NATIONAL AUOIT OFFICE
REPORT BY THE COMPTROLLER AND AUDITOR GENERAL
PSA Services: The Transfer of PSA Building Management to the Private Sector
ORDERED BY THE HOUSE OF COMMONS TO BE PRINTED 18 JANUARY 1996
LONDON: HMSO HC 130 Session 1995-96 Published 26 January 1996 E8.95 NET PSASERWCES:THETRANSFEROF PSAB~DINGWAGEME~ TOTHEPRIVATESECTOR
This report has been prepared under Section 6 of the National Audit Act, 1983 for presentation to the House of Commons in accordance with Section 9 of tie Act.
John Bourn National Audit Office ComptroUer and Auditor General 18 December 1995
The ComptroUer and Auditor General is the head of the National Audit Office employing some 750 staff. He, and the NAO,are totaUy independent of Government. He certiOes the accounts of au Government departments and a tide range of other phfic sector bodies; and he has statutory authori~ to report to Parhament on the economy, efficiency and effectiveness witi which departments and other bodies have used their resources. PSASERWCESTHETWSFER OF PSABUILDINGMANAGEMENTTOTHEPRIVATESECTOR
Contents
Page
S~ary and conclusions 1
Part 1: Background to the sde 8
Part 2: The preparation of PSA Btiding Management for sale 11
Part 3: The sde process 19
Part 4 The outcome, cost and a-stration of the sde 29
Appendices
1. Advisers and other fwms assisting PSA Services 41
2. Key dates in the sale of PSA Buikfing Maagement 42
3. The five regional PSA Btiding Management bustiesses 44
4. Tasks to be completed by the PSA Btiding Management businesses which were project managed by the Contract Manager 45
5. Detaifs of the Redundancy Sharing Scheme 49
6. Ftiancial summary of the sde of PSA Buifding Management 51 PSASERWCES:mE TWSFER OF PSAB~LDINGWAGEMENTTOTHEPRWATESECTOR
Summary and conclusions
Introduction 1 In May 1988, the Government decided that PSA Semites (the Department) wodd become a commercial organisation without a tied customer base. Later, in October 1989, Ministers decided that PSA Services’ activities shodd be transferred to the private sector wtie:
● protectig the interests of the taxpayeC
. constiting chent depatients and protiding a continuous setice;
. protecting staff interests - in partictiar their pension and severance entitlements.
Mtisters stated that, as PSA Btiding Management had no long term future in the pnbHc sector, they wotid prefer a sale unless closure was cheaper.
2 This report examines the transfer, to the private sector, of the btiding and estate management services provided by PSA Btiding Management’s regional businesses, which, unti their sale in 1993, were a part of PSA Services. The report focuses om the transition of the businesses into commercial organisations; their preparation for sale; the sale process; and the achievement of sale objectives. The report contains an assessment of the main costs to PSA Services of the decision to untie departments from them and introduce competition into the supply of btidmg and estate management services. It does not address the wider costs and benefits of untying to other departments and agencies.
3 Between September and October 1993, PSA Services sold, through competitive trade sales, the five regional PSA Btidtig Management businesses to four separate purchasers. The sale agreements provided for the transfer of personnel, goodti, some assets and tiabfities and contracte which had up to five years to run. The forward wor~oad agreed with the Mtiistry of Defence was estimated to be worth E400 mi~on in fee income over the five years to December 1998.
4 The five sales raised net cash proceeds of E1O.4 mfion, The sales of BM Noreast, BM South East and BM South and West, however, involved deferred payments over the period to 1997-98 as shown in Figure 1.
1 PSASERWCES:THETRANSFEROF PSABUILDINGWAGEMENTTOTHEPRWATESECTOR
.:7 :- .. -,! - .=. , .6.,.,,,. , ,., ,,,. .,: ,~. - . . .,.”..- .,~,:,,,,& >.?,~m,p~.--p~ .7: . — Flggre’f:Paymentarrangem6nts,forJhe:J!ve:P$ABO!ld.in~uS&$_ ‘.’ ...... ,“. .. * ,...... $. >...... , ...... ? ,.,&.. >,,&..., 1993-94 1994-95 1995-96 1996-97 1997-98 Total Cm fm fm fm fm fm BM Scotland 3.5 0.0 0,0 0.0 0.0 3.5 BM Manchester (11.5) 0.0 0,0 0.0 0,0 (11.5) BM Noreaat 0.0 2.0 3.0 3.0 0.0 8.0 BM South East and BM South and West”) (14.0) 8.0 5.5 5.5 5.4 10.4
Total Cash Proceeds (22.0) 10.0 8.5 8.5 5.4 10.4
Net present value (z) (22.0) 9.2 7.2 6.5 3.8 4.7
Soume: PSA Sewices
Notes: (1) 7he pumhaserofBM South EastandBM South and West received f 14 million from PSA Services which will be recovered by the end of 1996-97. (2) Calculated using a comme~ialloan rate of9percent - the base rate at 10ctober 1993p/us 3 percent.
5 Proceeds from the sale were more than offset by post-sale redundancy costs. At the point of sale, PSA Buildlng Management employees had accumtiated redundancy entitlements of S184.4 mifion. PSA Services took the sales as an OPPortuniU to Pass some of tiia habifim to the private sector. Thin, redundancy htii~ties ofS51 milhrm were transferred to purchasers, of whtch S1Omi~on related to civil servants seconded to BM South East and BM South and West, leaving E133.5 miMon payable by PSA Services, PSA Services’ Eabfity codd, however, be reduced to El 19.3 miMon, under a redundancy sharing scheme, if none of the staff who elected to transfer to the purchasers are made redundant.
6 In addition, PSA Services guaranteed the redundancy entitlements of staff transferring permanently with each business for a period of five years after the sale if any of the purchaser became insolvent. This guarantee carries a further potential cost estimated, at the point of sale, of up to f51 miMon. PSA Services do not expect this guarantee to be caUed as they consider that each purchaser has sufficient underlying tiancial strength,
7 A summary of the cost to PSA Services of the untying programme and the outcome of the sales is given at Figure 2.
Preparations 8 The transition of PSA Btiding Management from a Government department to for sale a commercial organisation, which began in 1988, was a si@cant management cha~enge, involving profound changes for management, staff and chent departments. In partictiar, the five regional businesses needed: to develop commercial accounting systems which cmdd be run in paralel with PSA Services’ normal cash accounttig arrangements; to negotiate commercial contracts for their work; to transform working practices to match new customer suppher relationships; and to adopt commercial pricing, business planning and management ski~s.
2 PSASERWCES:THETRANSFEROF PSAB~LDINGWAGEMENTTOTHEP~ATE SECTOR
Sale proceeds (4.7) Oepartmenfs maximum HatiK& for post sale redundancy costs3 133.5 Compensation in heu of notice4 m ~
Other receipts and COSIS
Realsafion of trade debtors excluded from the sa[e5 (102.0) Cash injaction to compensate for IiaMKties transferred with the five businesses 21.4 Advisers’ fees7 13.8 Contractor manager and other sale costs7 B w
Pre-sale redundancy costs driven by the un~ing programme7 ~
Contingent habifify in the event that all purchasers become insolvent ~
Source: PSA Services and Nationa/Audif Office
Notes: (1) The wider costs and benefits of the rmtyingprogmmme are outside the scope of this repoti (paragraph). (2) These figures are stitedat thehnetpresent value. (3) Purchasers meet allredundancycosts above agreed caps, thereby assumbrg a masimum Iiabiliv of f57 million. Redundancies were driven by the market testing process and the contraction of the market. (4) Mostsecondedsfaff were made redundant on their return to PSA Services. They were entitled to 6 months’ notice or compensation in lieu of thatpertod. This increased the cost of transferring PSA Building Managements activities to the private sector byf12.9million. (5) PSA Services excluded from the sale, trade debtors valued at f121.7million, of which fl12 million (NPVff02 miifon), had been recovered by November t995. These trade debts were, howevec due almost entirek from other Government departments, and therefore do not represent an inflow of funds to the ficheque< PSA Services considered that had trade debtors been included in the sale, proceeds would have been increased to reflest the trarrsferof this asset to the new owners. (6) Following the removal of trade debtors, cash was injected so that net assets would equal net liabilities at the point of sale. This item is excluded from the sale coats to be compared with closure because the closure model assumed parity between net assets and liabilities on sale. (7) These costs were excluded from the comparison with cos& of closure because they were incurred odor to June f993 - the date when the evaluation of the final bids was carried out.
9 In addition, staff numbers had to be reduced sharply, both to increase efficiency and productivi~ and to adapt to the lower prospective worMoad consequent upon the loss of PSA Building Management’s monopoly position. Untying meant that the businesses cotid look fomard to a share of the market that was only a &action of its former size and, therefore, redundancies were inevitable.
3 PSASERWCE5THETRANSFEROF PSABUI~lNGMANAGEME~TOTHEPRfVATESECTOR
10 The total PSA Btiding Management workforce was reduced born 15,000 in Aprfl 1990 to 6,700 by September 1993, through transfers to other Government Departments (3,000), natural wastage (1,000) and redundmcies (4,300), Afthrmgh redundancies cost f135.3 mimon, over the period to June 1993, PSA Services estimated that their achievement in securing inter departmental staff transfers saved a further S90 mi~on.
11 Dfictities in stabihsing the five regional businesses led Mtilsters to conclude that sale shmdd take place as soon as possible.
12 The National Audit Office’smain findings and conclusions on each of the objectives mentioned in paragraph 1 were as fo~ows.
Protecting the taxpayers’ interest
Comparison of the costs of sale tith closure
The outcome 13 PSA Setices prepared their first broad estimate of the Nely Werence in cost of the sale between sale and closure in May 1991. They subsequently developed a more detailed model to evaluate the direct costs of closing PSA Btiding Management between Jnue 1993 and March 1998, after pre-sale redundancy costs of El 35.3 mi~on had been incurred. This model distinguished alternative closure options and revealed their costs. Its main assumptions were subject to sensitivi~ analysis which, together with an assessment of the hdirect costs of closure fikely to fa~ on chent departments, indicated that Wely closure costs woufd he between El 95.1 mi~on and S310.6mfion (Figure 3). PSA Services examined the possibility of transferring contracts to the private sector but concluded that this wotid not lead to materia~y lower redundancy costs.
~gure,3:,Ttie. ~~timaled ;ailRrcloiMgtiik.B~l~ng:Managemefi-f#mJune:19~~;:::::
Range(i) Wd points(l) fm fm Ohesfcostsofclosure Trating (Droflts)/losses and other costs (12.6) to 42.0 14.1 Redundancy costs 127.7 to 163,6 m 115.1tO 205.6 158.9
Indhect costs of closure 80.0 to 105.0 ~ Total costs of closure 195.1 to 310.6. 251.4
Souce: PSA Sewices
Note: (1) The above figures combine the costs of closure for all five businesses,
14 The wide range of the estimated cost of cloeure demonstrates the dlffictities in producing such estimates. The principal uncertainties were:
. the number of staff that wotid be made redundant under closure. The model assumed that most staff wodd be made redundant and that new contractors were fikely to require f~ compensation for the redundancy habfities
4 PSASERWCES:THETRANSFEROF PSAB~LDINGMANAGEMENTTOTHEPRIVATESECTOR
transferred to them. However, PSA Services told the National Audit Office that in the event of closure they wotid have sought, wherever possible, to transfer staff to the fires ta~ng over the existing bnildlng management contracts together with part, or aU, of their existing redundancy habfities. If tils had occurred, the direct costs of closure wodd have been less than PSA Services’ estimate, but it is not possible to say by how much;
. the wide range of uncertainty concerning the trading profits or losses that the businesses might make in completing contracts in the closure period, depending on tbek success in raising productivi~ levels while closing the businesses down;
. the uncertain costs of the disruption that closure would impose on ctient departments. Aftbough prepared by PSA Services’ key contract negotiator, who had been intimately involved with every chent contract issue for a number of years, these estimates were only a broad indication of the costs involved and there was no pretence that they codd be precise;
. the absence of detailed closure plans which wodd have entailed site inspections and detafled analyses of the cost consequences of terminating contracts. These estimates were, therefore, less re~able than if they had been prepared on the basis of such plans. PSA Services told the National Audit Office, however, that there wotid have been practical difficulties in preparing such plans whch the Ministry of Defence re~ested should not be drawn up as this might be disruptive.
15 Recognizing these uncertainties, which the Department told the National Audit Office were reflected in the breadth of the closure range, PSA Services used the mid-point of the costs of closure as the benchmark against which to assess whether the sale of each business should proceed, As this was more than E1OOmi~on higher than the cost of sefing the businesses, El 41.7 mi~on, (Figure 2) PSA Services decided that the sales shotid proceed. However, because of the uncertainties discussed in paragraph 14 above, the National Audit Officewere unable to conclude on whether each sale took place at a cost less than that of closure.
