9 The Departments secured a very competitive price from Mapeley STEPS, a new entrant to the market. In doing so, the Departments applied lessons learned from PRIME, established clear criteria for evaluating bidders' proposals and recognised that there were risks in going ahead with the deal. Mapeley STEPS offered the lowest price by some £500 million. Its bid was also some £300 million lower than the best alternative to a PFI deal.
10 The pricing of the winning bid was based on returns over a 20-year time horizon and operating profits were expected to be minimal. Mapeley STEPS also assumed that it would win other business and that its central overheads would therefore be spread over a number of contracts. In order to evaluate whether Mapeley STEPS could deliver the deal at the price proposed, the Departments tested the robustness of Mapeley STEPS' financial model and examined some of the key assumptions that underpinned the deal in more detail. This analysis showed that the funding structure was robust under most scenarios examined, but that it might be vulnerable to increases in life cycle and annual maintenance costs.
11 Mapeley STEPS was selected as the preferred bidder in 2000 and, following detailed negotiations, the contract was awarded in March 2001 to Mapeley STEPS Contractor Limited (registered in the UK) which would provide the services, and Mapeley STEPS Limited (a property holding company registered in Bermuda). There was no material increase in the bid price between selection of preferred bidder and financial close. This was facilitated by a Memorandum of Understanding (MoU) agreed between the Departments and Mapeley STEPS which set out how outstanding issues would be resolved between the two parties.
12 At contract signature Mapeley STEPS was owned by Fortress Investment Group (incorporated in Delaware USA), Soros Real Estate Partners CV (a Limited Partnership formed in the Netherlands), and Delancey East Limited (resident in the UK at the time, but now offshore). As the STEPS freehold and long-leasehold properties were transferred to a company based outside the UK, tax on any gain made by a sale by this company will not be captured under the current UK tax regime. Furthermore, as the shareholders of Mapeley STEPS are non UK resident, they are not liable to pay UK capital gains tax if they sell their shareholdings since it is generally only payable on capital gains realised on the disposal of an asset by UK resident individuals and companies.
13 The location of Mapeley STEPS Limited in Bermuda has no material effect on the overall value for money of this deal to the UK taxpayer. Mapeley STEPS estimated that if it had been required to bring the STEPS properties onshore, its bid price would have had to increase by £55 million to cover the extra UK tax that might have been due.5 This is not a material figure in terms of a £1.5 billion deal or in the difference between the Mapeley STEPS bid and the nearest bidder and was not therefore a deciding factor in selecting Mapeley STEPS.
14 The Departments followed procurement law throughout the process. The Government has responded to the tax issues raised in this deal by suggesting a new clause for future PFI contracts that limits the ability of contractors to go offshore. It remains to be seen how it will work in practice.
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5 This estimate was provided to the National Audit Office by Mapeley STEPS. It represents the net present value, at a 6% real discount rate, of the additional unitary charge needed to offset the potential tax liability if Mapeley STEPS had not been based offshore. The figure reflects Mapeley STEPS own views on prospective increases in commercial property values over the 20 years of the contract and assumes no changes in current UK tax legislation. Given the inevitable uncertainties surrounding forecasts up to 20 years into the future, it can only be a very approximate estimate. This figure has not been agreed with the Inland Revenue and HM Customs and Excise since the Departments cannot comment on the tax affairs of individuals in public.