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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.

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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.

"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".

Sir John Bourn


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