The price obtained for each business
16 Despite PSA Services’ pre-sale preparations, the net proceeds from the sale reflected bidders’ concerns over the lack of a trading record and audited commercial accounts; doubts about the refiabihty of the businesses’ accounting and contract management information; the variable quafity of their contract records; the failure of management to match private sector productivity levels; the existence of a large habih~ for future redundancies; the Government’s poficy of not providing purchasers with warranties on the ~ahty of the information provided; and the commercial inexperience of management.
17 With the exception of BM Manchester, the price obtained for each business, after a~owing for the redundancy Uabihties involved, was close to PSA Services’ estimate of the profit from the contracted wortioad at the point of sale.
5 PSASERWCESTHETRANSFEROF PSABUIDINGWAGEMENTTOTHEPRWATESECTOR
PSA Services attributed the low offers for BM Manchester to bidders’ perceptions of the uncertainties attaching to the business’s fiancial data and the extent of the support it would re@re to compete successtiy post-sale. PSA Services had adhered to their pohcy of refusing warranties as to the state of the business.
18 The bids involving deferred payment were, in discounted terms, between El 6 miuon to El 8 miMon better than the next best bids. PSA Services told the National Audit Office that the purchasers were made aware that, if deferred terms were sought, a higher consideration wordd be re@red to offset the cost of the deferment. Therefore, while deferred payments effectively provided loans to purchasers, PSA Services did not consider them to be interest free. However, although supported by parent company guarantees, the deferred payments are not guaranteed by a third party financial institution.
19 What this means, therefore, is that PSA Services:
. paid El 1.5 mi~on to the purchaser of BM Manchester to ac~re the business;
. sold BM Noreast for S8 mi~on on deferred payment terme which have a net present value of S6.7 miUon; and
. sold BM South East and BM South and West for S1O.4 m~on on deferred payment terms which have a net present value of S6 mi~rm. The deferred payment terms for these business had the effect of creating an unsecured loan of S14 milhon which was repayable in the three years foUowing the sale.
20 The National Audit Office consider this was an unusual way of effecting a sale, partictiarly where fd ownership was transferred to the purchasers. Nevertheless, as PSA Services were unable to secure either better terms or better offers, Ministers decided to go ahead on this basis.
21 However, in conducting the sale of the five businesses, PSA Services succeeded in
. transferring E41 mil~on of the redundancy costs of those staff who transferred with the businesses to the new owners;
. transferring E1Omi~on of the redundancy costs of seconded citi servants to the purchaser of BM South East and BM South and West and
. avoiding the discount that purchasers wotid have sought if trade debtors had been included in the sale.
The cost of administering the sale 22 PSA Services’ advisers were appofited in competition. The admtilstrative costs of the sale, S21.7 muon, included advisers’ fees of S13.8 mi~rm and payments of f4.6 mi~on to Bovis Construction Limited in their capaci~ as Contractor
6 PSASER~CES:THETMSFER OF PSAB~LDINGmAGEMENTTOTHEPRIVATESECTOR
Manager. This reflected the amount of work needed to prepare the businesses for sale and protide management support. From 1991-92 onwards, PSA Services’ expendi~e on advisers’ fees exceeded their initial budgets by E4.7 mi~on (27.5 per cent).
23 To provide the Contractor Manager with an incentive to ensure that PSA Services’ objectives were achieved, the final 25 per cent of tbeti fee, on the second phase of their contract, was hked to the achievement of five successti sales by October 1993. The incentive dld not, however, extend to the completion of key tasks to specified ~ahty standards.
Constipation and the provision of a continuous service
24 Most major chent departments, including the Ministry of Defence, confirmed to the National Audit Office that they had been ade~ately constited on those aspects of the sale in which they had a material interest, and that a satisfactory service had been maintained throughout the sale period.
Protection of staff interests including their pension and severance entitlements
25 PSA Services took steps to protect the terms and conditions of employment of aU staff at the point of sale. Employees were given a choice of whether to transfer to purchasers. For those who transferred, their terms and conditions of employment were governed by the Transfer of Undertakings (Protection of Employment) Re@ations 1981. For those not transferring to new purchasers, fti redundancy entitlements, including compensation in heu of notice payments, were payable when jobs in other departments could not be found for them. The pension tights of afl staff were protected. PSASERWCES:THETMSFER OF PSAB~~lNG WAGEMENTTOTHEPRNATESECTOR
Part 1: Back~ound to the sale
Back~ound
1.1 men the Proper@ Setices Agency was estab~shed, it provided, managed and maintained the buildings and proper~ used by Government Dep-ents. In the 1980’s, responsibihty for these functions was pro~essively devolved to user departments and, in April 1988, citi depa~ents assumed ~ tiancial responsibihty for major new construction works and became hee to tender, competitively, new project management and design commissions.
1.2 Later in 1988, the Government announced that horn Aprfl 1990 these arrangements wmdd be extended to include au civil and defence works activities, including maintenance. Tbe Government also announced that those parts of the Prope@ Setices Agency responsible for protidmg works and estate setices were to be resmuctied to form PSA Setices (the Department), which was to become a commerciaUy-run tiading fund from Aprfl 1993. The remaining responsibihties of the Prope~ Sefices Agency, includlng the management of the departmental and common user parts of the civti estate, wodd fa~ respectively to occupying Depa~ents and to Prope@ Holdings, a dtiectorate within the Department of the Entionment.
1.3 The Department told the National Audit OffIcethat they had recognised that the introduction of competitive tendering wotid have a significant effect on PSA Semites’ business and lead to increased redundancy, restictig and other costs. However, while the benefits of market testing cotid not be Wantiled, the Government beheved that any additional costs wodd be more than offset by the savings that market testig wmdd bring,
1.4 In October 1989, the Government announced that the activities which wmdd be undertaken by PSA Semites were to be privatised as soon as the necessq arrangements, including the inhoduction of commercial accounts and any necessa~ resticttig of the organisation, had been completed. The Department considered that the earhest practical date for pfivatisation lay in the second haK of 1992. The Proper~ Setices Agency and Crown Suppfiers Act 1990 provided the statutory authority for these proposals.
1.5 In Apti 1990, when the separation of PSA SeMces and Proper& Holdings had been achieved, the Depatient established a privatisation unit and appointed Coopers and Lybrand as their main advisers (Append~ 1). In October 1990, fo~owing a review by Coopers and Lybrand, PSA Setices were reorganised into three units: PSA Projects; PSA BuOding Management and PSA International, which the Department subsequently closed d~g 1993, This Report deals with the tiansfer of PSA Building Management to the private sector. A chonolo~ of the main events is at Appendm 2,
8 PSASERWCES:THETRANSFEROF PSABUILDINGWAGEMENTTO~E PRfVATESECTOR
PSA Butiting Management
1.6 PSA Btiding Management were created in AprO 1990 as a regionaUy based organisation protidtig a range of services, which included the management and detive~ of btidtig and prope~ mahtenance, the project management and design of sma~er constriction projects and estate and property management. At that time, PSA Btiding Management employed over 15,000 staff and obtained most of their work from the Ministry of Defence. FiWe 4 shows the importance of the work for the Ministry of Defence in 1992-93.
.,’ Hgiie:4:Feeincorni by 61iink1992’93’; r‘; i ~~’; ~ ~
f million 100
101. L 80
60 , ,52°h.,.
40
20
0 SM BM BM BM BM Scotland Manchester Noreast South East South & West
me from MiniatV ❑ Income from Uvil ❑ o,har Income ❑ y;a,s”ca Oepaflments
Source: Long Form Repotis
[n 1992-93 PSABuildng Management obtainad most of their work from the Ministw of Oefanca
9 PSASERVSCES:THETRANSFEROF PSABU1~INGMANAGEMENTTOTHEPRNATESECTOR
1.7 In August 1991, PSA Services reduced the number of regional orgatisations from nine to five (Appendix 3). These five units were prepared for sale and offered to the market in January 1993,
Objectives of the sale
1.8 The sale took place within a wider objective to tiansfer au of PSA Services’ activities to the private sector as soon as possible while :
● protecting the interests of the taxpayer,
. constiting with chent departments and providing a continuing service; and
. protecting staff interests and in partictiar their pension and severance entitlements.
1.9 Ministers subse~entiy decided that, to assist the development of a competitive post-sale market, they would prefer to se~ each business to different bidders provided that each bidder cotid demonstrate the wi~ngness, abihty and financial resources to operate tiem as going concerus. Mtbough Ministers’ preference was for a successful sale, they stated that each business wmdd be closed if this was the cheaper option,
1.10 Tbe National Audit Office examined:
. how the Department prepared the businesses to meet the pohcy objectives (Part 2);
. how the Department conducted the sale and evaluated bids (Part 3); and
. whether the sale objectives were achieved and the sale administered weH (Part 4).
1.11 The National Audit Office’swork included an examination of Departmental papers and discussions with oficials, their principal external adtisers and tie short-hsted bidders. BDOStoy Hayward, Chartered Accountants, acted as technical constants to the National Audit Office.
10 PSA SEnWCES T1lE TnANSFER OF PSA B~LDINGMANAGEMENTTDTHEPRNATESECTOR
Part 2: The preparation of PSA Building Management for sale
2.1 Transforming the five PSA Btiding Management businesses into saleable organisations represented a si@cant management chaUenge. They had a mixed reputation amongst their chents and, amid the recession, needed to win work in both existing and new markets, whfie undergoing a significant reduction in size. In August 1990, the Depatient forecast that, in cash terms, income wotid fa~ from S407 miMon in 1990-91 to 8296 miMon in 1993-94 (27 per cent).
2.2 To prepare each of the five businesses for sale the Department needed to:
. introduce commercial management expertise;
● develop fiancial and management information systems, including the preparation of commercial accouts, contract information systems and commercial busfiess plans;
. cut costs, and reduce staff mnnhers;
. assist customers in developing appropriate contracts for existing and market tested work; and
. maintain the commitment of staff in completing a formidable range of tasks when at least hak faced imminent redundancy.
Commercial expertise
2.3 The Department’s adtisers, Coopers and Lybrand, considered in their August 1990 and May 1991 reports that, if the businesses were to make the changes needed to respond to the new competitive environment, management needed to be strengthened.
2.4 Mthough this was pafiy met by employing speciahsts horn the private sector in key areas such as finance, Coopers and Lybrand advised that a Contractor Manager shodd be appointed to oversee and drive through the preparations needed for PSA Buildlng Management to be offered for sale. The Department accepted this recommendation and, fo~owing competition, appointed Bovis Construction Limited, a member of the P&O Group, as Contractor Manager in November 1991. PSASERWCES:THETMSFER OF PSABUILDINGMANAGEMENTTOTHEPRNATESECTOR
2.5 Bovis were responsible for project managing the businesses’ preparations for sale, including the completion of 31 key tasks in each business whlcb reflected the most important measures needed to effect successfti sales (Appendm 4). To provide an ticentive to ensure that the Department’s objectives were achieved, the final 25 per cent of their fee, on tbe second phase of their contract, was hnked to the achievement of five successti sales by October 1993,
Financial and management information systems
2.6 The process of titroducing commercial accountig systems was we~ uderway before Ministers decided to se~ PSA Projects and PSA Buildlng Management separately. In July 1989 a report produced jointiy by the Department, the Treasury and Price Waterhouse concluded that 1992-93 was the earhest date by which auditable commercial accounts could be achieved and advised that it wotid be prudent to a~ow for shppage to 1993-94.
Preparation of commercial accounts
2.7 While the Department remained on cash based Government accounting systems throughout the pre-sale period, simple income and expenditure accounts were produced for the businesses for the first time in 1990-91. These were superseded by management accounts drawn up on commercial accounting principles from 1991-92 onwards (Figure 5),
Business 1991-92 Unaudited 1992-93 Unaudited 1993-94 Forecast
Net Net Net Operating Operating Operating Salea Protit[l] Sales Protit(l) Salea PrOfit{l) Em fm fm fm fm Cm
BM Scotland 39.5 4.5 34.7 5.1 30.0 3.0 BM Manchester 89.3 2.B 65.4 5.2 47.2 3.0 BMNoreast 90.3 13.5 54,8 1,5 40.9 3.6 EM South East 93.6 (7.0) 80.5 (0.6) 57.9 5.3 EM South&West 79.2 15.3 93.1 25.2 66.5 1s.5
Total 391.9 29.1 328.5 42.4 244.5 33.4
Source: Long Form Reports (Volumes 8&9) and 1992-93 ManagemerrtAccourrts
Note: (1) &cludes restructuring and redundancy costs which were borne central~by ths Depatiment. In addition, the businesses didnotpayinterest on capital and were not subject to t~ation.
