74. Unless there are strong supporting commercial reasons, surplus land not integral to the development should be excluded from PFI procurements.
75. Where surplus land is included in PFI procurements (to be sold in exchange for a reduction in service payments) acquisition teams should ensure that:
a. they own the land prior to sale;
b. the land is sold to the consortium for at least open market value - the "VFM test";
c. they take all reasonable steps to maximise the value of the land prior to disposal; for example, by obtaining enhanced planning permission;
d. consideration is given to whether arrangements to share in the future benefits, which the consortium or other parties may derive from the land, will improve the value for money of the PFI deal;
e. parent company guarantees are obtained to enable the MOD to recover the full cost of the land in the event of the private sector partner being unable to complete the building project and deliver services;
f. the timing of the sale is appropriate;
g. the accounting treatment of land is considered fully when determining the affordability of the project.
76. Before deciding to include surplus land in PFI transactions, acquisition teams should consider from the outset the potential disbenefits. PFI transactions are highly complex and experience to date has shown that inclusion of surplus land in deals adds further complications. As a consequence there may be delays in the PFI process which can prove costly. Other possible disbenefits may include:
a. potential tax liabilities; and
b. potential timing problems if transactions are not back to back.
77. Where a new building is to be built on a site that the MOD already owns, acquisition teams should ensure that:
a. they retain their freehold interest in the land rather than sell this to the project company;
b. the arrangements for land on expiry of the primary period are sufficiently flexible;
c. the accounting treatment of land is considered fully when determining the affordability of the project.
78. Occasionally, MOD may wish to sell land which is integral to the scheme to the private sector. Any decision to sell the site on which a new building is to be built should first take into account the requirement that MOD should not enter into any contractual arrangement where assets essential for its functions are put at risk.
79. If it is deemed appropriate to sell rather than lease, the primary considerations should then be of a commercial, value for money nature. If the buildings have an alternative use and the private sector is constructing the property with this in mind, then there may be an argument for selling the freehold. This is more likely to be a valid reason for some small community-type schemes. If the situation arises where there is a real commercial justification for MOD to sell the freehold to the project company, they should only do so in exchange for at least open market value, subject to overage as discussed further below.
80. Asset changes to MOD's balance sheet as a result of entering into a PFI contract must be set out clearly as part of the project's business case. These changes will have to be agreed with the acquisition team's relevant financial controller prior to inclusion in the balance sheet, capital charge estimates and hence pricing.