Potter Raper’s (PR) answers received on 28 July 2017

PR’s answers received on 28 Aug 2017 in response to my additional comment in Q8.

PR’s answers received on 05 Jan 2018 in response to my 19 Nov 2017 Section 20 Observations

21 July 2017

Dear Madam/Sir

Potter Raper have provided the tenants of Salisbury Estate with three cost analyses for heating works about
which I have some queries. The documents will be referred to as follows:

 CBA1: dated Dec 2015 Appendix ‘C’ of the “Feasibility and Budget Costs Report and Option
Appraisal for Renewal for Underground Heating and Pipework at Salisbury Estate. London, SE17”
dated December 2017
 CBA2: issued Feb 2017 ‘Salisbury Estate Life Cycle Cost Comparison’ issued February 2017
 CBA3: issued Jun 2017 ‘Life Cycle Cost Comparison Rev H Salisbury Estate issued June 2017.

1. In CBA1 there are 34 items detailed totalling £2,990,562.00. This appears to equate to ‘Capital Cost
Assessment’ for Option 1-Whole Communal Heating System in CBA2 where there are 5 items totalling
£1,886,621 and CBA3 where there are 4 items totalling £2,000,000.00. Please provide a breakdown
for the CBA2 and CBA3 totals by the 34 original items from CBA1 and an explanation of how a saving
of 33% relative to CBA1 has been achieved.

The document dated December 2015 is not a CBA but a feasibility estimate. And such was split into
sections based on the Mechanical Consultants findings. The document Ms Barwell refers to as CBA2
(actually should be called CBA1) is based on tenders received from contractors. The saving
mentioned is achieved as based on actual tendered figures not an estimate also for a different
scope of works . Also because when tendered the works were split into different sections/headings.
To try and split out into sections from original feasibility estimate would be subjective as to where
costs went, therefore a futile exercise.

2. CBA2 and CBA3 have a maintenance/Running Cost figure for Year 1 for the individual boiler option but
this is considered to be “included” in Year 1 for the District Heating System (DHS) option. Please
explain why the assumption is difference between the two CBAs and why there is no maintenance or
running costs for the DHS in Year 1 but there is for individual boilers.

No maintenance in 1st year as would be carried out by contractor and therefore included within
capital costs.(this is the case on all schemes)

3. Both CBA2 and CBA3 calculate the Net Present Value (NPV) for Year 1 of the Individual Boilers using
the same discount rate as for Year 2:

Year 1: Annual cost x 1/1.03^2 (CBA2 = £26,074; CBA3 = £123,310.17)

Year 2: Annual cost x 1/1.03^2 (CBA2 = £26,596; CBA3 = £125,776.37)
Year 3: Annual cost x 1/1.03^3 (CBA2 = £26,338; CBA3 = £124,555.24)

Please explain why the following typical yield curve calculation was not used:
Year 1: Annual cost x 1/1.03^1 (CBA2 = £26,857; CBA3 = £127,009)
Year 2: Annual cost x 1/1.03^2 (CBA2 = £26,596; CBA3 = £125,776)
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 Year 3: Annual cost x 1/1.03^3 (CBA2 = £26,338; CBA3 = £124,555)

Note that the Annual cost was inflation-adjusted each year.

We used the method as suggested by our professional body the RICS.

Costs are taken at present value Year 0 then adjusted year on year up to year 40 by the

stated inflation figure of 2% in line with the Bank of England’s target inflation rate. Costs in

future years are then adjusted by a discount rate of 3% for the calculation of NPV. (3% is the

value stated by the Cabinet Office for long term discount rates period 31-75 years) to a net

present value figure to allow comparison taking into account when future payments over the

complete timeframe take place.

This is the definition of a standard yield curve, and that which I used in my initial analysis above.
Potter Raper have not followed this methodology as you will see in the highlighted number above
and this is what I am trying to get an answer to- why have they used a different Year 1 formula to
the norm? They still have not answered this question, they have simply given me the definition of
a yield curve, which they have not followed

4. In CBA2 an undiscounted allowance of £300,528 is made in the DHS option in Year 5 for “Internal
works to properties” (£280,633 if the Year 5 maintenance costs of £19,894 is deducted). Please
explain where this is accounted for in CBA3.