2.8 The Department’s reporting accountants, KPMGPeat MarWick, audited the businesses’ balance sheets as at 31 March 1992, Their opinion on them was quahfied because there was a risk that further items might come to fight which wodd require material adjustments and because the ownership of some
12 PSASER~CES:THE TRANSFER OF PSAB~LDINGWAGEMENTTOTHEPRNATESECTOR
btidings and plant at Ministry of Defence sites had not been agreed. The audit was not extended to cover the 1991-92 Profit and Loss Accounts because of the inevitable difficulties in obtaining opening balances.
2.9 Accounts showing the actual trading restik for the seven months to 30 October 1992 and projected restits for the ti year ending 31 March 1993 formed the basis of the Long Form Reports and Information Memoranda produced to support the sale. Mthough tiese documenk were not subject to audit, WMG Peat MarWickretiewed them. We signiRcant progress had been made in each buetiess stice earher reviews, some uncertainties remained including
. inade~ate provision for goods or services received but not invoiced, resufting in a possfile underestimate of costs incurred during the year;
. under and over estimates of income; and
. signiRcant discrepancies between the financial accounts and the records of customer departments, includlng duphcated and disputed invoices.
2,10 Some of the short-fisted bidders looked to the Reporting Accountants to warrant the information in the Long Form Reports as the Department had advised bidders that it was not Government practice to give warranties on the accuracy of sale information. Some also suggested that the 1992-93 commercial accounts shmdd have been audited. The Department considered that a formal audit wodd have increased costs and delayed the sale by six to nine months with no certainty thal each business’s auuuuuls wudd lIave beeu given aII wlquah~ed opinion. A ~ahfied audit opinion codd have led to reduced sale proceeds.
2.11 The bidders undertook detafled evaluations of each business between March ~d June 1993 before the unaudited management accmmts for 1992-93 were avaflable. Thus, the bidders did not have a W year’s trading record on which to formtiate their bids. In the absence of audited accounts and a Rnancial track record, they took a consemative tiew when valuing each business. The Depatient were aware of these risks, but accepted them in view of the decfining woruoad and the need to maintab the momentmn of sale preparations.
Contract information
2,12 Inititiy, PSA Buildlng Management reheal on modifying existing systems to provide the necessary contract information, but the data they produced coufd not readily be reconciled with data from the accounting systems. Therefore, in October 1991, BM Scodand piloted a new contract costing system which the other businesses adopted during 1992-93.
2.13 PSA Building Management developed the new system ~icUy to produce basic contract accounting and control information for relatively simple contracts. The Repotilng Accountants concluded that, while fit for the purpose for which it was intended, the system was not partictiarly sopMsticated by normal commercial standards and the information it produced was not who~y rehable. PSASERWCES:THETRANSFEROF PSABUt~INGWAGEMENTTOTHEPRNATESECTOR
2.14 The Department considered that individual contract ~es with standardised documentation were needed to assist bidders to evaluate the contracts being sold. However, some bidders found it dlfficrdt to match, in au cases, detaRs in contract files with information in the Long Form Reports,
2.15 The bidders told the National Audit Officethat, as a restit of these factors, they had to take a more prudent view of the value of PSA Building Management than might otherwise have been the case.
Bustiess plans 2.16 The Department considered that credible business plans shotig forecast income and profit, wmdd help bidders with their valuation of the businesses. In addition, since the businesses’ Hmited track record was largely based on non-market tested work priced at negotiated levels, previous performance might not be a good guide to future prospects in the private sector - where market testing and competition for contracts wotid prevafi.
2.17 Some short-tisted bidders saw the projections in the business plans as optimistic, particdarly the forecasts of work to be won from new chents. This, together with the lack of an audited tiack record and the poor Wahty of the underlying contract costing iuforrnation, led two bidders to prepare their own business plans on less optimistic assumptions.
Cashflow
2.18 From April 1990, financial responsibihty for the settlement of contractors’ invoices passed from the former Prope~ Services Agency to chent departments. Many were not, however, ready to process such payments and, therefore, PSA Services provided a bi~ paying service which was funded through cash advances.
2.19 Prior to the sale, PSA Btildtig Management, in common with other parts of PSA Services, experienced difflcdties in obtaicdng c~ent departments’ acceptance of works invoices that were paid on their behaE. This resdted in a large number of disputee and working capital re~irements peaked at El ,200 mi~on in January 1991. The Committee of Pubfic Accounts examined these arrangements in their Twen@-Second Report of Session 1991-92 (HC 208) and in their Thir@-Fifth Report of Session 1992-93 (HC440). On both occasions the Committee expressed serious concerns about these invoicing problems.
2.20 With the exception of property management work h the Mtilstry of Defence, Departments progressively took over responsibfity for bi~ paying and at the point of sale PSA Buifding Mmragement no longer paid contractors’ invoices on behati of chent departments.
2.21 In tie case of market tested defence property management work, con~actors are re@red to pay their sub-contractors tithhr seven days of receiving the ctient’s payments. During 1992-93, PSA Building Management introduced new payment procedmes to enable them, as a contractor, to comply with these
14 PSASERWCES:THE~SFER OF PSABmLDINGMANAGEME~TOTHEP~ATE SECTOR
contractual terms horn 1 Apfl 1993. Their introduction reduced working capital re@ements for PSA Btiding Management by fi195 mi~on (80 per cent) and debtors by S72.5 tion (68 per cent). To avoid purchasers discounting trade debtors, which were worth S121.7 mi~on at the point of sale and mairdy due from Government depatients, the Depa~ent did not include this asset in tbe sale and instead pursued the debt co~ection themselves.
2.22 Prior to the sale, potential purchasers indicated that they wished to obtain businesses which generated positive cas~ows; a caeh ehortf~ would be viewed titb concern and taken into consideration when valuing each business.
Internal controls
2.23 The Department’s Central In@ Unit, working alongside their internal audit function, investigates a~egations relating to suspected irre~arities. Early in 1993, anonymous allegations were reported in the national press concerning BM South East Contracting. There were a~egations of nepotism, the use of bogus companies, tax evasion, the pursuit of private work, the misuse of Government assets and the circumvention of security re~ements.
2.24 The Central In- Unit and the Department’s Internal Audit investigated these allegations and concluded that there was no evidence of co~ective fraud or corruption. There were, however, departures born best practice and a lack of management control and supervision. The Department strengthened the management team in the business and implemented an action plan to tackle the identified deficiencies. These included: improved controls on the employment of casual and agency staff; tie dlsclosme of business interests by employees; improved credit control arrangements; and an increased level of supervision of contractors carrying out works. In addition, the Department recovered a dupficate payment of f13,015 from a former contractor.
2.25 In March 1993, tbe Central In- Unit had a total of 16 further cases under investigation one in BM Scofland; four in BM Manchester; six in BM South East and five in BM South and West. The Unit concluded that no action was justified in 15 cases; the remaining case resdted in a prosecution. The Department made the detiaik of these cases available to short-fisted bidders who confirmed that they had not influenced their bids.
Efficiency measwes
2.26 The Department implemented a three year cost competitiveness initiative from 1990-91. By March 1991 PSA Services had reduced costs by an estimated S35 miWon - a f2.2 mi~on improvement on the cost reduction target set for 1990-91. However, during 1990, the PSA Services Chief Executive decided that further measures were needed to create commercia~y tiable businesses. Accordhgly, in March 1991, the cost competitiveness initiative was superseded by profit improvement plans wbicb were aimed at ensuring that, horn 1991-92, each business earned a 7.5 per cent return on fee income.
15 PSASERWCESTHE~SFER OF PSABUI~INGWAGEMENTTOTHEPRWATESECTOR
2.27 The scale and natme of the changes that PSA Btilding Management was undergoing meant that, despite significant cost savings, efficiency improvements were d~lcdt to measure and achieve. The position was further comphcated by: the recession in tie building industry, which exerted downward pressure on fee rates; the need to shed direct staff as wor~oad reduced; the demands placed upon the businesses by the introduction of new tiancial and personnel systems; and the increased devolution of responsibihties to each of the businesses. Nevertheless, with the exception of BM South East, each business reported operating profits for 1992-93 which exceeded their annual target rate of return on fee income of 7.5 per cent (Figure 6).
Business 1991-92 Unaudited 1992-93 Unautiled 1993-94 Forecast “10 “/0 “1.
BM Scotland 11 17 10 BM Manchester 3 8 6 BM Noreast 15 14 9 8M South East (7) (1) 9 BM South& West 19 27 27
Source: Long Form Reports (Volumes 8&9) and 1992-93 ManagementAccounts
BM SouthEastandBM Manchester were the least Profitable businesses,
2.28 Furthermore, with the exception of BM Noreast, this financial ratio improved in 1992-93 compared with 1991-92. However, because of a re-organisation of work between the regions, the contraction of each business, their lack of experience in compiling and monitoring performance against commercial budgets, the absence of audited financial information, and difficdties in estabhshing comparable productivity measures, it is difflcdt to measnre the extent to which these gains were due to improvements in efficiency.
Reduction in staff numbers
2.29 The signflcant progress made by each business in reducing costs was achieved mainly as a restit of substantial reductions in total staff numbers, horn just over 15,000 in Ap~ 1990 to 6,700 by September 1993.
2.30 Some staff reductions were achieved by natural wastage (1,000) and the transfer of around 3,000 staff to other Government Departments - which avoided potential redundancy costs of about S90 mi~on. However, around 4,300 were made redundant at a total cost of fl 35.3 mi~on. Further staff reductions are expected after the sale as a restit of the continued contraction and restructuring of the businesses and the loss of market tested contracts. The Department undertook to share the estimated redundancy costs with purchasers through a redundancy sharing scheme the detatis of which are given in Appendix 5.
16 PSASERWCES:THETRANSFEROF PSABUILDINGMANAGEMENTTOTHEPRIVATESECTOR
Market testing
2.31 Chent departments have progressively subjected their works cervices re@ements to market testing, PSA BuOdmg Management set themselves a target of winning between one-in-three and one-in-four contracts in such competitions. By late 1992, PSA Btiding Management had won about ha~ of the contracts for which they had submitted bids but, although the success rate exceeded forecasts, many of tbe contracts won were of low value (Figure 7).
Contracts won Value Period Number Per cent fooo Per cent
BM Scotland April 1991- October 1992 22 38 2,922 14 BM Manchester Apfll 1991- March 1993 38 48 3,366 28 BM Noreast Apri 1991- March 1993 31 44 3,341 25 BM South East Apri 1991- December 1992 21 34 2,830 35 BM South&West Apfil 1991- December 1992 71 61 7,442 70
Total 183 47 19,901 30
Source: Long Form Repotis
In the pre-ea[es petiod the businesses were successful in winning nearly half of all contracts for which they Md, However, these represented only 30 per cent of the work tendered for by value.
Employee issues
2.32 Potential bidders expressed concern at the possibfity of receiving staff who had been transferred against their wil and of having significantly overstaffed businesses. The Department also judged that there wodd be insficient staff commitment to the sale process and the risk of delay, and industrial action, if staff faced comptisory transfer at the date of sale. In March 1992, the Secretary of State therefore offered staff the choice of whether or not to transfer permanently tith each business. Staff not flng to transfer permanently would face redundancy if not selected for secondment, or after their period of secondment ended, unless alternative jobs in the CivR Service codd be found.
2,33 Staff transferring to the purchaser have their efisting terms and conditions of service, with the exception of their pension arrangements, protected under the Transfer of Undertakings (Protection of Employment) Re@ations 1981 as amended by the Trades Unions Reform and Employments Rights Act 1993. The right to comparable pension arrangements post transfer is protected by etistig employment legislation. The Secretary of State gave assurances that purchasers wodd be expected to offer staff pension arrangements that were broadly comparable to those for the Civil Service. If purchasers cotid not do so, the Secretary of State stipdated that staff wotid need to be compensated. The Department developed, in constipation with the Government Actuary and the PSASERWCES:THETRANSFEROF PSABUI~INGWAGEMENTTOTHEPRWATESECTOR
Trades Unions, a pension scheme of e~ivalent value to the Citi Setice scheme which they recommended to bidders, This was subseWently accepted by each purchaser.
2,34 The recommended scheme has a number of special measures to protect its funds: the assets batting employees’ pensions are to be held separately from each purchaser’s business assets; investment in each purchaser’s shares is hmited to five per cent of the fund’s assets; and there is e~al management and employee representation on the pensions fund board.
