* Net assets employed are shown after deducting the Group’s share of project specific net debt. The table does not include the £6.3 million debtor in respect of Northern Territories Airports or £0.5 million in respect of Horizon Energy.

The different accounting treatments for each of the above asset recognition policies are explained in accounting policy (O).
As previously announced and reflected in our interim results for 2003, we have changed the basis for post retirement benefit accounting and adopted FRS 17, ‘Retirement Benefits’. This has resulted in a net deficit of £93.7 million (2002 – £103.8 million) being introduced to the Group balance sheet.
The restatement of 2002 comparatives resulting from these changes to accounting policies is explained in note 1. All comparative results set out in this review have been restated.
The implementation of International Financial Reporting Standards in 2005 is unlikely to result in material changes to the Group results if they remain as currently drafted. There will, however, be significant changes to the presentation format and disclosures. The Directors believe that finance debtor accounting is appropriate for the majority of PFI projects, where there is limited demand risk and limited exposure to residual property values. We urge the international standard setters to follow the UK’s lead in accounting for PFI projects.

PROFIT AND LOSS SUMMARY

The profit before tax shown against each of the operating divisions includes interest payable on non-recourse project finance and interest receivable on finance debtors recognised by PFI/PPP Project Companies. There are very significant differences in the presentation of results between those projects that adopt finance debtor accounting, on which major maintenance costs are added to the finance debtor when incurred, and those that adopt fixed asset accounting. The most appropriate measure of performance is to compare results after charging or crediting all project related interest. As shown in the table below, all sectors of the core business achieved significant growth in profit before tax in 2003.
The growth in profit before tax of accommodation projects reflects the increasing number of investments achieving operational status and therefore generating revenue. All operational accommodation projects are profitable. The Norfolk & Norwich Hospital project was refinanced in December 2003, upon which a charge to the profit and loss account of £0.7 million was recognised in terms of debt issue costs.
The results of Laing Roads show steady growth. No new roads entered the operational phase in 2003. Traffic volumes on the A130 PFI road project are significantly below the base case forecast for the first full year of operation. As a result, the profitability of the A130 has reduced from our initial expectations and it has been appropriate to refinance the project. The results shown above include the writing off of £1.5 million of debt issue costs on the refinancing. All operational roads are profitable, including the A130, before allowing for the cost of refinancing.
The principal contribution to Rail profits comes from Chiltern Railways where passenger revenues grew by 9.4% in 2003. The Group has sold its interest in Manchester Metro at a profit of £1.0 million and has withdrawn from future involvement in Midland Metro. In the latter case this resulted in a reversal of £1.1 million of losses recognised in prior periods. The Group has no further funding obligations with regard to this project.
The profit reported in Utilities & Airports stems principally from the sale of our minority interests in Adelaide Airport and the Northern Territories Airports in Australia which totalled £4.9 million.
The Group is now focussed on the development, investment and operating phases of PFI/PPP projects. It is part of the Group’s strategy to create capital growth in the value of its portfolio by holding and managing assets throughout construction and the early stages of operation. Thereafter, the Group will seek to realise a portion of the value growth through refinancing or selective disposal. The profit and loss summary shown above includes £7.1 million of profit from the sale of, and revaluation of, investments, operations and other fixed assets within our continuing businesses (2002 – £2.8 million).

The single remaining house building business, Octagon Developments Limited, in which the Group holds a 30% interest at a net book value of £15.8 million, will be divested in due course. The company operates in the South East of England as a niche house builder at the high value end of the housing market.
On 1 November 2002 the Group sold its interest in Laing Homes Limited to George Wimpey Plc. The sale consideration totalled £295.2 million of which £30.0 million was paid on completion and a further £50.0 million on 31 December 2002. The remaining balance of £215.2 million has all been received in 2003.

Property

On 12 April 2002 the Group sold its interest in Laing Property Developments Limited. During 2003, the Group received £3.3 million of which £1.9 million had been recognised as profit in 2002. The balance of £1.4 million, having been conditional upon the granting of planning consents now received, has been recognised as profit in 2003. A further £1.6 million of conditional deferred consideration may be received in the future, subject to the granting of third party consents.

