7 The Department secured a competitive deal from Mapeley, but there were significant risks involved requiring careful management. By 2009 the Department had paid Mapeley £312 million more than forecast (2009 prices), £138 million relates to payments to reimburse Mapeley for unrecoverable VAT costs arising from the complex lease arrangements. The remainder relates to changes in specification, inflation, and use of vacation allowances. While there has been some improvement in service delivery, with Mapeley responding to 92 per cent of maintenance calls on time in 2008-09 and completing 98 per cent of planned tasks on time, Mapeley has not met all service requirements, and in 2008-09 the Department deducted an average of £56,000 a month from facilities payments. A benchmarking exercise with 16 other Government departments indicates that in 2005-06 the Department's STEPS estate costs were lower than many other departments' costs at £157 per square metre. This figure reflects the Department's high presence in regional areas where accommodation costs are lower, and the reduced contractual payments arising from the transfer of freehold properties. The Department now expects to pay £570 million (2009 prices) more than originally estimated over the life of the contract.
8 The contract's existence meant that the mechanics of the estates merger went smoothly following the merger of Inland Revenue and Customs & Excise in 2005, as the Department managed the contract as a single entity. The contract provides the opportunity for the Department to vacate up to 60 per cent of the estate, to help it achieve savings and efficiency targets. By March 2009 it had saved £52 million out of an available £151 million. At the start of the contract, the Department had the potential to save £1.1- 1.2 billion (2009 prices) over the life of the contract, but it has not recognised the contract as a major strategic asset and the total possible savings now available have fallen to £900 million. The Department now has plans to vacate large numbers of properties, but did not adequately consider the impact on Mapeley. This programme creates financial pressures for Mapeley, further exacerbated by the economic downturn and falling property values. The Department could incur significant costs in the event of Mapeley default, including one-off costs of £40-110 million for unpaid rent and suppliers. There would also be substantial ongoing costs relating to estates management and increased rent liabilities.
9 The Department has taken some measures to improve its management of the contract since 2007, although there is not yet a fully effective partnership in place. It has not committed appropriate commercial and legal skills to managing the contract, and has generally reacted to risks and issues as they arise rather than strategically managing the contract. In applying Treasury guidance on refinancing, it was able to negotiate successfully a windfall gain share of £900,000. It has also obtained £4.5 million as a share from Mapeley's sale of properties and has recently undertaken additional work to understand its liabilities in the case of contractor default. But under the contract it does not have full visibility of all Mapeley's gains and losses, particularly on renegotiated leases that ultimately may affect its liabilities in the event of contractor default. There remain outstanding claims that have yet to be resolved, and there have been significant delays in adding new properties into the contract, which directly affects the cost to the Department of vacating buildings. The Department is taking steps towards identifying outstanding issues, preparing a consolidated negotiation with Mapeley, and developing an estates strategy.