2,35 Employees’ existing terms and conditions of employment were, therefore, protected on transfer to the successti purchasers. The Department’s legal adtisers confimed that the Department had comphed with au relevant legislation,
2.36 The costs of matching Civil Setice severance entitlements are high, as private sector severance entitlements are typicatiy sma~er than those in the Citi Sefice although genera~y we~ in excess of the statutory minimum. The Government Actuary’s Department estimated in Aprfl 1993 that the statnto~ minimum cost of making aHremaining PSA Btiding Management’s staff redundant wodd be S15 milhon compared with estimated redundancy costs under the Civil Semite scheme of f203 milhon.
18 PSASERWCES:THETRANSFEROF PSABUILDINGMANAGEMENTTOTHEPRWATESECTOR
Part 3: The sale process
The tMng of the sale
3.1 In May 1991 Coopers and Lybrand advised the Department that the earfiest practical date for sale wodd be in 1992. They warned that an early sale wotid take place against a background of poor ~ahty financial information and that bidders wotid seek compensation for this additional risk.
3.2 Potential bidders indicated that they wotid prefer an early sale whtie the cmrent and future wor~oads were sti robust. This wotid give them the oPPortuni@ to win new business and make the considerable productivi~ and efficiency improvements needed in a way that suited them.
3.3 The Department accepted Coopers and Lybran&s advice that delaying a sale until after a sustained period of contractor management was unWely to recoup the cost of the investment needed to complete efficiency and productivity improvements. Given these reasons, and the effect a deferred sale wotid have on staff motivation and retention, Ministers confirmed in Jtiy 1991 that the businesses, subject to satisfactory progress, wotid be offered for sale towards the end of 1992.
The method of sale
3.4 The absence of audited commercial accounts and a five year trading record tied out a pubhc flotation. The Department decided that a widely marketed trade sale of each business was the most appropriate method of disposal. They also decided that management shotid be given the opportunity to bid for each of the businesses.
3.5 With the approval of the Treasury, the Department offered the management buy-out teams fiancial support, up to a maximum of 75 per cent of their costs, in submitting an indicative offer. The Department’s contribution was hmited to S40,000, PIUSvalue added tax, for each team. If a buy-out was short-tisted it wotid receive a further S40,000, plus valued added tax, once it had submitted a final bid. The fiancial assistance was dependent on bids conforming to the Department’s re@ements and supported by appropriate financial guarantees. This assistance was refundable in fti in the event of a successfd bid.
Sale strate~
3.6 Coopers and Lybrand advised that, if sticient interest was to be generated, a clean break - whereby the Government’s financial interest in each business ceased at the date of sale - wodd not be possible. It remained the Department’s
19 PSASER~CES:THETRANSFEROF PSABUID~GWAGEMENTTOTHEPRWATESECTOR
pohcy, however, to minimise departures from the clean bre~ principle. In addltimr to the redundancy sharing scheme (paragraph 2.30 and Appendm 5) the Department recognised that if they were to secure value from the sale each business wotid need to be sold with a contracted forward woruoad.
Future worMoad
3.7 Some of the potential bidders contacted by Coopers and Lybrand felt that they wodd be taking a considerable risk in ac~lng uncompetitive businesses with a decfining worMoad and a mixed reputation with some of their chents.
3.8 The Department therefore sought to negotiate a forward worMoad witi their chent depa~ents, which was consistent with their needs, prior to the completion of their market testing programmed. Property Holdings was the ody civil department that agreed a contracted wortioad, which was worth 84.2 miMon for the three years to March 1996.
3.9 The stie and complexiv of their estate meant that the Ministry of Defence had to phase in their market testig programme over a much longer period. ConseWentiy, the Minis@ needed PSA Btiding Management to continue to protide setices unti the end of 1997-98. The Mtis@, therefore, a~eed a contacted worUoad which PSASetices estiated to be worth jwt over f400 m~on in fee income over tie five years to 1997-98 on contracts with a total value of S2.8 bWon.
3.10 This agreement meant that the Ministry of Defence had marginaUy to extend their market testing timetable and to accept higher than average fees than those being obtained in contracts currentiy being completed; at an estimated cost of S14 mi~on. However, the Minist~ recognised tiat the formal work agreement wodd enhance the prospects of a successti sale ad that the extra costs wotid be recouped by increased sale proceeds. To give the Ministry flexibfi~ in their operational retirements, these contracts can be terminated at six months notice in the event of the closure of a base or poor performmce by the contractor.
3.11 Bidders told the National Audit Officethat a sizeable level of ~aranteed income was essential to their decision to bid for one or more of the businesses.
Valuation
3.12 The Department concluded that the appropriate benchmark for assessfig bids shotid be the estimated cost of closure because of the signtilcant Habtity for future redundancies and Ministers’ tiew that PSA Btidlng Management had no long-term future in the pubhc sector.
3.13 The Department prepared its fwst broad estimate of the Wely difference in cost between sale and closure io May 1991. They subseWently developed a fmancid model to evaluate the direct costs of closing PSA Buildlng Management between June 1993 and March 1998; after presale redundancy costs of S135.3 ~on
20 PSASERWCES:THETRANSFEROF PSAB~LDINGMANAGEME~TOTHEPRtVATESECTOR
had been incnrred. The model produced a base case which indicated that the tiect costs of closure wodd be S158,9 m~on. Tbe mode~s main assmnptions were then snbjected to sensivi~ analysis which showed that Wely direct closure costs wodd he between El 15.1 mifion and S205.6 mWon (Fi~e 8),
Business Range Most Likely Case fm fm
BM Scotland 13.7 to 24.7 19.1 BM Manchester 25.9 to 44.5 35.5 BM Noreast 26.7 to 42,6 34.2 BM South Eaat 36.7 to 55.2 45.4 BM South&West 12.1 to 38.6 24.7
Total 115.1 to 205.6 158.9
Source:Coopers and Lybrand bidewluafion reports
3.14 The principal factor in these calctiations was the cost of redundancy. In addition, the Depa~ent considered that the cost of closure wodd include disruption and other costs which wodd be borne by both itse~ and chent departments. Mthough these were difficdt to ~antify with precision, tbe Department estimated that these additional costs wotid he between E80 mihon and E105 mfion for au five businesses. These estimates, which provided only a broad indication of the costs involved, were prepared by the Department’s key contract negotiator.
3,15 To assist the Department in their negotiations with bidders, Coopers and Lybrand produced estimates of the post-tax profits that purchasers could expect to earn horn contracted work at the point of sale (Fi~e 9). This dld not, however, constitute a ti valuation of each business.
Business f million
BM Scotland 3.2 to 7,8 BM Manchester 4.1 to 10,0 BM Noreast 6.1 to 11,1 BM South East 4.2 to 10.1 BM South&West 17.8 to 28.5
Total 35.4 to 67.5
Source: Coopers and Lybrand
21 PSASERVrCES:THE~SFER OF PSABUILDINGWAGEMENTTOTHEPRNATESECTOR
Marketing of the sale
3.16 Coopers and Lybrand were responsible for marketing the sale. To gauge the level of tikely interest they smeyed the market on several occasions between 1990 and 1993.
3.17 The sale competition began in January 1993 with advertisements in the ~rnes, the Financial Hrnes and the European and received widespread media coverage. A total of 120 companies, including four horn overseas, were sent a copy of the information memorandum. The Department received bids for one or more of the five husiuesses from 14 different bidders and no business received fewer than four initial bids.
Negotiations tith bidders
Bid evaluation criteria and methodolo~ 3.18 Figure 10 shows the criteria used to evaluate both the ititial and final bids.
. the finsncial value of offers under various staff transfer/core size assumptions . the bidders’ financisl atatua . the Secretary of State’s preference to sell esch business to different purchasers in order to promote post-sale competition . Molders’ commitment to developing each business in the pfivate sector . the creditifify of Mddera’ future plans . bidders’ intentions towards staff ● secondment and pension arrangements . the impact on continui~ of service to c[ents
Sourae: Coopers and Lybrand emluation of irritialbfds
3.19 The financial evaluation of each hid was complex as, in addition to a sde price, bidders were asked to give an assessment of the lon~term staffing needs of each business (core size) and to place a bit on the Depament’s share of post-sale redundancies (the redundancy cap). The value of each bid was also affected hy the nmber of staff electing to transfer to each purchaser (the staff transfer rate) and the timing and cost of future redundancies (the staff mix profile). As the Department were to contribute to redundancy costs up to five years after the sale, they discounted payments made after the fist year to determine the net present value of each bid.
3.20 To evaluate the financial value of each bid Coopers and Lyhrand developed a bid evaluation model. This produced a range of financial values for each bid on the basis of pessimistic, most tikely and optimistic assumptions. These covered core sizes and staff mix profiles across a wide range of staff transfer rates. Afthough the model produced 189 separate sensitivities for each bid, the evaluation
22 PSASERWCES:THETRANSFEROF PSABU3LDINGWAGEMENTTOTHEPRtVATESECTOR
concentrated on the most hkely outcome except where bids were close. In these circumstances, the Depatient considered the bids having regard to the wider range of values tithm both the pessimistic and the optimistic aseumptione.
3.21 The Depament also wished to ensure that they chose the combination of winning bids for each business that m-lsed total proceeds for the whole sale. A permutation model was therefore developed to assist in the selection of final bids.
The short-tisting of bids
3.22 To eecnre effective competition, Coopers and Lybrand recommended that the short-hst for each business shodd be restricted to three or four bids. Above this level there was a rick that biddere wmdd concentrate on the most attractive businesses thereby leading to an imbalance of bids in the latter stages of the sale process. To guard further against this possibi~ty, Coopers and Lybrand recommended that bidders shoufd be short-fisted for no more than two businesses and that, wherever possfile, those that had bid for more than one business shotid be short-fisted for their first and second preferences.
3.23 To preserve Molder confidentiahty, bidders for each of the five businesses were given code letters and individual bid code names. The Department received a total of 33 bids.
3.24 A number of these bids were sdject to conditions and WaHfications which meant that they did not conform to the Depatient’s rewed format. In addition, to secure places on short-fists, there was some tactical bidding which the Department expected wmdd be revised at a later stage. The Department, therefore, placed only hmited weight on the tiancial value of initial bids and examined the bids against the fti range of evaluation criteria shown in Figure 10. The financial value of the initial bids is shown in Figure 11 overleaf.
3.25 Four bidders were not short-fisted for any of the five businesses: one decfined to offer a guarantee of their severance habfity and the other three were considered too sma~ to manage an ac@sition of this size. Furthermore, two of the rejected bidders were management buy-out teams who did not have the support of key members of their management boards.
3.26 The management buy-out team for BM Scotland submitted a competitive bid. However, the finely balanced decision to short-fist it complicated the biddtig process since two private sector bidders, who had submitted attractive initial bids, did not wish to be short-hsted against a management buy-out. As both of these bidders had submitted attractive bids for more than one businees, short-hsting the management buy-out team for BM Scotland also had repercussions for the short-hsts of other businesses. It reduced tbe number of attractive bids for BM Scotland but tidened the choice for the short-hsts for BM South East and BM South and West.
23 PSASER~CES:THETRANSFEROF PSABWDINGWAGEMENTTOTHEPRWATESECTOR
Hgure 11: The Evaluation of the Rnancial Valua of Initial Mds
(ey :ode Balder .effer A - Ba[fo”r BeaW B - PMRealv c W S AtNns E - %r Roben McAlphv Richard Ells and GRE Propeties Umited Consoti”m G Mowlem H TaylorWoodrow K Torpy M MBO Team from thf Cambridge Design Ornce N - Pen Frischmann an, Mathew Hall Is Consotium -20 A w o - MBO Team A M s - Amey Ho[mngtimbl A Umited Consotium G N w Seno s Y MBO Team s z Wmpeylchesteflon 1 s lnternatio”al .,~ Consotium BM EM BM BM BM Sotih - Shotihtied holder Scotland Manchester Noreast Southeast andWest
Source: Coopers and Lybrmrd bid evaluations based on common aesumptiorrs for each business on core sizes, staff transfer rates and the timing and mix of redundancy payments.
Motes: (1) The financial value of the bids was onfy one of the criteria used by the Depaflment in the shoti-listing process (Figure 10). The Depafiment sought to short-list a broad range of credible purchasers and placed only limited weight on the value of the initial bids, This was because:
● some bids did not conform fulfy to the Depatimenfs requirements, and moving them to full compliance was expected to incur additional costs;
● it was assumed that bidders who bid for several businesses would eventually focus on one;
● following further research bidders might substantially change the vahre of theiroflers;
● to gain a place on the shofl- fists of their choice, some bidders may have submitted tactical bids which did not reflect theirpereeption of the underlying value of those businesses;
● of the existence of specific factors. Some bidders stated, for example, that they did not wish to be short-listed against management buy-out teams.
figure 11 shows, for each business, the wide range of initial Mds received and those chosen for shofl-hsting. However, given the timited weight placed upon the financial value of each initial bid, in this paticular sale, conclusions about the shmthsting process have to be made in a wider contefi (Paragraphs 3.22 to 3.26).