Construction

In October 2001 the Group sold its interest in Laing Construction plc but retained financial responsibility for the completion and finalisation of a number of specified contracts. Provision was made in the 2001 results for the estimated costs to complete these contracts and for the cost of settling related disputes with clients and subcontractors. All of these contracts have reached practical completion and progress has been made with settling some of the disputes. The Board has reviewed the remaining provision and has concluded that it is prudent to release a net £2.6 million to the profit and loss account, net of underwriting losses referred to below, within discontinued activities.
The Group’s captive insurance company, Woodcroft Insurance Company Limited, has provided reinsurance to the Group’s primary external insurers since its formation in 1987. Woodcroft’s exposure is capped in terms of individual claims and in aggregate for each year. The vast majority of claims affecting Woodcroft relate to the Group’s discontinued Construction activities. During 2003 Woodcroft recorded a loss before taxation of £0.6 million. This result reflects an independent actuarial assessment of claims incurred but not yet reported. Woodcroft no longer underwrites insurance in respect of the Group’s continuing operations but it continues to remain at risk on construction related claims, including industrial disease, where the loss occurred prior to the disposal of Laing Construction plc and Laing Homes Limited. The provision for claims and reserves for claims not yet reported at 31 December 2003 amounted to £19.0 million (2002 – £19.2 million).
The Group’s insurers are continuing to defend a legal action in respect of the Great Eastern Hotel management contract on which the client is claiming damages of £19.7 million. The Board is of the view that the claim has no substance and it is being rigorously defended.
The Group continues to carry a provision for rectification of defects at the Cardiff Millennium Stadium. The Board believes it is nearing completion of all known defects. However, the client has lodged claims in respect of the pitch and the sliding roof.
Work is now well advanced on the Second Severn River Crossing to correct engineering design defects on maintenance equipment.
The Board is satisfied that the remaining provisions and reserves of £44.4 million are sufficient to satisfy the Group’s commitment in respect of all retained liabilities.

PFI/PPP
Project
Companies
£ million

Corporate
funds
£ million

Associates

The Group’s share of interest payable by associates relates to WL Homes LLC, prior to the sale of the Group’s equity interest, and to Octagon Developments Limited.

Group

Group interest includes interest receivable on cash deposits, amortisation of debt issue costs on the Group’s corporate facilities, commitment fees and letter of credit fees. Group interest also includes the interest payable on project specific debt and receivable on finance debtors in relation to the PFI/PPP Project Companies that are consolidated as subsidiaries. This incorporates debt issue costs written off on the refinancing of the A130 PFI road project and a school project.
The Group has paid interest on the bridging facility arranged to finance the deferred consideration on the sale of Laing Homes Limited and has fully amortised the issue costs associated with that facility. The reversal of the discount applied to the deferred consideration has been credited to the profit and loss account as interest receivable.
The Group interest charge includes the FRS 17 financing costs/income associated with the post retirement obligations.
The comparatives for 2002 include the breakage costs on prepayment of US loan notes following the sale of Laing Homes Limited and the rearranging of the Group’s corporate facilities.
As the interest analysis table demonstrates, the Group’s share of interest receivable and payable related to the finance debtors and non-recourse borrowings of PFI Project Companies is broadly neutral.
At the start of 2003, UK base rates were 4.0% but reduced to 3.75% in February and then to 3.5% in July. As a response to increasing consumer credit and fears of inflationary pressures the Monetary Policy Committee moved rates up to 3.75% in the fourth quarter and then to 4.0% at the start of 2004. The Group’s main corporate facilities attract interest at a margin of 175 basis points over Libor.
The most significant items included within the Group’s interest charge relate to the PFI/PPP Project Companies, where in each case the interest rates for the project’s long-term borrowings are fixed using interest rate swaps. Short-term junior facilities are typically small in nature and are left unhedged.
At the end of 2003, the Group had no recourse borrowings and had cash deposits that are unhedged. The Board reviews the Group’s hedging policy on a regular basis.

TAXATION

The Group’s tax charge for 2003 was £13.3 million (2002 – £11.3 million). This includes prior year tax charges of £1.9 million associated with the discontinued businesses on final apportionment of taxable profits and losses available to the pre and post sale periods.
The corporation tax charge of £2.8 million for the year is mainly associated with the tax charges in PFI/PPP Project Companies. The corporation tax charge of £7.1 million in 2002 reflected the tax charges in both PFI/PPP Project Companies and that attributed to Laing Homes Limited. The tax legislation applicable to Project Companies falls into two distinct categories. Project Companies to which the ‘Composite Trade Basis’ applies tend to have an effective tax rate that approximates 30% on reported profits before tax. Whereas those that attract capital allowances tend to have a much higher effective rate of tax because only a proportion of construction costs attract capital allowances.
The Group has insufficient taxable profits to obtain full deduction for its bid costs and overheads and this is projected to continue until 2006, when it is anticipated that taxable profits will exceed allowable expenses. Tax losses arising in 2003, which have been carried forward for future use, amounted to £13.4 million. No deferred tax asset has been recognised in respect of these losses.
The Group has taken advantage of Substantial Shareholding Exemption on UK capital gains totalling £4.8 million but Capital Gains Tax of £1.0 million has been charged in relation to the sale of the Australian Airports.
Having implemented FRS 17 early, the Group has recognised a deferred tax asset of £35.8 million (2002 – £43.0 million) on the deficit to reflect the tax deduction that the Directors believe will be available on future pension contributions and medical insurance premiums.

