19.3.1 In some Projects it may be necessary for a new site to be secured for the purposes of the Project. Historically, where there has not been a requirement for the Project to be operated from a certain site, Authorities have required bidders to price the cost of the land acquisition into bids with a view to making the acquisition after selection of the winning bidder. However, such an approach should not be taken on Projects where the location of the site is critical to the success of the Project for the following reasons:
• deliverability of the Project should be demonstrated at the time the Outline Business Case is prepared by the Authority. This may be best achieved if the Authority secures the site prior to, or at the time of, the Outline Business Case being prepared;
• where the Project is being procured using the Competitive Dialogue procedure, the availability and pricing of the land would need to be determined prior to the close of the dialogue;
• requiring bidders to commit to pricing of land acquisition prior to making the acquisition is unlikely to offer best value for money to the Authority, as bidders are likely to include a contingency in their bid to allow for difficult negotiations with the owner of the site or future variability in the purchase price. Furthermore, delay in Contract award may arise if the owner of the site realises that the winning bidder has priced its bid on the assumption that the Project will be delivered on that site, therefore giving the owner a strong negotiating position against the winning bidder; and
• the result of competition could effectively be determined not by the best value for money bid, but by the best property deal available.
19.3.2 Where the location of the site is not critical to the success of the Project, bidders should be encouraged to offer innovative solutions in respect of land acquisition.
19.3.3 Where land and property owned by the Authority becomes surplus as a result of the Project and this surplus land is dealt with as part of the procurement, the Authority must ensure that it receives market value262 for such land from the Contractor. When surplus land and property features as an integral part of a bid, it can be difficult for the Authority to reach clear judgements about market value. However, this does not relieve an Authority from its obligation to demonstrate that it has achieved market value. The risks involved in surplus property development are different to those within a PFI Contract and Authorities should consider in advance of procurement:
• how best value can be extracted from surplus land assets to the benefit of the public sector (including whether it should form part of the Contract or be sold separately), taking account of the town planning status and market risks;
• if land is to be included in the Contract, how mandatory and variant bids will be evaluated to take account of differing approaches by bidders to the treatment of land receipts within the PFI; and
• whether it is appropriate to introduce competitive market testing of the surplus land proceeds and/or gain sharing mechanisms within the Contract.
19.3.4 Where the Authority cannot satisfy itself that market value has been achieved it should consider seeking bids that remove the financial benefit of the surplus land and property. Where the Authority intends to release property to the Contractor, it must consider carefully how best this is done, over time, in order to achieve best value for money. For example, transfer of surplus property at Financial Close prior to it receiving detailed planning permission, is unlikely to prove good value for money. Care should be taken in evaluating proposals that combine the realisations from sale and/or development of surplus land with the construction of operational property and provision of services.
19.3.5 The Authority needs to take care that the inter-relationship between the realisation of proceeds from the sale of surplus land, and the property and the facilities from which services will be delivered during the term of the Contract, supports the overall objectives of the Project and also does not prejudice the Authority's position should an event of early termination arise.263
19.3.6 Residual value interests may form an important part of some projects.264 Such projects require very careful structuring. In addition to financial and legal advice, Authorities should seek early guidance from SIB on such schemes. In addition to value for money, balance sheet, termination payment and other derogation issues, the relevant property and security interests would need attention. Commonly in such Projects, the Contractor would assume a certain residual value for the relevant asset at the end of the Project term (which would be bid as part of the tendering process and appear in the bidder's financial model) and, in the light of this, the amount of Unitary Charge bid by the bidder would be reduced. Authorities must however be clear as to:
• who is taking the residual value risk in the Project (i.e. the risk of the actual value of the asset being greater or less than the assumed value either at expiry of the Term or on early termination in any of the early termination scenarios);
• how this may impact the balance of risk and incentive in the project;
• how this is best and most securely structured (in terms of property interests and options and possible value sharing arrangements);265 and
• the precise basis on which the residual value is valued at expiry or termination.266
On a facilities Project (where the assumption is that the underlying value of land will go up) Authorities will want to ensure that they have a proper interest in increased land values. On an equipment Project (where the assumption is that the value of equipment will go down) Authorities may want to ensure access to the equipment at a value for money price should they continue to need it at expiry or early termination of the Contract.
19.3.7 On the English Department of Health LIFT programme,267 the LIFT companies bought the properties at the start of the Contract and took the residual value risk on them. Public sector gain sharing provisions applied on disposal of surplus property, and the public sector had to pay open market rates if it wanted continued use of the properties at the end of the term.
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262 See section 24.2 (General Principles, Disposal of Surplus Property) of Government Accounting 2000.
263 Where the Contractor takes the market movement risk, it may be exposed in the event of a termination at a down-cycle in the property market.
264 This has been the case in certain Great British housing projects and certain MOD equipment projects.
265 See section 19.1.3 above.
266 Any definition of Market Value used should be as precise as possible to avoid future disputes. See footnote 261 above. See generally Section 20.5 (Transfer of Residual Value Risk).
267 See standard LIFT documents on the Partnerships for Health website: www.partnershipsforhealth.co.uk.