24 PSASERWCES:THETRANSFEROF PSABUILDINGWAGEMENTTOTHEPRWA~SECTOR
Final bids
3.27 Figure 12 overleaf shows bidders’ final offers. Figure 13 on page 27 provides a summary of the net present value of fial bids received and their comparison with the estimated costs of closure.
3.28 Under the most Wely assumptions for core size and staff choice restits, the Department’s selection of purchasers miuiiised the expected cost of the sales except for BM Scotland. In that case, the management team’s bid was marginany better than Serco’s, when the former’s bid was adjusted to reflect tie favorable and higher staff transfer rates expected by se~ng the business to the existing management. However, Coopers and Lybrands sensitivi~ analysis showed that on most assumptions Serco’s hid was more attractive, by up to S6.1 m~on, despite the weighting of the resdte of staff choice in favour of the management team.
3.29 The Department therefore decided to se~ BM Scotiand to Serco as their offer represented the least cost to Government on most assumptions and because Serco were assessed as being more tiancia~y robust, and having greater relevant commercial experience, than the management buy-out team. The Depatient considered that, in the case of the other sales, there were no siguficant ~afitative differences between the leading bidders.
3.30 The bid permutation model estabhshed that, under the most hkely assumptions for core size and staff mti, the combination of winning bidders shown in Figure 13 m-lsed sales proceeds at low, most Nely and Klgh staff transfer rates. It was not possible to carry out an exact comparison of the bids for BM South East and BM South and West, as the joint bid from PeU Frischmauu and Matthew HaUwas on a dtierent basis to that of the other offers. However, it was clear from the bid evaluation, that the offer from Pel Frischmann and Matthew HaUrepresented the most favorable outcome.
3.31 The Department constited the Ministry of Defence, tieir major chent, about the irnphcations for post-sale competition of se~g BM South East and BM South and West to a single buyer. Both the Depatient and the Ministry considered that these were not stilcient to outweigh the clear financial advantages of the joint bid, and that a sale of the whole of PSA Building Management to four pmchasers wotid stimtiate stilcient post-sale competition for government maintenance work.
Conduct of the bidding process
3.32 A8short-fisted bidders told the National Audit Office that they were satisfied that the sale process was handled in a fati, open and constructive manner by both the Department and their advisers, with the exception of two members of the Scottish management buy-out team. PSASERWCESTHETMSFER OF PSABUIDINGWAGEMENTTOTHEPRWATESECTOR
Hgure 12 Range of Rnal Mds
f milNon o Key :ode Gidder w .etter s A Ga[fourBeaw -20 o GH c W S AtMns I E E Sir Robefi McAlpine, mchard Ells and GRE Propeties timited Consoeum c G - Mow[em .40 A [1 H - TavlorWoodrow N N - Pe~lFfischmann a“d Mathew Hall COnsotium o - MBO Team -60 s - Amey HolOngtiGibb hmited Consotium w - Semo Nnning bid Estimated cost of closure mnoe -80 AC
EC AW1 -100
EW
1 I -120 GM EM GM BM South ~st Scotland Manchester Noreast an:n:Mw~th
Source: Coopersand Lybrarrd bid evaluations
Notes: (1) This figure shows the cash value of the final bids - prior to evaluation by the bid evaluation model. The assumptions in the mode/ related to core sizes, staff transfer rates, the cost of future redundancy payments and timing of sa/e receipts.
(2) where bidders specified range of values in their final bids, the midpoint of this range has been taken.
(3)Jhebidsshownaboveexcludecompensationforliabilit;es transferredto each purchase[ The effect of this is shown in Part 4, figure 15.
(4) Bids for BM South East and BM South and West are shown as cOmbi”ed individ”a/ bids. This was to enable comparison of the sale of BM South East and BM South and West to a single bidder with closure and the offers made by other bidders.
(5) G was selected as the preferred purchaser for EM Noreast. This waa because their bid was financial~ more attractive in the majori~ of sceneries modelled by Coopers and Lybrandand the profit sharing scheme proposed by H was valued at zero.
Hgura 12 shows, for each business, the wide range of final and winning bids compared with tha direct cost of closure.
26 PSASERWCES:THE TRANSFER OF PSABULDINGWAGEMENTTOTHEP~ATE SECTOR
~=e~13:=ofiafiJon~ofl~j-ne~jre~/n~~a~e ~fj~na( @f$’jasedfo~a$$umpJ’ionj ~ ‘~‘~.:
.,., ,,;,.:*,*##r,. ., ...... : .,.:.,, ,. . ...! ...... ’ . . ,aboultha!mostf ikelyscenario: for eventual core size, staff mix prOfile and staff transfer rates, used by tbe Department in selecting the winning biddar(’)
BM Scotland ‘2)‘3) BM Manchasta$2) BM Noraasl(z) BM South Ea~2) ‘4) and BM South and Wesd21‘4}
Bidder NPV Bidder NPV Bidder NPV Bidder NPV fm fm fm fm
Serco(5) (7.3) Ws (26.4) Mowlem(5) (13.8) Pen (40.0) AtHns(5) Frischmsnnl MatthewHall C0ns0rtium(5)
Management (7.1) Balfour (2B,7) Taylor (14,2) Closure and (56.1) Buy-out Beatfv Wood row W S Attins(6)
Amsy (15,9) Sir Robati (57.8) Holtingsl McAlpine @bb Umitsd Consortium Consortium and W S AtKns(6)
8alfour Beatty (58.4) and W S AtKns(6)
(19.1) C10sure(7) (35.5) C10sure(7) [34.2) Closure of both (70.1) businesses)
Notes: (1) The most /ike&scenario represents onfy one ofa range of possible outcomes modelledby the Depatiment when selecting the preferred b!dde[ (2) All figures have been adjusted to reflect the assumptions made by the Depaflment of the number ofafaff /ike& to transfer to each purchase~ (3) Serco were selected as the preferred pu~haseras their bid hada higher netpresent value (of up to f6.1million) undermoststafftrans ferassumptions and, unlike the bid from fhe Management Buy-out, placeda capon the Department&liability forpost-saie severance costs. (4) BM South East and South and West were bid forjointbandsold to the Pe/lFrischmanM Marhew Hall consofiium. (5) Winning bidders, (6) These unsuccessful bids do not representjoint offe~ for the businesses. The Depatiment evaluated combinations of individual bids for comparative purposes. (7) Midpoint of the direct costs of closure.
figure 13 compares the net present value of each final bid as calculated by Coopers and Lyhrand Bid Evaluation Model with the cost of closure.
3.33 They considered that they had been disadvantaged by the attitude of the Department and Coopers and Lybrand whom, they felt, had been opposed to the participation of a management buy-out. They were particularly concerned that they had not been given the oppotiity to canvass the support of staff, or offer
27 PSA SERWCES THE TRANSFER OF PSABUDINGWAGEMENTTOTHEPRWATESECTOR
them the opportmi~ to make a financial contribution to the buy-out, even though these restrictions were standard practice in handkg buy-outs io tbe pubhc sector. The buy-out team bad been notiled of tie conditions h advance and had confirmed in writing that they wished to bid mder those conditions.
3.34 The Department and their advisers were not opposed to the pticipation of a competitive management buy-out in the sale process. However, given tie scale of expected redundancies, they made it clear to the management team that they might find it difflcdt to mmmt as strong a hid as a private sector company which had stistantial financial reserves. The Department’s advisers cotimed that the restrictions imposed on approaching employees conformed to normal commercial practice and were necessary to ensure a level pla~g field.
28 PSASERWCESTHETSANSFEROF PSABUILDINGMANAGEMEmTOTHEPRIVATESECTOR
Part 4: The outcome, cost and administration of the sale
Staff choice
4.1 The Department achieved a shghtly higher transfer rate than predicted for three of the businesses.
Business StaffNumbers Management Estimate ActualTransfers Efigibleto Transle~’) ofStaffTransferring
per cent per cent
BM Scotland 863 46 56 BM Manchester 1,222 4B 49 BM Noreast 1,009 46 57 BM South East 1,155 42 38 BM South&West 1,336 46 46
Tofal 5,585 46 48
Source: Returns given by the businesses to the Department
Note: (1) Excludes agerrcysfaff
With the exception of BM South East and BM South and West, the number of staff transferring to the new ownere was greater than the Department estimated.
4.2 The Department were, however, disappointed at the low percentages of staff wishing to transfer permanently to each purchaser. A post-sale staff survey indicated that the two main reasons why staff opted for secondment were the size of their personal redudanq package and concerns about long-term job secwity in the private sector.
4.3 The PeU Frischman~atthew HaUConsortium told the National Audit Office that they had sticient work for afl seconded fee earning staff employed by both BM South East and BM South and West. Conse~enfly, as staff came to the end of their secondment period, replacements from the private sector wmdd need to be found. In their view, the staff choice exercise had led to unnecessary increases in severance payments as many secondees wonfd face redrmdancy on their retmn to the Citi Service.
29 PSASERWCES:THETRANSFEROF PSAB~LDINGMANAGEMENTTOTHEPRWATESECTOR
4.4 The Department explained that pre-sale surveys of potential purchasers had shown concerns about ac@ring business which were overstaffed and had an Dn*g workforce. Staff choice was, therefore, crucial in securing staff commitment to the sales and reducing the size of the workforce by voluntary means. Furthermore, otier bidders had not taken the same tiew as the purchasers of BM South East and BM South& West about the need to replace secondees on a one for one basis when they were returned to the Department. The Department’s estimated redundancy habihty for these staff was S45.2 m~on. In addition, they were entitied to compensation in heu of notice (CILON)amounting to some S6.5 milhon. The Department do not beheve, however, that in the absence of staff choice it wmdd have been uossible to avoid the fti amount of these redundancy costs.
The final transactions
4.5 Figure 15 shows the details of the final transactions.
Rgure 15:’ Detil$’of the tinal’sal~~a~sa~oris(l) ‘;’: ‘r’ ‘::’ ~ ~ ! :
Business Purchaser Sale Price Compensation in lieu of Government cost notice fiabfmy for post Sals redundancy costs
Em fm fm frn
BM Scotland Sercn PIC 3.5 (1.8) (16.3) (14.6) BM Manchester WS AtMrrs Ltd (11.5) (2.2) (31.7) (45.4) BM Noreast Mowlem 8.0 (2.4) (29,8) (24.2) Cnnstrucfion Ltd BM South Eaat PenFrischmanti 10.4 (6.5) (55.7) (51.8) andBM South Matthew Hall &West COnsOfiium
Total 10,4 (12,9) (133.5) (136.0)
Source: final Sale Agreements and National Audit Office Estimates
Note: (1) figure 15 excludes compensation of f21,4 million for Iiabiflties transferred to purchasers as bidders were asked to bid on the basis that each business would be sold with f nil net assets.
4.6 hy redundancy costs in excess of Cl 33.5 milhmr wiUfafl to the purchasers unless they are unable to meet their obhgations through bankruptcy, In this event, the Department have guaranteed to staff, for five years after the sale, the redundancy entitlements transferred to each purchaser. This creates a contingent habihty estimated at f51 mi~on at the point of sale which, because of the purchasers’ underlying financial strength, the Department do not expect to be caUed.
! 30 I PSASERWCES:THETRANSFEROF PSABUILDINGWAGEMENTTOTHEPRWATESECTOR
4.7 Each business has been sold with its share of a forward wor~oad worth a total of S404 mifion in fee income over the five years to 1997-98.
Completion Au&t
4,8 The Department decided that bids for the businesses shotid be made on the basis that net assets e~affed net habi~ties at the point of sale, To estabhsh the amomt of any adjustment that might be rewired, the balance sheet of each bustiess at the point of sale was subject to a completion audit by Ernst and Young, Chartered Accountants.
4.9 The Sale Agreements re@ed each business to have a nominal net asset value of E2 at the point of sale. The Department estimated, at the point of sale, that habihties woufd exceed assets by S8.4 mi~on on transfer and, therefore, protided purchasers with a compensating amomt of cash. Purchasers were, however, re@red to produce completion balance sheets after the sale date to estabhsh a precise value for the transferred net assets or habihties at the point of sale and the need for any adjustment to the compensation payments.