PENSION AND MEDICAL INSURANCE

The FRS 17 post retirement deficit has reduced during the year from £146.8 million to £129.5 million. This is principally due to the increase in the value of equities held as investments by the respective funds. After accounting for the associated deferred tax asset, the net deficit reduced from £103.8 million to £93.7 million.
The Group re-commenced employer contributions to the John Laing Pension Fund from 1 January 2003 at 18% of pensionable salaries. With effect from 1 January 2004 employee contributions re-commenced at 2% of pensionable salaries, rising to 6% by 2006. The John Laing defined benefit schemes have been closed to new members since January 2002.
During 2003 the Group has agreed a schedule of contributions with the trustees of the John Laing Pension Fund which provides for special contributions, over and above the employer and employee contributions referred to above, of £4.0 million per annum for at least the next four years. In 2003 a £5.0 million special contribution was paid in order to top up the transfer value of assets to the George Wimpey Plc pension fund relating to the employees of Laing Homes Limited.
Note 6 to the accounts sets out the detailed FRS 17 disclosures relating to post retirement benefits.

BALANCE SHEET

Group consolidated net assets at 31 December 2003 were £114.0 million (2002 – £106.1 million) after including the FRS 17 deficit in respect of post retirement benefits of £93.7 million (2002 – £103.8 million).
The principal assets employed in the PFI/PPP sector are included within investments in joint ventures at £91.1 million and in line by line consolidation of 12 wholly owned PFI Project Companies. These had net assets employed of £46.7 million, after deducting non-recourse project finance. In addition, the balance sheet includes fixed asset investments of £0.5 million and debtors of £9.9 million being the consideration due on the sale of our interest in Northern Territories Airports and a 10% interest in Modus. The total net book value of these infrastructure project interests is included in the consolidated balance sheet at £148.2 million and the portfolio value of these assets, which is not recorded in the Group balance sheet, is estimated at £250.3 million.
Outside of PFI/PPP projects, the Group balance sheet includes provisions of £44.4 million for retained liabilities (2002 – £59.6 million). Net assets employed in the retained housing businesses at 31 December 2003 were £15.8 million (2002 – £79.1 million, net of non-recourse bridging finance on deferred consideration due from the sale of Laing Homes Limited).

FINANCING

During 2003 the Group has fully repaid the bridging facility arranged to finance the deferred consideration on the sale of Laing Homes Limited. The sale of the residual housing businesses generated a net cash inflow of £53.9 million and the purchase of a portfolio of 8 PFI assets from Amey and the Cleveland Firearms facility absorbed cash resources of £32.8 million. On 16 June 2003, due to contractual rights arising from the Amey acquisition, the Group sold its interest in the A19 road for £3.4 million. On 27 October 2003 the Group sold its interest in Adelaide Airport for a net cash consideration of £12.8 million. The balance of £6.3 million of the £6.5 million proceeds from the sale of Northern Territories Airports in Australia, which was contractually completed on 17 November 2003, was received in January 2004.
The non-recourse borrowings of PFI/PPP Project Companies consolidated as subsidiaries increased during 2003 from £202.1 million to £295.0 million and the non-recourse bridging finance of £184.0 million against the deferred consideration from the sale of Laing Homes Limited was fully repaid.
Bid costs and overheads accounted for a relatively high cash outflow in 2003 due to a very heavy programme of projects at the preferred bidder stage, many of which will not achieve financial close until the following years, when bid cost recoveries will be more favourable.
The Group received £18.5 million in December 2003 from the successful refinancing of the Norfolk & Norwich Hospital project.
Of the net Group funds of £86.8 million, amounts of £19.2 million are held on deposit in the name of Woodcroft Insurance Company Limited as asset backing to insurance claims reserves, £2.2 million is held as backing for future rental payments and £0.3 million is held against performance bonds. These amounts are not freely available for alternative uses.
The Group has £90 million of corporate debt facilities available up to 15 October 2007 and a further £5 million of overdraft facilities that are available on demand. The facilities remain largely undrawn in terms of debt as at 31 December 2003. However, the corporate facilities have been utilised for the issue of letters of credit in support of future equity commitments to PFI/PPP Project Companies.
At 31 December 2003 the Group had committed £62.5 million (2002 – £50.9 million) for equity and loan subscriptions to PFI/PPP Project Companies. Of this, £56.5 million (2002 – £48.0 million) was backed by letters of credit. The estimated equity commitments available to the Group on its projects at preferred bidder status that had not reached financial close at 31 December 2003 was £98 million (2002 – £35 million).

Non-recourse
funds/
(borrowings*)

Total
Group