In CBA 2 (actually CBA1) internal works to properties were included, for both options, as at the
time we were going to be doing so. In CBA3 (Actually CBA2 ) there is no allowance for internal
works in the individual or shown for communal. (However FYI there is an allowance for limited
remedial internal works within capital costs for communal)

5. Please provide details of how the undiscounted CBA3 Year 2 running costs for the DHS of £138,312.51
and the Year 1 running costs for individual boilers of £130,819.76 were derived.

Costs for both options were based on supplied running costs, submitted and requested from
Salisbury Estate, Tenants and Residents Association for 4 Salisbury Close and 22 Chatham Street.
These were then extrapolated (using bed weighting and typical internal areas) to take account of
size and type of property and properties that are disconnected.

6. The undiscounted figure provided for Individual Boilers in Year 13 of CBA3 is £725,713.01 (see table
below). The Year 12 running cost figure adjusted for inflation gives a Year 13 running cost of
£165,911.09, meaning the cost for the boiler replacement in Year 13 is £559,801.92. ie:

£725,713.01 - £165,911.09 = £559,801.92

(Year 13 total) (Year 13 Running costs) (Boiler costs)

If the Year 13 boiler replacement figure is inflation-adjusted to Year 26 then the boiler replacement
cost is £724,163.48. The Year 25 running cost figure adjusted for inflation gives a Year 26 figure of
£214,623.68, meaning the total for Year 26 should be £938,787.16. ie

£214,623.68 + £724,163.48 = £938,787.16

(Year 26 Running costs) (Boiler costs) (Year 26 total)

Please explain why CBA3 gives a Year 26 total of £953,270.43, as this appears to be the Year 27

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 Boiler replacement figure plus the Year 26 Running Costs for the total Year 26 figure (see purple
figures below).

Answer 6,7,8 noted there was a formula error within 1 cell picking up the year 12 replacement
costs rather than year 13. Once adjusted correctly it increases the overall cost of the individual
boiler option by 0.098%

7. Similarly, please explain why the Year 39 total includes the Year 39 running costs but the Year 40
boiler costs (see blue figures below) instead of £1,190,609.11

See answer to 6

8. Extrapolating the Year 13 boiler replacement cost of £559,801.92 back to the Year 0 pre-inflation
figure (green figures below) results in a unit price of £1,940.56. Please explain how this relates to the
stated allowance of £1800 per unit (pink figures below).

See answer to 6

Ms Barwell’s questions the accuracy and suggest the 0.098% error identified makes the cost for
individual boilers lower rather than higher. As in our previous response it was duly noted that one
cell formula (year 13 replacement) was linked to the year 12 replacement costs rather than year
13.

Once corrected this leads to an increase. The replacement costs are calculated from the base date
year, then a yearly inflation figure is applied, to calculate the future figure. For that reason, the
costs increase each year, so year 13 would be more than year 12. Therefore by correcting this
discrepancy, it would overall increase the costs of the individual boiler option.

Note - Potter Raper’s 05 Jan 2018 answer is now that the starting cost for the boilers is £1,940.56
in order to include access costs (from their response to my 19 November Section 20 Observations.
My original question above asked how the their £1,940.56 starting figure related to the stated
allowance of £1800 but they did not mention the inclusion of access costs until 05 Jan 2018 )

9. The BCIS component life schedules do not seem to be publicly available. In the Potter Raper
document to which CBA1 was appended page 3 states: “…such long life assets as the district heating
pipework, if correctly specified, should be suitable to deliver heat without issue now considered with a
life expectancy of between 35 and 50 year period.” Please explain why the most optimistic maximum
life span of 50 years is used for the DHS option in CBA2 and CBA3 rather than the average of 42.5
years.

The CIBSE District Heating Manual for London [GLA] it is expected that with modern installation
materials and techniques new installations are expected to “achieve life-times in excess of 50
years”. The 35-50 years mentioned is the estimate life span of the existing underground pipework.
Improvements in materials, installation and manufacturing mean a longer lifespan is expected.