4.10 The completion balance sheets submitted by purchasers indicated that habihties exceeded assets by E32.6 miMon at the point of sale. After a detailed audit by Ernst and Young on behati of the Depatient, this was reduced to E21.4 mi~on and, therefore, the Department paid purchasers an additional El 3 miffion (Figure 16) on which no interest was payable. This increase arose mainly from adjustments to the Department’s earher assessment of income due on contracts transferred to purchasers.
ngure36’PaYmentsto’Pfi6tiasersK&sureItiatnetasseisequalledititIiatififies i ~~~’
Businewes Pre-sale completion Additional Cash (Completion Dale) Estimete BalanceSheet Payment Claim submified Audited by purchasers
A B c (C -A)
foows fooos fooos foows
BM Scotland (1/9/93) 1,900 3,865 2,625 725 BM Manchester (1/10/93) 1,979 6,279 5,587 3,608 BM Noreaat (1/10/93) 2,162 6,885 4,963 2,801 BM South East (1/10/93) 1,000 7,375 2,9B0 1,980 BM South&West (1/10/93) 1,400 8,151 5,274 3,874
Total 8,441 32,555 21,429 12,9ss
Source: DeDaflmen&l records
Po#-sale paymente of 213 milhon were made to purchasers to meet the omective of ensuring that net assets equalled net fiabitities at the point of sale.
31 PSASERVSCES:THETRANSFEROF PSABUI~lNGMANAGEMENTTOTHEPRWATESECTOR
Achievement of sale objectives
The tupayers’ interest
4.11 The final settlement agreed between the Depment and each of the purchasers arose out of a strong sale competition for each business. In three cases, the winning bids were the most attractive on the majority of assumptions mode~ed by Coopers and Lybrand. In the fourth, WS Atis’ bid for BM Manchester was the most attractive under the most Ekely assumptions. John Mowlem Construction Limite&s bid for BM Noreast was close to that of another bidder on the most hkely assumptions, but was more financia~y attractive in the event of low staff transfer rates and core sizes,
4.12 The Department transferred fu~ ownership of each business to the purchasers although they agreed to defer part of tie sale proceeds for BM Noreast, BM South East and BM South and West for up to four years. This was an unusual method of financing the sale, particdarly as W ownership had been transferred to the purchasers. The Department concluded that deferred consideration for these businesses, however, represented a better deal than rigid adherence to the clean break principle patilcufarly as: a clean break might have led to lower proceeds; they have avoided retaining any stake in the future performance of these businesses; and, have also avoided auditing and monitoring costs,
4.13 The agreement to defer a part of the proceeds effectively provided efiernal finance which, although supported by parent compmy guarantees, was not gumanteed by third party financial institutions.
4.14 The Department rejected a profit-sharing scheme put forward by a bidder for BM Noreast on the grounds that it wmdd prevent a clean break and wotid be costiy to pohce and administer. This bidder did not re@e the Department to share h any post-sale losses. By rejectig this proposal the Department forewent an opportrmi~ to benefit shoufd there be a better than expected post-sale performance by the business. The Department noted, however, that retaining a stake in the post-sale performance of the business was contrary to the Government’s privatisation poticy. Fwtiermore, a post-sale proEt sha~g scheme might provide the purchaser with an incentive to place new work won elsewhere within Kls group, thereby mafimising the Department’s contribution to post-sale redundancy costs,
4.15 The price received for each business compared favorably with Coopers and Lybran~s estimate of the value of the contracted wor~oad, after adjustment for the redundancy tiabihties transferred to each purchaser, with the exception of BM Manchester (see Figure 17 opposite).
4.16 The Department attributed the low offers for BM Manchester to bidders’ perceptions of the uncertainties of the business’s fiancial data and the extent of support it wotid reWire to compete successtiy post-sale.
S2 PSASERVrCES:THEMSFER OF PSABUILDINGMANAGEMENTTOTHEPRNATESECTOR
Businesses CoopemandLybrsrndvaluation Sale Proceeds
Estimated Purchasers’ Total Cash Net Present Value of Redundancy Value Contrasted tiabihfy{i) workload
Em Cm fm Em fm
BM Scotland 3.2 to 7,8 (3.5) (0.3)to 4,3 3.5 3.5 BM Manchester 4.1 to 10,0 (8.3) (4.2) to 1.7 (11.5) (11.5) BM Noreast 6.1 to 11.1 (6.3) (0.2) to 4.8 S.o 6.7(2) BM South East and BM South&West 22.0 to 36.6 (32.9) (10.9) to 5.7 10.4 6,rJ(2)
Total 35.4 to 67.5 (51.0) (15.6) to 16.5 10.4 4.7
Sou~e: Coopers and Lybmnd Iefterdated 17Jmre 1993, Sa/eAgreements, and NAO anabaia
Notes: (1) This will increaae aa length of service and final salary entitlements grow overtime. (2) Calculated using a commercial loan rate of9per cent - the baae mte at t October 1993 (fipercen~ PIUS3percent.
Impact of employment protection law
On trade sales 4,17 In Janua~ 1990, the SoLicitorGeneral conRrmed that the Transfer of Undertakings (Protection of Employment) Re@ations 1981 (TUPE Re@ations) wmdd apply to the privatisation of the services provided by the Property Services Agency. These Re@ations stiptiate that employees’ contracts of emplo~ent are not terminated on the transfer of an undertaking and, therefore, their terms and conditions of employment wotid be safeguarded on sale. In addition, staff wodd not be entitled to redundancy payments at the point of sale.
On market testing 4.18 Prior to March 1993, the Depatient’s legal adtice was that the Re@ations were unhkely to apply to the contracting out of a setice in return for a fee. Therefore, when PSA Btiding Management lost work to the private sector through market testing, they redeployed etaff elsewhere in the business and, where this was not feasible, staff were made redundant.
4.19 Prior to the sale, the Department incurred S135.3 mi~on in redundancy payments. Mthough some were due to the loss of individual market tested contracts, the Department attributed the majority of these to the need to respond to a contracting market and to compete comrnercia~y.
33 ------PSA SPRWCRS. THF. ..-. TRANSPFR...... nR. . PSABUI~INGMANAGEMENTTOTHEPRNATESECTOR
4.20 In March 1993, the Cabinet Office issued guidance which stated that the TUPE Re@ations were potentially capable of application to market testing, but that each case must he judged on its facts.
On the cost of closure 4.21 In the hgbt of the March 1993 Cabinet Officeguidance, the Department took the view that, for the purposes of determining the cost of closing each business, it cotid not assume that the TUPE Re@ations wotid apply. In addition, to have re-organised the businesses, to make it more fikely that the Re@ations wmdd have apptied, would have contravened Government pohcy. The cost of closure modeRing, therefore, assumed that most staff wordd be made redundant. The Department consider that this was the only prudent assumption that they codd make. The Department accept that under closure they wmdd have considered a number of options to achieve Ministers’ objectives for the privatisation of PSA Building Management’s activities. These wodd have included measwes to ensure that there was a genuine sharing of commercial risk with the private sector and the transfer of habfities to contractors wherever possible. The Department did not develop these options, however, because:
. the diversion of management attention to preparing such contingency plans was judged hkely to have undermined the prospects of achieving successti sales;
. of the effect that such closure planing wmdd have had on staff morale and commitment to sale; and
. of the tiews of their main chent, the Ministry of Defence, who beheved that such planning wodd have been disruptive.
4.22 It is possible, however, that the Department might have succeeded in transferring some of the habihty for future redundancies to new contractors in the event of managed closure. Under the sale arrangements, the purchasers accepted habifity for S51 miRion (27 per cent) of post sale redundancy Eabfities in retmn for the acWisition of businesses. Therefore, to the extent that redundancy EabiEty might have been transferred to new contractors in the event of closure, it is possible that severance costs in the closure evaluation have been over-stated. The Department consider, however, that in the event of closure, where contracts and not businesses were being sold, bidders wotid not have accepted an e@valent amount of risk. Thus, the redundancy habifi~ the Department wmdd be able to transfer to contractors wodd be signficanfly lower than on sale; and they consider that it would not have been sufficient to erode the financial advantage offered by sale.
34 PSASER~CES:THETMSFER OF PSAB~~ING WAGEMENTTOTHEPRIVATESECTOR
Comparison of the costs of sale with closure 4,23 The comparison of the cost of sale with that of closure is comp~cated by four further factors. First, the reahstic range for the costs of closure is fikely to be narrower than that forecast by the Department. This is because the upper and lower Emits are based maidy on two redundancy scenarios that are unhkely to OCCW.The upper Emit assumes that those with the Mghest redundancy entitlements wi~ leave first, in the event of closure, and the lower hmit assumes that those with the lowest entitlement wi~ leave f~st.
4,24 Second, the cost of the closure excludes the foUowing
. El 35.3 mi~on of redundancy costs incurred prior to June 1993. This was because the Department wished to compare the value of the bids received with the closure costs that wodd be incurred after the receipt of offers;
. cash injections of E21.4 mi~on. FoHowing the decision to exclude trade debtors in the sale, the Department gave bidders an assurance that they wotid inject sticient funds into each business to ensure that net assets e~a~ed net EabUties at the point of sale. The cost of closure estimates were, therefore, prepared on this basis.
4.25 Third, uncertain@ concerning the trading profits or losses that the businesses might make in the closure period, depending on their success in raising productivity levels while closing the business down.
4.26 FinaUy, although the induect costs of closure, S80 miRion to E105 mtion, were prepared by a long se~g and experienced professional, they were subjective and not supported by detailed research or independent opinion. The National Audit Officewere, therefore, mable to vafidate these figures.
Redundancy Sharing Scheme 4.27 The Depatient’s redundancy sharing scheme wiU a~ow the taxpayer to share, in a hmited way, from any improvement in each of the business’s post-sale trading resdts to the extent that more jobs than expected are preserved. With the total habtity for redundancy costs of afl staff who transferred with each business being estimated at S55.2 mi~on at exchange of contracts, of which responsibihty for E41 mi~on has been accepted by the purchaser, the maximum extent to which the Department can benefit from a reduced call on its post-sale severance habfi~ is S14.2 miMon. The redundancy sharing scheme was also successfd in transferring S1O mfion of tie redundancy cost of seconded civil servants to the purchasers of BM South and West.
4.28 ~s scheme benefits the taxpayer by titing the Government’s habfities. However, unless there is a shared band, which is the case for BM Noreast, or the redundancy habihties for seconded staff exceed the Department’s cap (BM South and West), there is no incentive for purchasers to minimise redudancy costs below the agreed maximum. It also had the disadvantage that, where the level of redundancies is belOw the agreed caP (Append~ 5), PSASER~CE5~E TRANSFEROF PSABU1~INGWAGEMENTTOTHEPRrVATESECTOR
purchasers may replace transferred staff with their own employees; partictiarly where they have surplus capaci~ or their etisting terms and conditions of service are below those enjoyed by former PSA staff.
Redundancy costs 4.29 The Department’s habihty for post-sale redundancy costs was estiated at S127.5 mi~on foUowing the sale hut was subse~entiy increased to El 33.5 mihon, This increase was mainly due to a mechanism in the BM Manchester sale agreement whereby the severance cap wmdd be increased by S20,000 per head if the number of ~ansferring non-industrial citil servants was less than 560.
Staff choice 4.30 Staff choice was included in the sale fo~owing a ministerial commitment given in 1990 that staff would not be transferred against their wi~. It ensured the co-operation of staff during the sale process, when around hati had no future in the business but whose contribution to pre-sale work was essential. Furthermore, it enabled the businesses, snbsequentiy, to shed excess labour without industrial relations problems, thereby stimdating a competitive sale process and avoiding excess costs being passed onto chent departments in the post-sale period.
4.31 Staff choice had, however, a number of disadvantages. It made the bidding process more complex, increased the amount of advisers’ time needed and created uncertainty as to whether those opting for transfer wmdd represent a My balanced and experienced work force. mile the secondment programme provided safeguards for a transitional two year period, staff choice denied each purchaser the long term use of those able and experienced staff who elected not to transfer to the purchasers. It ako affected the overa~ cost of the sale as the value of bids decreased as the staff transfer rate (para~aph 3.19) dropped because tiis led to an increase in the number of post-sale redundancies.
Compensation in heu of notice 4.32 The Department expected that most industrial staff and Professional and technical wades, and about 25 per cent of administrative; staff, were hkely to be made redundant on their return from secondment. The purchasers are required to give two months’ warning of their intention to return seconded staff. mere no suitable post can be identified elsewhere within the Civil Service the individuals wi~ be given notice of redundancy. Staff are, however, entitied to a minimum notice period of sk months (twelve months for some staff aged over 60) or compensation-in-heu of that period.
