Press Release - The Contributions Agency: The Newcastle Estate
Development project
25 November 1999
Sir John Bourn, head of the National Audit Office, told
Parliament today that the pioneering 31-year *Private Finance
Initiative deal to redevelop the office accommodation of the Inland
Revenue and Department of Social Security in Newcastle is likely to
deliver the improved accommodation sought. This would be at a
higher direct cost than continuing with the existing premises,
which, however, fall well short of modern standards. The Department
expect to make compensating efficiency savings from the
re-development and will share in any further development gain. It
is unclear whether a publicly funded redevelopment of the estate
would have provided better value for money.
The former Contributions Agency let this contract on behalf of
the Department of Social Security as a whole. On 1 April 1999
the Contributions Agency moved to the Inland Revenue and became the
National Insurance Contributions Office.
The Newcastle estate housed over 13,000 of the Department’s
staff in over 2.5 million square feet of space, much of which was
old and in very poor condition. This means that new accommodation
will almost inevitably yield major operational benefits. The
contract provides for the number of sites to be reduced from 12 to
5. The redevelopment is currently proceeding close to timetable and
the first new buildings have been delivered.
The contract was awarded to a consortium formed for the purpose
called Newcastle Estate Partnership, (NEP) owned by AMEC
Developments Ltd, a subsidiary of a UK based international
construction and engineering group, and Building and Property
Group, a facilities management company. From January 1998, NEP
became owners of parts of the Department’s freehold estate in the
Newcastle area and will redevelop it during the following five
years. The contract requires them to provide offices for the
Department over 31 years from 1998. In return, the Department will
pay NEP at a predetermined price according to the availability of
the space. At the end of the contract, the Department may renew it,
occupy the buildings on a traditional lease arrangement at a
predetermined rent, or move elsewhere.
This was a groundbreaking deal. The Contributions Agency adopted
sensible approaches to the procurement. Nevertheless for a number
of reasons it took three years from the Contributions Agency
inviting interest to signature of the deal, compared to an initial
timetable of nine months which they acknowledge, with the benefit
of hindsight, was too short. This involved bidders and the Agency
in much higher procurement costs than they had expected and delayed
the start of the redevelopment. The bidders were concerned about
the costs they had to bear although most stated that they would
still be interested in bidding for future Private Finance
projects.
The Department have transferred to the private sector the risk
that the Department might vacate without payment up to 20 per cent
of the office space available under the contract. Although all
business units felt unable to make realistic long-term forecasts of
the requirements for office space, the Department saw flexibility
as mandatory because of the known and possible major changes
affecting the offices concerned and their staffing levels. The
Contributions Agency also saw flexibility as inherent to the
Private Finance Initiative. So they did not ask bidders how much it
was adding to their prices. This approach means that the Agency did
not know with certainty how likely the Department were to need the
flexibility over the life of the contract – it was a matter of
judgement – nor how much it would cost.
The estimated direct cost to the taxpayer of the Private Finance
deal of £241 million (in present cost terms) is £51 million more
than remaining in the existing premises over the life of the
contract. The Department considers that the deal is value for money
and estimated that efficiency improvements of only 3% of annual
running costs would enable them to contain this extra cost within
their budgets. The benefits from replacing the dilapidated estate
include improved working practices and environments, and freeing
the Department from the risks of property ownership. The Department
did not prepare a full Public Sector Comparator, which would have
estimated the costs of publicly financing a redevelopment of the
estate. As a result, the National Audit Office are unable to say
whether the private finance deal is likely to deliver better value
than a conventionally funded project. The Department’s decision not
to use a Public Sector Comparator was consistent with Treasury
guidance extant at the time but since withdrawn.
The report commends the former Contributions Agency for applying
a broad output specification to the project and for encouraging the
private sector to make innovative proposals. The Agency achieved
some advances in Private Finance practice. In addition, the report
recommends that:
- Departments should undertake a comprehensive strategic review
of the fundamentals of the service they require before they begin
formal procurement;
- Where such large projects involve the accommodation of several
executive agencies, they should have the appropriate level of
corporate management and support to reduce the scope for dispute
and poor co-ordination;
- Departments should consider inviting variant bids from
suppliers in key areas of accommodation deals, such as flexibility
to vacate space without payment and whether to require a capital
payment for property transferred to the supplier;
- Client departments should eradicate major uncertainties from
suppliers’ bids before awarding one preferred bidder status;
and
- Where, as in this case, the Private Finance option has a higher
direct cost to taxpayers, departments should, before signing the
deal, consider carefully the indirect benefits in terms of risks
reduced or transferred to the private sector and the value to their
operations of higher service quality. If quantification is not
possible, they need to set out clearly and comprehensively how they
have arrived at the conclusion that the unquantifiable benefits
outweigh the quantifiable costs.
Sir John Bourn said today:
"This project well illustrates the learning curve faced
by departments and bidders alike in the use of the Private Finance
Initiative. The lessons learned should help future deals proceed
more quickly and with a clearer demonstration of value for
money".
Notes for Editors
*The Private Finance Initiative was announced by the Chancellor
of the Exchequer in his 1992 Autumn Statement. He said that it had
the objective of finding new ways of mobilising the private sector
to meet needs which have traditionally been met only by the public
sector. It is intended to improve the value for money of public
sector projects by encouraging the development of closer
relationships between the public and private sectors through the
transfer of risk and responsibility, and to enable the public
sector to benefit from private sector skills and innovation in the
delivery and procurement of services. This is the ninth NAO report
on Initiative projects to be published.
The Committee of Public Accounts are expected to take evidence
on this report on 8 December 1999.
The Comptroller and Auditor General, Sir John Bourn, is the head
of the National Audit Office employing some 750 staff. He and the
NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 68/99
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