NATIONAL AUDIT OFFICE REPORT BY THE COMPTROLLER AND AUDITOR GENERAL British Rail Maintenance Limited: Sale of Maintenance Depots ORDERED BY THE HOUSE OF COMMONS TO BE PRINTED 15 JULY 1996 LONDON:HMSO HC583 Session1995-96 Published19 July1996 29.70 BRITISHML WNTENWCE UMITED: S~E OF WNTEN~CE DEPOTS 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 the Act. John Bourn National Audit Office Comptroller and Auditor General 8 Jtiy 1996 The Comptroller 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 certifies the accounts of au Government departments and a wide range of other puhhc sector bodies; and he has statutory authori@ to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources. BRITISH ML WINTENANCE LIMITED: SALE OF WNTENANCE DEPOTS Contents Page Introduction, summary and principal conclusions 1 Part 1: Privatisation as soou as possible h a competitive process 8 Timetable 8 Sales process 10 - Generating interest 10 - Maintaining price tension 10 - Information available to bidders 15 Part 2: Mtitatimg safety, reducing costs and improving efficiency 17 tithin a competitive entionment Safety 18 Restructuring 18 Intellectual property 19 WorMoad contracts 21 Bidding framework 21 Part 3: Obtaining the best possfile market price, taking account of 23 sale costs, habfities, staff iuterests Best possible market price 23 - Sale structure 23 - Valuation 32 - Property clawback 33 Selection of adtisers and costs 34 Indemnities and warranties 35 Staff interests 36 - Assistance to management buy-out teams 36 - Employees’ terms and conditions 36 Part 4 The classification of docmnents as “Not for NAO eyes” 38 Glossary 42 Appendices 1. Objectives of the Secretary of State in relation to rafl privatisation 44 2. Map of locations of depots sold, their main functions and type of 45 vehicle usually repaired at each depot 3. Chronology of main events 46 4. Main participants in the heaW maintenance market 47 5. The issue of cash in the Eastleigh sale 48 6. Relevwt PACrecommendations 50 7. Text of memorandum on BRML classtiled as “Not for NAO eyes” 54 BRITISHML ~NTEN~CE LIMITED: SWEOF~NTEN~CE DEPOTS Examples of the types of traction and rolling stock overhauled by British Rail Main{e-nance Limited Class 73Electro-diesel locomotives Third-rail Electtic Multiple Units receiving attention at a BRML depot Overhead line Electric Multiple Unit being worked on inside a BRML Oriving Van Trailer and InterCity stock on West-Coast Main Line depot OieselElectficClass56 and Class 91 Electtic locomotives under Diesel Multiple Unit at Glasgow Central BRITISHML ~NTENANCELIMITED SALEOFWINTENANCEDEPOTS Introduction, summary and principal conclusions 1 The British Rail Board (British Rafl) sold seven maintenance depots controffed by British Rail Maintenance Limited (BRML)to three separate purchasers in April and June 1995. These businesses comprised a small electronic service depot and six hea~ maintenance depots. 2 The hea~ maintenance depots carry out maintenance ad repairs to railway vehicles and components ~ro~g stock) wed in passenger and freight rail activi~, including refurbishment, modifications and co~sicm damage repairs. At the time of the sale they undertook the majority of the hea~ maintenance of British Ra~s locomotive, coach and muftiple unit vehicle fleets and some 50 per cent of the total mwket for hea~ maintenance. The electronic sefice centre at Stidon repairs, tests and cahbrates electronic equipment used on traction and ro~ng stock. 3 Gross proceeds totalled 532.3 miltion after adjustments to reflect changes in net assets from the 17 September 1994 audited balance sheet, on which final bids were requested, to the balance sheet at 31 March 1995 in the case of one of the maintenance depots and the electronic sewice centre and 27 May 1995 for the other depots (see Figure 1). Payment to British Rail of E2.7 million in respect of these adjustments was received in stages following the sale. A number of small final adjustments await agreement of the completion accounts which remain outstanding at the date of this report. E500,000 of the proceeds from the sale of the Wolverton and Springburn depots was deferred until 6 December 1995 as British Rail and the Department of Transport ~the Department”) believed that this wmdd lead to a higher overal price. Proceeds could be reduced depending on negotiations bemeen one of the purchasers, ABB, and the European Commission on the length of a covenant which restricts British Rail and their subsidiaries from expanding their heaW maintenance activities, (fro) Chafl Leacon ABB Customer Suppoti Dmited. 