4.33 By March 1994 compensation in heu of notice had averaged about five months I pay for returning non-industrial staff and four months pay for industrial staff - at an estimated cost of El 2.9 mihon for d seconded staff. These costs are not I included in the redundancy sharing scheme (see Appendm 5) and therefore fa~ on the ta-payer. The decision not to require secondees to work out their notice in fti in each business reflects the wish of purchasers to ha”e the freedOm tO
36 PSA SERWCES: THE TWSFER OF PSA BUILDINGMAGEMENT TO THE PRWATE SECTOR
restructure and reorgatise the way in which the business undertake work. These changes were considered necessary if the businesses were to improve their efficiency and match private sector productivity levels.
Tax knphcations 4.34 The Depa~ent obtatied adtice from the Inland Revenue that the sums paid to the purchaser wotid be free from taxation and made this known to final bidders.
4.35 The Department, with the agreement of the Treasury, considered that the assessment of the costs of the sale, and of the forecast costs of closure, shotid be W1ted to the direct conse~ences of the Government’s sale decision and shotid not extend to the taxation conse~ences of decisions made by the businesses fo~owing sale completion. This was because any tax retief to which firms may be entitled, arising from the sale agreements, represents a cost of fiscal, not privatisation, pohcy.
Clawback on future asset sales 4.36 Freeholds on property occupied by each of the businesses were retained by the Department after the sale. In these circumstances, clawback on property was not necessary.
4.37 N rights to inte~ectual prope~ were retained by the Crown which gave each purchaser a non-exclusive hcence to exploit them and retain any income arising. The Department regarded clawback as inappropriate for these items since they related mostly to computer software, balding or site specific information and manuals that wotid be needed by each business and which were uuhkely to generate any signiRcant windfaU gains.
Shartig post-sale profits 4.38 The Department sought purchasers who had a strategic long-term interest in each business. In he with their clean break pohcy, they dld not protide for the taxpayer to share in the proceeds from a resale of any of the businesses. Tbe Department considered that the taxpayers’ and cfients’ interests were better protected by the legal guarantees given by each purchaser. These guarantees re@re each buyer to perform their obhgations under the sale agreements and to underwrite the redundancy costs for which the purchaser is responsible. They also provide strong disincentives to resale of the businesses since the original purchasers wotid remain Eable for their obhgations under the sale agreements.
4,39 The Department also considered that the need to obtain their consent to any resale within five years, and the purchasers’ inabihty to transfer the benefits of their severance sharing scheme to a third party, provided further protection. The sale agreements did not, however, re@e the Department’s consent to the flotation of either BM South East or BM South and West. The Department was satisfied that, in having to meet the Stock Exchange’s re@rements for a flotation, the businesses’ new owners wodd have to exceed anything the Department might reasonably have re@red as a condition of its consent.
S7 ------. ..-...... PSA BU1~ING MANAGEMENTTO THE PBWATE SECTOR
The provision of a continuous service 4.40 The Department gave priori~ to safBguardlng the interests of ctient depwtients, particularly those of the Ministry of Defence, both in terms of service provision during the pre-sale period and in developing the sale strategy, Many of the services provided by the PSA Building Management businesses were essential to chent departments’ operations and it was critical that these departments’ operational capabih~ was not compromised by the changes underway in the Department. These factors influenced the restructuring of the Btiding Management businesses; the development of commercial contracts; and the timing and structure of sale, It was also important to the Mfilstry of Defence, in particular, that the post-sale businesses wotid be able to compete strongly against each other and other supphers in the market, and the sde strategy was developed to take this into account.
4.41 The short-hsted bidders’ intentions for each business formed an integral part of the Dep~ent’s assessment criteria. They concluded that each of the winning bidders intended to contiue and develop each business as a going concern. Ftiermore, each sale agreement re@ed the purchaser to meet au obhgations and habiities kansferred at the sale date, thereby protectig chents’ interests.
4.42 The Department were aware that potential conRicts of interest coufd wise where a pmchaser was a sub-contractor of the business to be ac~ed or where a business had let a contract to the purchaser on the chent’s behati. Contracts where such conRicts coufd occur were brought to the attention of each department together with advice on how to deal with them.
4.43 The National Audit OfRceestabhshed that most of the major chent departments, including the Ministry of Defence, felt that they had been adeWately constited on those aspects of the sale in which they had a material interest, and that a satisfactory service had been maintained for them.
4.44 The Lord Chancellor’s Department felt tiat the consdtation was less effective than that for PSA Projects, although they noted that this ewher constipation was intended to be an integral part of the overa~ constipation on the privatisation of the PSA businesses. The Employment Service noted a lack of co-ordination in the conversion of efisting agreements into commercial contracts. The Department noted that this work had been delegated to the businesses who needed to develop their customer relationships in the period before the sale. The Ministry of Agricdture Fisheries and Food noted that, although tiey had received an acceptable service throughout the sale period, there had been a reduction in the standard of service received immediately after the announcement of the sale dates.
Protecting staff interests, including pension and severance entitlements 4.45 The Department succeeded in protecting staff interests, though constipation, staff choice, the ~PE Regulations, and the model pension scheme.
38 PSASERWCE5THETRANSFEROF PSABUILDINGWAGEMENTTOTHEPRIVATESECTOR
4.46 This meant that employees retained their existing terme and conditions of emplo~ent, includlng their severance entitlements, fo~owing their transfer to purchasers, Employees’ pension entitlements were safeguarded through the adoption of the model pension scheme by aU purchasers.
Management and administration of the sale
4.47 The Depa~ent compfied genera~y with relevant recommendations made by the Committee of Pubhc Accounts on previous eales. The Department’s management of the sale was also consistent with Treasury guidance on tbe handhg of trade sales and management buy-outs.
4,48 The National Audit Officereviewed the costs incurred in achieving a successti sale of aU five businesses. However, as the preparation for the separate sales of PSA Projects and PSA Building Management was carried out largely at the same time it was necessary to apportion the coete of the privatisation unit and professional advice between the two sales. Tbe Department initia~y divided such costs in proportion to the fee turnover of each businese, and later a~ocated costs to the appropriate sale according to the nature of the work carried out.
4.49 On this basis, the direct costs of administering the sale are estiated at S17.1 Won (Appendix 6, Figure 2). These costs do not include the costs of restictig each business and of inhoducing commercial accounts, as these were incurred as a resnk of the earfier detision to commerciahe PSA Services. The administrative costs also exclude the 4.6 tion paid to the Contractor Manager.
4.50 Total adminis~ative costs of S17.1 mi~on, including advisers’ fees of S13.8 mition, reflected the dfilcdties involved in preparing each business for sale and in providing support to their management. They ako included staff costs of El.9 mi~on incurred by the businesses in preparing information for the sale process. Because of difficdties in attracting staff, the costs of the privatisation unit, at fl.2 mi~on, were below budget. These skiUs were suppfied by the main advisers who were appointed fo~owing competition.
4,51 Combined expenditure on advisers’ fees for both the PSA Projects and PSA Btiding Management sales exceeded the Depatient’s budget by 15 per cent in 1991-92 and 26 per cent in 1992-93. In 1993-94, the initial budget for the PSA Btiding Management sale of E6.4 Won was increased to S1O.5 Won, and total expenditure for the year, at S8.4 fion, 31 per cent above the initial budget but 20 per cent below the revised budget. The Department felt that capped fees were not appropriate because of the nature and timetable of each sale. Instead, titial budgets were de~erately set at the minimum feasible cost and advisers were re@ed to justify increases as the sales progressed. Apti from the Contractor M~ager, no other performance objectives were set for advisers.
4.52 However, caps were introduced for valuation advice and work undertaken on the long form reports h 1993-94. Mthough KPMG Peat MarWick exceeded their cap, they were paid an additional E253,000 for additional and unforeseen work on the long form reports.
39 PSASERWCES:THETRANSFER OF PSABUI~NGMAGEMENTTOTHEPRNATESECTOR
4.53 The Department fo~owed estabhshed practice in protiding support tot~g fi188,000 for the unsuccessfd management buy-out teams. However, the teams dld not fdy comply with the criteria for such support as they did not provide the financial guarantees reWired by the Department. The Department decided that, as each team had provided credible bids and had come reasonably close to providing the financial guarantees sought, to witihold such support wotid have been inequitable; particularly as tbe bid for BM Scofland had been short-fisted.
4.54 To provide tie Contractor Manager with an incentive to ensure that the Department’s objectives were achieved, the final 25 per cent of their fee, on the second phase of their contract, was Hnked to the achievement of five successti sales by 1 October 1993. The incentive arrangements did not, however, extend to intermediate targets in terms of setting detailed quahty standards for au key tasks. (Appendix 4), The Department told the National Audit Office that progress on these tasks was monitored through the Departmental haison arrangements with the Contractor Manager and formed an integral part of tie prowess towards a successfd sale. The Department did not tie other advisers’ fees to the satisfactoryacheivement of key objectives and tasks,
I
I
40 PSA SERWCES: THE TRANSFER OF PSABmLDINGMANAGEMENTTOTHEPRIVATESECTOR
Appendix 1 Adtisers and other firms assisting PSA Sertices
Financial Adtisers :
Coopers and Lybrand Main financial and marketig advisers
WMG Peat Mafick Reporting accountants and tax advisers
Ernst and Young Completion statement auditors
Legal Adtisers : Field Fisher Waterhouse Advisers on main sale agreements and prope~.
Contractor Manager: Bovis Construction Limited To oversee and drive through the preparations needed for PSA Building Management to be offered for sale.
Other: Baiu Clarkson Insurance advisers
Government Actuary’s Department Actuarial advisers tight, Frank and Rutley PrOpe@ valuation specia~sts
41 PSASERWCES~E ~SFER OF PSABUILDINGMANAGEMENTTOTHEPRNATESECTOR
Appendix 2 Key dates in the sale of PSA Building Management
1988
May Secretary of State announced that the Property Services Agency was to become a commercial organisation without a tied Government customer base.
Au@st The Proper~ Services Agency appointed Price Waterhouse to work with the Agency’s Business Development Directorate to advise on business strategy and commercial changes.
1989
May A joint worhng party consisting of the Properv Setices Agency, Treasw and Price Waterhouse recommended the sale of the commercial activities of ke Agency as a single entity as soon as practictile.
October The Secretary of State announced that the Proper~ Sertices Agency’s commercial activities were to be privatised.
1990 I
Aprfl The Prope~ Sertices Agency separated into Property Holdtigs and the four operating divisions of PSA Services (the Department). Tbe Privatisation Unit was estabhshed.
May Coopers and Lybrand were appointed to advise on the trmsfer of the Department to the private sector.
June The Property Services Agency and Crown Supphers Bti received Royal Assent.
October The Department were separated into three main commercial activities, PSA ( Projects (incorporating PSA Speciahst Setices), PSA Btiding Management and PSA International. Coopers and Lybrand recommended that PSA Bddmg Management and PSA Projects shmdd be sold separately. PSA SERWCES THETRANSFEROF PSA B~LDING WAGEMENT TO THE PRIVATE SECTOR
1991
Aprti Coopers and Lybrand reported on the feasib~ty of privatisation.
Jufy The Secretary of State announced the spfit of PSA Btiding Management into five regional businesses (BM Scotland, BM Manchester, BM Noreast, BM South East and BM South and West) before privatisation.
October Bovis Construction Limited were appointed as Contractor Manager of the five businesses.
1992
March The principle of staff choice was announced for the sales of PSA Projects and PSA Buildlng Management.
September Ministers announced their aim to be ready to offer the five businesses for sale by the end of the year.
1993
Jauary The sale of PSA Building Management was launched and the Information Memoranda were issued.
March Indicative offers received.
June Final offers received.
Juue Contracts exchanged for BM South East and BM South and West.
Jufy Contracts exchanged for BM Scotland, BM Manchester and BM Noreast.
September Sale of BM Scotland completed.
October Sale of BM Manchester, BM Noreast, BM South East and BM South and West completed.
October Written answer to Parhamentary Question summarizing the outcome of the sales.
