2.3 It is usual for organisations to seek some flexibility to exit properties in long-term contracts, for example through break clauses in traditional leases. There are two methods of purchasing this flexibility in private finance initiative contracts. If the occupier is reasonably certain it will no longer require particular buildings, it can specify allowances to vacate specific areas over a specific period. The costs of such allowances are incorporated into the contract price. If it is uncertain, it can negotiate the additional costs it would pay if it were to vacate properties.
2.4 In negotiating vacation allowances, the Department classified its buildings as flexible, intermediate or core, and negotiated different vacation arrangements for each type (Figure 7).
• Flexible (12 per cent of the Department's STEPS estate): it designated as flexible those buildings which it wanted the option of vacating. It has annual allowances enabling it to vacate 99 per cent of flexible space, which it can use at no additional cost by giving 12 months' notice.5
• Intermediate (13 per cent of the Department's STEPS estate): intermediate buildings have specified dates for exit, which are the earliest the Department can vacate without additional cost. If missed, there is a two-year lock-in period after which it can vacate by giving 12 months' notice.
• Core (75 per of the Department's STEPS estate): the Department designated buildings it expected to retain in the longer term as core, and invited bidders to price the cost of exiting these buildings, which it would only pay if vacated. Mapeley offered allowances of 225,000 square metres over the life of the contract at no cost. The Department can use these allowances by giving 12 months' notice and unused allowances accumulate. The Department also has 225,000 square metres of further core allowances, which it can use with 12 months' notice and payment of compensation.6
2.5 The vacation allowances are a significant benefit for the Department, enabling it to manage its accommodation according to business needs rather than to fixed lease terms. At the start of the contract, the Department had the right to vacate 764,900 square metres, 60 per cent of the STEPS estate. 42 per cent was at no additional cost, and 18 per cent attracted compensation.
2.6 We estimate that at the start of the contract the Department could have made savings of around £1.1-1.2 billion (2009 prices) on ongoing estates costs over the life of the contract if it fully used the vacation allowances, including further core allowances, as soon as they became available.7 Excluding allowances for which it has to pay compensation, it could have saved around £800-870 million.
|
|
|
152,121 |
Paid for in contract price. No additional cost on vacation. |
||
|
Intermediate |
|
Variable based on transition date |
162,791 |
Paid for in contract price. No additional cost on vacation. |
|
|
Core |
Years 4-18 |
15,000 |
225,000 |
No cost. |
|
|
|
Further core Years 4-18 |
15,000 |
225,000 |
Compensation paid when allowances are used. |
|
|
Total |
|
|
764, 912 |
|
|
|
Source: National Audit Office analysis of Departmental information |
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5 The Department asked bidders to price two levels of flexible vacation allowances, 10,000 or 15,000 square metres each year in years six to fifteen. Mapeley bid the same price for both, effectively providing the Department with an additional 50,000 square metres of flexible allowances at no extra cost.
6 Compensation, designed to reduce Mapeley's losses resulting from vacations, is calculated by a complex formula.
7 The Department would have to pay compensation to achieve these savings.