19.08 IIford Doncaater Wolveflon Railcare Limited, a BabcocWSemens joint venture 5.7 Springburn Eastleigh Wessex Traincare Limited, a management buy-out team 7.15 Electronic service centre ABB Customer Suppofi Umited 0.38 This figure shows the tots proceeds for Btitish Rail’s sale of their six heay Total DrOCeedS 32.31 maintenance depots and the Swindon Electronic Sewice Centre Source: British Rail Vendor Unit Completion Accounts Summaw29.3.96 1 BRITISHML ~INTENANCELIMITED: SALEOF~NTENANCEDEPOTS 4 The actual proceeds of the sale remained with British Rail as at Juoe 1996 but benefited Government as they reduce British Rai~s overa~ level of fidebtedness to the Government. British Rail incurred sale costs of S2,81 2,000 and tie Department sale costs of approximately S274,200, in total approximately 9.6 per cent of proceeds, of which approximately 8.7 per cent is attributable to British Rail and 0.9 per cent the Department. These costs include the costs of advisers fees for restructuring the depots in preparation for sale. 5 The sales were conducted under the provisions of the Railways Act 1993 ~the 1993 Act”). This Act sets out the Secretary of State for Transport’s objectives for rail privatisation overall (see Appendix 1) Specific objectives for the sale by British Rail of the seven BRMLbusinesses were set by British Rail after consultation with the Department and are set out in paragraph 8 below. 6 British Rail prepared the businesses for sale and sold them, subject to the consent of the Secretary of State. They were responsible, with their advisers, for the marketing of the businesses, analysing and negotiating bids; and for making recommendations to the Department on key aspects of the sales. Decisions on sale strategy, and the monitoring of progress against sale objectives, were undertaken by the Board of British Rail who are appointed by the Secreta~ of State for Transport. Day to day implementation of the strategy was carried out by British Rail’s Vendor Unit ~the Vendor Unit”) under the oversight of a Board Member. BRMCSheadquarter staff and the management of the depots had no involvement in the sales process (other than the provision of information) but had day to day responsibility for operations, 7 The Department monitored sale progress at a strategic level to seek to ensure that the Secretary of State’s objectives were comphed with in British Rai~s key proposals and made recommendations to the Secretary of State on tbe sale terms proposed by British Rail. The Department relied on British Rail to alert them to important, novel or contentious issues which would not come to the Department’s notice through their normal, strategic monitoring. Sale objectives 8 The specific sale objectives of British Rail, agreed with the Department, were: a) To transfer the depots into the private sector as soon as possible by means of a competitive process; b) To maintain safety, reduce costs, and improve the efficiency and viabihty of the depots within a competitive environment for the provision of heavy railway maintenance services; and c) To obtain the best possible market price, taking due account of sales costs, staff interests, and the need to minimise habihties in the pubhc sector. 9 An important consideration arising out of the statutory objectives for rail privatisation set out in the 1993 Act was to provide opportunities for employees to acquire an interest in the ownership of the depots in which they were employed. This was reflected in the tiird objective above. 2 BRITISHML ~NTEN~CE LIMITED: SALEOF WINTENANCE DEPOTS Scope of 10 The National Audit Office examined whether the Department and British Rail National Audit achieved the sale objectives, fo~owed best practice in the organisation and Office management of the sales and had regard, where appropriate, to examination recommendations of the Committee of Pubhc Accounts in relation to the handhng of privatisations. 11 The National Audit Office also investigated the classification of papers in the Department as “Not for NAO eyes” following the leak of a document relating to the sales which had been so classified by the Department (see text of document at Appendk 7). 12 The National Audit Office’swork included an examination of the Department’s papers and discussions with their staff. The Comptroller and Auditor General is not the external auditor of British Rail and has no access rights to the papers and officials of British Rail, other than information held by the Department. Discussions, however, also took place with British Rail, West Merchant Bank (their financial adviser), Price Waterhouse (who as well as acting as Reporting Accmmtant on the sales also carried out an investigation on British Rai~s behalf into the sale of the Eastleigh depot) and other parties involved in the sales. 13 The National Audit Office also had discussions with Ernst& Young and accompanied Ernst & Young iu their discussions with other parties in connection with a study commissioned by the Department on the sale of the depots. The National Audit Office are gratefti for the assistance provided by British Rail and other parties, and also to their advisers on this transaction, PanneU, Kerr Forster.