Source Departmental records
43 PSASERWCES:~E ~SFER OF PSABU1~INGWAGEMENTTO~E PRNAmSECTOR
Appendix 3 The five regional PSA Building Management businesses
BM Noreast
-
N BM South East
Source: PSA Services Privatisation Unit
44 PSASERWCESTHETRANSFEROF PSA BUILDINGWAGEMENT TO THE PRWATE SECTOR
Appendix 4 Tasks to be completed by the PSA Btiding Management bushesses which were project managed by the Contractor Manager
Task Objective Priority Completion dale Scotland Manchester North East South South & PSA East West BM HQ 1. Improve Fee To have in place effecOve and tested H 1291 3/93 3/93 3/93 3/93 Invoicing Systems local invoicing arrangements for the Ministry of Defence by 31 December 1991 before the progressive roll-out across the businesses 2. Establsh Local To esfabfish effetive and tested local M 10/92 3/93 3/93 3/93 7/92 Works Mlhng works bilting systems for the Ministry of Defence by March 1992 before the progressive roll-out across the buaineases
3 Implement Contract The pmvi.sion of control information H 10/92 3/93 3/93 10/92 7192 Costing Systems on a contract by contract basis pilot system in BM Scotland before the progressive national roll-out in March 1992 4. Install Local Payroll To transfer non-industrial payroll from L 5/92 11/92 6/92 7192 7/92 4/92 Syatema Hastings to the MiniafW of Defence (Bath) by 1 April 1992 and devolve payroll reporting to lowest local management tisr 5. Esfabhsh To review business hardware and H U93 1/93 7192 10/92 3/93 Information Systems network configurafiona. To split, reallocate and merge databases to ensure five independent systems by 31 March 1993
45 PSA SERWCESTHETMSFER OF PSAB~DING MANAGEMENTTO THE PRWATE SECTOR
~=y...... , . Details of Tasks ., .,., ,,,
Task Ouecfive Priority Completion date Scotland Manchester North Eaat South South& PSA Eaat West BM HQ 6. Establah TreaauW To ensure that the Treasury Function’ H 5/92 5/92 5/92 5/92 5/92 Functions was eatabtiahed and a Treasurer appointed in each business by 31 December i 992 7. Make arrangements To prepare a detaOed plan for the H U93 3/93 3/93 3/93 3/93 to move from Pre to operation of five post-funded Peat Funting of busineasea and pmgreaaively Works ~penditure to improve cash flew management by 31 March 1993 8. Determine To ensure fixed assets were entered on H 10/92 7/92 9/92 9/92 4/92 11/92 Ownership and the asaet registers by 1 April 1992 Value of Assets and Compile Regiatera 9. Implement Auditable To ensure that each buainesa produced H 9/92 7192 6/92 9/92 8/92 financial Systems financial statements as at 31 March 1992 wtich could be audited (but these were not expected to comply with SSAP 9). To ensure that each business had auditable financial systems capable of producing accounts for year ending 31 March 1993 10. Produce Budget To monitor, control and manage caah M 5/92 5/92 5/92 5/92 4/92 5/92 Fmecaata expenditure and raceipts with the Vote pmviaion. To produce commercial budgets 11.Produce Regular To produce all current and planned M 5/92 5/92 5/92 5/92 4/92 5/92 Financial Reports financial repotis on a regular basis together with quarterly VAT returns 12. Produce Other To produce non-financial management L 4/92 4[92 4/92 4/92 4/92 4/92 Repofls repotis on a regular basis 13, Set up Tender To continue to develop commercial H 9/92 7/92 6/92 7/92 7/92 Pricing Systems tendering shlla and experience by 1 July 1992 14. Accommodation To ensure that appropriate prope~ M 3/93 1/93 I0/92 3/93 3/93 and Propew arrangement were agreed by 1 APrO1992 and to have arrangement in place by 31 March 1993 to enable PSA Building Management to continue to occupy the accommodation it needed 15,Arrange appropriate To set in place all necessa~ insurances L 9/92 7192 9/92 7/92 11/92 Insurance Cover for incorporation of the five buaineasea by 31 March 1993
46 PSA SER~CES THE TRANSFER OF PSA B~LDING MANAGEME~ TO THE PRIVATE SECTOR
,,. .,.,.
Priority Completion date Scotland Manchester North East South South & PSA East West BM HQ 16. Arrange a Review Arrange a review of all records by H 1/93 t /93 3/93 1/93 3/93 1/93 of Records 31 March 1993 17. Negotiate Contracts Supply and Service Agreements to be H 3/93 3/93 4/93 U93 3/93 with Existing Clients converted into agreements of a contractual form with all clients with effect from 1 Apri 1992 (so that they could become genuine contracts at incorporation). To agree details of individual contracts within the Ministry of Defence by 31 March 1993 Note: tinked to Task 28 18. Provide Progress To esfabhsh means of providing H 10/92 10/92 10/92 7192 U93 Information for safisfacfov progress information to Ctients ctienta by 1 Apri 1992 19. Implement To ensure that the reorganisation was M 4/92 4/92 4/92 4/92 4/92 4/92 Reorganisation fully implemented by 1 April 1992 of BM Businesses 20, Business Planning To maintain the business planning H 4/92 4/92 4/92 4/92 4192 process and to improve the quatity of plans 21 .Rationahae Staff Determine required staff numbers and H 3/93 3/93 3/93 3/93 3/93 3/93 Levels planned pmductiviW levels for each business implement agreed staff reductions through Voluntary Early Retirement schemes, transfers and, where necessa~, compulsow redundancy 22, Run down lmplementthe run down of BMHQ and L 3/93 Headquatiers devolve any residual responsibihties to Function (BMHQ) the businesses by 31 March 1993 23.implement QuaIi& Maintain and improve the qualify of H 3/93 3/93 3/93 3/93 3/93 Assurance service provided by each business, and ensure that each achieves BS 5750 certification for all mainstream activities by 31 December 1992 Note: all businesses reached accreditation but not all were certified successfully 24. Generate New To achieve levels of new work H 10/92 10/92 10/92 10/92 11/92 Business identified in current plans inclu~ng the penetration of target marketa outside pubtic sector PSA SER~CES: THE TNSFER OF PW B~~~G WAGEMENT TO THE PRWATE SECTOR
~Dettils. of Tasks
Task Obfesfive Priority Completion date Scotland Manchester North East South South & PSA East West BM HQ 25.Achieve To reduce overhead$ to achieve L 5/92 5/92 5/92 5/92 B/92 5/92 Productive planned productivity improvement Improvements and to estabtish and achieve further productivi~ improvements 26. Implement Health To improve current Health and Safety M 10/92 6/92 10/92 9/92 7192 and Safety levels Improvements 27. Implement Staff To review current staff training poticy M 10/92 7/92 10/92 11/92 7/92 Training Progrsmme and to implement a new programme 28. Pursue To agree with key cfienta forward H 3/93 Government contractual workload, taking account Workload of the Mnistw of Defence’s market Guarantees testing pmgramme, by 31 March 1993 29, Pursue revised PSA To implement the revised Concordat L 10/92 Sewices Concordat between PSA Projects and PSA Buildng Management 30. Secure To agree POHCYon reduntiancy H 1291 Government guarantees Redundancy Guarantees 31 .Resolve 1990/91 To reduce outstanding 1990/91 L 4/93 Debt Hastings debt
48 PSA SERWCES: THE TRANSFER OF PSA B~LDING WAGEMENT TO THE PRIVATE SECTOR
Appendix 5 Details of the redundancy sharing scheme
1 In recognition of the anticipated post-sale redundancies that each business wotid face, the Depa~ent indicated that it was prepared to enter into arrangements (the Severance Shatig Scheme) under which severance costs arising in the five years after sale wotid be shared between the purchaser and the Department.
2 The Depatient re@ed that their absolute Habfity under the Severance Sharing Scheme be capped. Costs incmed by the Department in mahng payments to the purchaser under the Severance Sharing Scheme, and directly in matig non-transferring staff redundant, wotid both count against the agreed cap. The follotig paragraphs describe the mechanics of these arrangements.
3 Prospective purchasers included in each bid for a business a financial cap on the aggregate post-sale redundancy habti@ to be met by the Department and the maximum number of staff to whom this cap wodd apply. Costs wmdd be borne, as incurred, by the Department until the cap was reached and thereafter by the purchaser. If an employee was made redundant more tian five years after the date of sale, or if the funds within the cap had been exhausted, the purchaser wotid bear the fd cost of any redundancy payments made to that employee.
4 The Depatient wodd charge to the cap tie costs of ma~ng non-transferring civil servants redundant fo~owing the sale or on return from secondment. In the event that the total redundancy costs of such non-transferring staff exceeded the agreed cap, the purchaser wodd pay the excess to the Department.
5 If an employee was made redundant by the purchaser within five years of the sale, and there were funds avaflahle within the agreed cap, the Department wmdd pay to the purchaser an amount eWaI to the lower of:
. the value of the redundancy payments actuaUy made in respect of that employee;
. the value of the redundancy payments to which that employee wodd have been entitled, had he or she been made redundant by the Secretary of State immediately before the sale, but adjusted by the increase in the Retafl Price Index between the date of sale and the date of redmdancy.
49 PSA SERWCES: THE TRANSFER OF PSA B~~ING MANAGEMENTTO THE PRIVATE SECTOR
6 Prospective purchasers were adtised that the degree to which they were *g to demonstrate their confidence h sustaining a large core bus~ess, by assuming contingent severance habifities, wodd be a key factor fi selecting preferred purchasers.
7 The Department agreed to modified arrangements folotig the offer made by Mowlem Construction Limited for BM Noreast. For Wls sale, tie Department agreed to pay aUpost-sale redundancy costs to an agreed level, E25 m~on. The next 89 mi~on of post-sale redundancy costs wotid be shared eWaUy be~een the purchaser and the Department (the shared band). Any post-sale redundancy costs exceeding S34 miOion wodd be borne who~y by the purchaser.
8 The fo~owing example i~ustrates how the original scheme offered to bidders works,
Wustration: Assume that an organisation employs 1,000 stti, The average cost of matig each person redmdant is fl0,000 (ie f10 Mon in tohl for the whole popdation). A bidder proposes tiat the sustainable stie is 500 staff and therefore that the Government’s cap shotid be S5 mWon. The outcome of stafTchoice is that 450 staff trasfer and 550 staff opt for secondrnent. The foUotig table shows the impact of vafious outcomes after five years. (For stiphcity tis assumes no placement of surplus Citi Semants in other Government Departments).
600 Actual Redundancy Cost
Oflginal WorHorce (1,000) - Actual WorMorce in 5 yesrs (600) x Average Redundancy Cost (fl0,000) =E4 milhon
Savings reahsed by Government within their Cap = fl million
400 Actual Redundancy Cost
Original WorHorce (1,000) - Actual Purchaser Payment = f6 millon (total WOrMorce in 5 years (400) x cost) - f5 miltiorr (cap) = H milfion, Average Redundancy Cost (fl0,000) ~his includes a contribution of = f6 milhon fO.5 milfion towards ma~ng non-transferring civil sewants redundant, because the cost of redundancy of 550 non-transferring staff exceeds the agreed cap). PSA SERWCES: THE TRANSFER OF PSA BUILDINGWAGEME~ TO THE PRWATE SECTOR
fm a) Proceedsreceived on 1 September and 10stober 1993
Net salereceipts(q) 4.7 Compensationpaymentsfor transferred tiabififies w (3.7)
b) Adjustments affer 10stober 1993
Adjustment of creditor tiabitifies following completion statement audit u
Net proceeds (payments) (16.7)
~gure2Adminiilrafion ~iti of ~he;a,e ~ompetition(z)
fro(3)
Advisers’ fees 13.8
fooo(s) Main sale advisers 6,051 Reportino accountants 5,334 Legal advisers 1,760 Completion statement auditors 409 Actuarial advisera 140 Other advisers 54 13,77s
Contractor Manager
Management Buy Out contributions
Privatisation Unit Cost
Long Form Repot costs borne by PSA Building Management
Total direct coats of tbe sale(4)
51 PSA SERWCES: THE TRANSFER OF PSA B~~ING WAGEMENT TO THE PRWATE SECTOR
Rgure 3 Government fended redundancy coils ~
fm Pra sale redundancycosts
Redundancy payments for staff agreeing to leave pflorto 1 April 1993 135.3
Post-saleredundancycosts
Contingent severance shating hatihtyfrom 1 April 1993 133.5 Compensation in Heu of notice payable to secondeea - Depatimenfa eafimated m 146.4 IaMhw
Maximum redundancy Iiabimy ~
RgUre 4 Uabifities transferred to the purchasers Or avoided aa a resuft of the Safe
fm (Satimated)
. Pm sale redundance costs 90.0
. Contingent severance tiatilfies for transferred staff 51.0
. Trading surplus that would have been incurred under c[osure to 1998-99 (1.5)
Total
. Indirect costs of disruption, etc, that would have occurred in the event of a closure
Notes: (1) This is stated at rretpresent value as the proceeds from the sales of BMNoreastandBM South and West, along wi?h the payment to the purshaser of BM South East, are payable in annua/ installments, (2) &cludes ofherrestructuring costs met byihebusinessesastheserelafeprimariJto the policy of commercia[sation introduced prim to the announcement ofprivatisation. (3) These costs are expressed inclusive of VAT where appropriate. (4) The GovernmentActuayk Depaflment estimated the value of the pension fund contributions for those staff who elected to tmrrsfer to the DUKhaSeB’ own scheme at f33.6mi//imr.
Sources: PSA Services’ financial records, sale agreements andptivatisation unit files.
52