My comment on this answer from my 19 Nov 2017 Section 20 Observations:

The single biggest reason that CBA2 and CBA3 result in the cost of the DHS being less that individual
boilers over a 40 year period is due to the discount applied in year 41 since PR have assumed that the
communal underground pipework has a lifespan of 50 years. In Appendix C of the PR document
“Feasibility and Budget Costs Report and Option Appraisal for Renewal for Underground Heating and
Pipework at Salisbury Estate London, SE17” issued to residents in Dec 2015 page 3 states: “ …such
long life assets as the district heating pipework, if correctly specified, should be suitable to deliver
heat without issue now considered with a life expectancy of between 35 and 50 year period .” so I
asked PR to explain why the most optimistic maximum life span of 50 years is used for the DHS option
in CBA2 and CBA3 rather than the average of 42.5 years. They responded with: “The CIBSE District
Heating Manual for London [GLA] it is expected that with modern installation materials and techniques
new installations are expected to “achieve life-times in excess of 50 years”. This evidence provided by
PR is a truncated quote, the full quote is “Therefore once installed to the desired standards it is
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 reasonable to aspire to achieve life-times in excess of 50 years; a period of 20 years over the
minimum to be expected.” Everyone I have surveyed has interpreted the full quote to mean ‘the best
case scenario is 50 years but the worst is 30 years. By omitting “aspire to” from the beginning of the
quote and “a period of 20 years over the minimum to be expected.” from the end, PR have
deliberately changed the interpretation many would make regarding the anticipated life span of the
pipework.
PR also say “The 35-50 years mentioned is the estimate life span of the existing underground
pipework. Improvements in materials, installation and manufacturing mean a longer lifespan is
expected.” However, this is pure speculation. Unless PR can provide evidence that pipework
consistently lasts 50 years it is unreasonable to use any lifespan other than the known average.
When the CBAs are adjusted to take account of this, the cost of the DHS option will increase
significantly.
PRP have run the LCC model with 42 years as the typical lifespan (Rev J) of underground

pipework. This would put the communal system life cycle cost at £6,384,391. This is lower

than all of the Evora LCC costings.

This excludes Evora's incorrectly stated costing for Value Engineered GFCH, which doesn't

allow for access scaffold and multiple building height flue replacements and additional fire

protection measures, and is incorrectly stated within figure 2. Pg 19 GFCH (Value Engineered)

at £6,374,712.57 and within Appendix 1.2.8 GFCH (Value Engineered) at a figure of

£6,729,198.93.

Not sure why they are bringing the Evora LCC costings into this - I have never mentioned them.

10. Please explain how credit taken for components with remaining lifespan was calculated in all CBAs.

Residual value at year 40 is calculated by, number of years lifespan pro rata'd to find yearly cost.
Then that yearly cost is applied to lifespan remaining at year 40 to calculate residual value.

Residual value at year 40 is calculated by the number of year’s lifespan remaining, divided by

the total lifespan of the component. This gives a percentage of value remaining at year 40. costs
with interest applied. This can be adjusted using the discount rate method as before to

calculate residual net present value.

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 Inflation = 2% Discount rate = 3% Properties= 223
Running costs Boiler cost Annual cost NPV

