1 In 2001 the Inland Revenue and HM Customs & Excise, now HM Revenue & Customs (the Department), signed a 20-year contract with Mapeley STEPS Contractor Limited, one of several companies within the Mapeley Group involved in the contract. In this report references to Mapeley mean the companies involved in the contract; and Mapeley Group the wider group. The Department transferred ownership and management of around 60 per cent of its estate, including the estate of the Valuation Office Agency. The remainder of the Department's estate consisted of private finance initiative deals on specific buildings, properties rented from other departments, and properties at ports.
2 Under the STEPS deal (the Strategic Transfer of the Estate to the Private Sector), the Department sold 132 freehold properties to Mapeley and now leases them back. Mapeley manages these, and 459 properties the Department leases from third-party landlords, and provides facilities management and maintenance services on these and other service-only properties in return for fixed monthly payments from the Department (Figure 1).
3 The Department based the contract on the Department for Work and Pensions' PRIME contract, the largest Government estates outsourcing private finance initiative deal, and learnt from its experience. The Department expected to reduce running costs during the contract compared with continuing to manage the estate itself, and it has the flexibility to exit up to 60 per cent of the estate, with costs of breaking lease terms borne by Mapeley. Figure 2 summarises the deal's main features.
4 Mapeley's bid was some £500 million cheaper than other bids (2001 net present value) over the life of the contract, and some £300 million cheaper than the Public Sector Comparator, the Department's estimate of the cost of continuing to manage the estate itself. The National Audit Office (NAO) and the Committee of Public Accounts (PAC) reported on the deal in 2004 and 2005. They concluded that the Department achieved a good price for the contract, but good risk management would be essential as Mapeley was a new company entering the market and had put in a low bid to establish itself. It based its bid on speculative returns from increases in property values over the 20 years, and expected minimal operating profits.
Figure 1 | ||
Type | Number of buildings | Space (square metres) |
Freehold and historic leasehold | 132 | 437,300 |
Leased and licensed | 459 | 917,700 |
Total | 591 | 1,355,000 |
Source: National Audit Office analysis of Departmental information | ||
Figure 2 | |
At contract start | The Department sold freehold buildings and assigned responsibility for managing leased buildings to Mapeley for a £220 million up-front payment, and £150 million in reduced payments over the contract. |
During the contract | The Department makes monthly payments to Mapeley to cover rent, facilities management, maintenance and debt costs. Mapeley provides fully-serviced accommodation and bears the associated risks. The Department manages the relationship and payments to Mapeley, passing on charges to the Valuation Office Agency and other occupiers. |
Benefits for the Department | Benefits include the opportunity to: • exit up to 60 per cent of the estate and the flexibility to manage its accommodation according to business needs rather than fixed lease terms; • transfer day-to-day management of services; • transfer property-related financial risks such as increased rents; • obtain professional estate management expertise; • reduce costs through lower capital and facilities management expenditure; • obtain capital through an upfront payment; and • share in windfall gains. |
At contract end | The Department will not own the estate but retains a right to occupy buildings, with leases based on market terms. |
Source: National Audit Office analysis of Departmental information | |
5 At contract signature Mapeley was owned by Fortress Registered Investment Trust, Soros Real Estate Investors and Delancey Estates Limited. Mapeley obtained £262.5 million of funding for the contract, comprising £42.5 million of initial equity, a £30 million loan from shareholders and £190 million of commercial debt. Seven months into the contract, Mapeley approached the Department with cash flow problems. By 2004 its position had improved, largely as a result of changes in the property and financial markets, which enabled Mapeley to obtain income by entering arrangements with landlords to extend leases in exchange for upfront payments. In 2002 Mapeley estimated that it would receive £70 million from these deals. Shareholders also injected £8 million in short-term funding, with an annual ongoing commitment of £2-3 million.
6 This report considers how the contract has operated, including how it has enabled the Department to adapt to efficiency targets and economic changes. Appendix 1 describes the methodology. We also report the Department's progress against the Committee of Public Accounts' previous recommendations (Appendix 2). We examine the:
• performance of the contract - costs of the contract, service delivery and gain-sharing (Part 1);
• Department's management of accommodation changes - its use of property vacation allowances, and inclusion of additional buildings into the contract (Part 2); and
• Department's management of contract risks - how it is managing risks from the economic downturn, and whether it has an effective partnership with Mapeley (Part 3).