Workplace 2010 stimulate interest and make Trillium an attractive option? That may be far too hypothetical.

Mr P Irwin:

I would be speculating on the views of other commercial organisations and how they look at a business. Nevertheless, speculation in the press or any discussion about the sale of Trillium does not feature Workplace 2010 at all. The sale of Trillium is a big deal, and it is of interest to the financial world, but Workplace 2010 is just another contract on which the company is bidding. It is significant to us, and it is an important contract, but given the scale of the deal that is being talked about, Workplace 2010 does not feature particularly highly.

The Deputy Chairperson:

Members have raised some concerns about the competitiveness of our side of the deal. Are we aware of how competitive the bidding is for Trillium with Goldman Sachs, Charterhouse Capital Partners or the William Pears Group?

Mr Orr:

We are aware only from what we read in the press. I can repeat that speculation if you wish. Concern has been expressed that Land Securities will not receive bids at the level for which it is hoping. That is pure speculation, however, and I have no inside knowledge whatsoever of those commercial aspects.

The Deputy Chairperson:

Thank you very much for your presentation and your evidence. I will now draw this section of proceedings to a close. The Committee may submit further questions to you for a written response.

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