3.9 Since Mapeley STEPS first stated that it had financial problems, a number of factors have combined to improve its financial position. Principal among these is the fact that it has been able to improve its property management income, largely as a result of changes in the property and financial markets, and its recruitment of a financial director. It told the Departments that its shareholders had also injected additional short-term funding of £8 million with an annual ongoing commitment of £2 million to £3 million.
3.10 One of the principal reasons for undertaking a property deal such as PRIME or STEPS is that the risk of managing property in line with general movements in the economy and the financial and property markets is transferred to the private sector contractor. In its original bid, Mapeley STEPS had expected to realise £6 million in the first year from efficient management of the STEPS estate. It took longer than expected to realise this income and it achieved only £1 million in the first year.
3.11 Since the first year, however, Mapeley STEPS has strengthened its management team and has been able to improve the company's estate management. Furthermore, changes in the property market and more general changes in the financial markets, have allowed the contractor to begin to realise value from the estate. As returns on equities have been weak in recent years compared to returns on property, property has become a more sought after investment in the market. The most marketable property is currently that with a lease in excess of 15 years remaining and with a good quality tenant. Much of the STEPS estate fits into this category, particularly since Government departments are the tenants. Mapeley STEPS has therefore been able to lengthen some of its leases in return for a premium cash payment from landlords.
3.12 In November 2002, Mapeley STEPS submitted revised cash flows that took account of its improved financial position. While its short-term position had improved, its business model has a high degree of fixed costs and is therefore very sensitive to any future shortfalls in forecast income. The Departments recognise that, even with the current improved health of the contractor's finances, the STEPS contract will always be finely balanced and they remain alert to the risks that this creates.