Individual cost £575.13 £1,940.56 £1,800.00

0 Capital Costs £128,254.67 £432,745.09 £401,400.00
1 Year 1 £130,819.76 £441,400.00 £127,009.48 £409,428.00
2 Year 2 £133,436.16 £450,228.00 £125,776.37 £417,616.56
3 Year 3 £136,104.88 £459,232.56 £124,555.24 £425,968.89
4 Year 4 £138,826.98 £468,417.21 £123,345.97 £434,488.27
5 Year 5 £141,603.52 £477,785.55 £122,148.44 £443,178.03
6 Year 6 £144,435.59 £487,341.26 £120,962.53 £452,041.60
7 Year 7 £147,324.30 £497,088.09 £119,788.14 £461,082.43
8 Year 8 £150,270.78 £507,029.85 £118,625.14 £470,304.08
9 Year 9 £153,276.20 £517,170.45 £117,473.44 £479,710.16
10 Year 10 £156,341.72 £527,513.85 £116,332.92 £489,304.36
11 Year 11 £159,468.56 £538,064.13 £115,203.48 £499,090.45
12 Year 12 £162,657.93 £548,825.41 £114,085.00 £509,072.26
13 Year 13 £165,911.09 £559,801.92 £725,713.01 £494,175.25 £519,253.70
14 Year 14 £169,229.31 £570,997.96 £111,880.51 £529,638.78
15 Year 15 £172,613.90 £582,417.92 £110,794.29 £540,231.55
16 Year 16 £176,066.17 £594,066.28 £109,718.62 £551,036.18
17 Year 17 £179,587.50 £605,947.60 £108,653.39 £562,056.91
18 Year 18 £183,179.25 £618,066.56 £107,598.50 £573,298.04
19 Year 19 £186,842.83 £630,427.89 £106,553.86 £584,764.00
20 Year 20 £190,579.69 £643,036.45 £105,519.35 £596,459.28
21 Year 21 £194,391.28 £655,897.17 £104,494.89 £608,388.47
22 Year 22 £198,279.11 £669,015.12 £103,480.38 £620,556.24
23 Year 23 £202,244.69 £682,395.42 £102,475.72 £632,967.36
24 Year 24 £206,289.58 £696,043.33 £101,480.81 £645,626.71
25 Year 25 £210,415.37 £709,964.20 £100,495.55 £658,539.25
26 Year 26 £214,623.68 £724,163.48 £938,787.16 £442,026.47 £671,710.03
27 Year 27 £218,916.16 £738,646.75 £953,270.43 £98,553.66 £685,144.23
28 Year 28 £223,294.48 £753,419.68 £97,596.83 £698,847.12
29 Year 29 £227,760.37 £768,488.08 £96,649.28 £712,824.06
30 Year 30 £232,315.58 £783,857.84 £95,710.94 £727,080.54
31 Year 31 £236,961.89 £799,535.00 £94,781.71 £741,622.15
32 Year 32 £241,701.13 £815,525.70 £93,861.50 £756,454.59
33 Year 33 £246,535.15 £831,836.21 £92,950.22 £771,583.69
34 Year 34 £251,465.85 £848,472.93 £92,047.79 £787,015.36
35 Year 35 £256,495.17 £865,442.39 £91,154.12 £802,755.67
36 Year 36 £261,625.07 £882,751.24 £90,269.13 £818,810.78
37 Year 37 £266,857.57 £900,406.26 £89,392.73 £835,187.00
38 Year 38 £272,194.72 £918,414.39 £88,524.84 £851,890.74
39 Year 39 £277,638.62 £936,782.68 £1,190,609.11 £389,373.68 £868,928.55
40 Year 40 £283,191.39 £955,518.33 £1,233,156.95 £86,814.26 £886,307.12
£5,252,334.44

Yours faithfully,

Karen Barwell PhD

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After receiving Potter Raper’s response in green I emailed this to Bola on 28 Jul 2017 and received the

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purple response on 28 Aug 2017. Note: part of the response is under question 8 above in order that
the discussion about each point is kept together.)
Thank your for forwarding the responses from Potter Raper. I have not yet reviewed them fully but
will respond fully when I have. However, in the meantime, you will note that their response to my
questions 6. 7., and 8. below was that the calculations they have provided are not correct (I need to
review fully, but on first glance they also appear to have made another error in their response since
the correct calculation reduces the cost for individual boilers rather than increasing it). Since Potter
Raper has repeated calculation errors in all the CBAs provided to the council and tenants (they have
stated that the report dated Dec 2015 is not a CBA) I would like to know who in the council has
reviewed these figures and what their qualifications to do so are?
See also Q8 above.

Also maybe in the interest of explaining why a communal system would likely be more cost
effective, if you list out the works involved in each scheme side by side it becomes in my mind clear
which scheme would likely have a lower initial cost.

Individual Communal

Trenching for upgrade of gas mains Trenching for district heating pipework

Replacing gas pipes Replacing district heating pipes

Installing in new position 200+ Boilers Replacing in current position 2 boilers

Scaffolding for flues

Adaptation of existing kitchens to 200+ properties

Adaptation of heating pipework within 200+ properties

Electrical works to 200+ properties to connect boilers

Removal of 200+ redundant existing systems

Builders work in core drilling for 200+ flues

Potter Raper make our point for us here as to why costing for immersion heating is required - only 3
items on the ‘Individual’ list are required for non-gas options. The table would look like this:

Individual Communal

Installing 200+ Electrical Boilers in existing hot water Trenching for district heating pipework
tank cupboards

Electrical works to 200+ properties to connect boilers Replacing district heating pipes

Removal of 200+ redundant existing systems Replacing in current position 2 boilers

I received no response from the council regarding who reviewed the figures and what their
qualifications to do so are.