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PRIVATIZATION 5: Prime property Private management of government estate The problem Governments are not necessarily the best professional managers of buildings and property. The property portfolio - the land and buildings owned by the government - might not be managed to generate the greatest use and value for the taxpayer. Officials can be slow in getting round to the repairs and replacements that are needed in government schools, hospitals, and offices - favouring more visible, current spending on wages, or prestige new building projects. The idea: contract out the management A better system is to transfer the responsibility for running public sector estates to private sector consortia. Thus, government agrees a contract with a specialist firm to provide it with suitable accommodation, while the contractor further agrees to manage all service contracts to a guaranteed minimum standard. Then there can be clear performance measures and monitoring, and just one point of contact to go to if something needs attention - in contrast to the sometime byzantine structures of public works departments. Examples In the United Kingdom, the management of government property, including the scrutiny of leases, the buying and selling of property, the everyday repairs and maintenance, was traditionally left to civil-service bodies such as the Property Services Agency. But a new idea has been pioneered in the shape of the PRIME (Private-sector Resource Initiative for the Management of the Estate) project. Under this initiative, the government sold (for over £4 billion) the Department of Social Security (DSS) estate to a consortium of investors and service providers. The successful Trillium consortium, backed principally by investment bank Goldman Sachs (and now part of Land Securities plc) entered into a 30-year concession whereby Trillium would provide serviced accommodation in return for a monthly unitary payment by the Department. The consortium is obliged to ensure that this accommodation remains in good repair and up to the high standards demanded by the department and its employees. Under the PRIME arrangement, Trillium has taken over responsibility for managing all 1.7 million square metres of the DSS estate, the largest in Britain, which includes local offices in nearly every town in the UK as well as a number of major administrative centres.As its part of the deal, the DSS (now turned into the Department for Work and Pensions) pays rents to the consortium on the buildings that it occupies but which the consortium now owns. In the first year of the contract, this amounted to £236 million. The government also retains an option to reoccupy all or part of the estate on conventional offices leases at market rents after the 30-year contract expires. The consortium owns the freehold of the buildings formerly held by DSS but it in turn must pay the rent on those properties which the Department was leasing from commercial landlords. It therefore has every incentive to ensure that the property portfolio is well managed in order to maximize the useable space available to the client and get the best value for money out of the portfolio. Under the contract ,Trillium provides thirteen different 'facilities-management' services including cleaning and maintenance (everything from cleaning toilets to changing lightbulbs), catering and security. If the services offered are not up to the specification, the DSS pays a lower fee; if buildings are unavailable, it pays nothing.. Trillium also shoulders a range of risks: the risk that its property development and disposal activities do not generate good value; the risk that at any one time insufficient space is available to the DSS; and the additional risk that the services provided at the department's many offices fail to meet the specified standard. The consortium also bears the risk that it may underestimate the amount of capital expenditure (such as major repairs and refurbishments) that may be required to meet its contract obligations. Results: astonishingly large savings PRIME is already saving the taxpayer £28 million a year, equivalent to 22 per cent of the annual running costs that the DSS was incurring on its property portfolio. It has achieved these savings through a spirit of enterprise. As company, Trillium has exploited economies of scale (it is now one of Britain's largest property companies), its own purchasing power and a far more pro-active approach to maintenance. For example, Trillium has set up a specialist team of utilities experts to renegotiate much more competitive contracts for heating and lighting. It is also identifying 'spend to save' opportunities where it invests in plant and machinery to generate future energy savings. Trillium has invested £1 million a week on the PRIME estate: over the thirty years of the contract it plans to spend almost £1 billion. Previously it cost the taxpayers more than £350 million a year to run the DSS network of offices - of which a high proportion, around ten per cent, was in reality surplus to requirements. The buildings, often in a poor state of repair, simply rotted instead of being made to realize their full potential. Over the total lifetime of the project, the DSS expects a saving of £600 million. What is more, the taxpayer can expect to enjoy a 50 per cent share of any redevelopment gains that Trillium generates from the estate it took over. Keen to exploit the commercial opportunities that exist, the company is actively pursuing the development potential of PRIME's under-utilized asset portfolio. Assessment: estate of the art Government property tends to be poorly managed. The DSS did not even have a full register of the properities it owned - key files had simply been lost, and basic management data were missing. DSS officials admitted to the Public Accounts Committee that they simply did not have the skills or experience to run Britain's largest property portfolio efficiently. A cultural change was required, and DSS could not achieve this turnaround on its own. One of the main goals of the PRIME project was to introduce private-sector innovation. PRIME has enabled the DSS to benefit from Trillium's expertise in service delivery, maintenance and property management. Parliament's Public Accounts Committee noted in its review on the PRIME deal that the "contract incorporates a welcome degree of benefit sharing and risk transfer". On the debit side, procurement costs were very high for both DSS and the private sector consortia bidding for the PRIME contract. Some of this may have been due to the fact that it was a pioneering private finance intiative (PFI) project (see the chapter Seize the Initiative!) and out of the ordinary. Whatever the reasons, the DSS spent £10.9 million on procurement costs, compared with an initial budget of only £1.7 million; and the final three bidders spent a total of £27 million on preparing their bids. Future competitive contracts should not cost so much. since both public and private sectors have gained valuable experience from the PRIME project. On the basis of the success of PRIME, and following new capital-accounting rules (see the chapter Closing the GAAP) various ministries have now been instructed to sell assets that are worth a total of at least £1bn a year. The MoD's married quarters estates have been sold to Japanese investment bank Nomura, for example: but there are much bigger initiatives underway too. The Inland Revenue and HM Customs & Excise has initiated a broadly similar contract for their enormous property portfolio - the so-called STEPS initiative - worth £2 billion over its 20-year life. The 760 properties occupied by the Revenue and Customs & Excise range from dog kennels at ports to Inland Revenue offices throughout the country and important London buildings such as Customs House on the River Thames. The contract was won by of the Mapeley Consortium, which includes Fortress Investment Corporation, Soros Real Estate Partners, Halifax, DTZ Debenham Thorpe, Delancey Estates, Electronic Data Systems (EDS), Aqumen Group plc (part of Mowlem), McLellan International Ltd, and Coflex. The aims of the project are to enable the departments to focus on their core activities, to provide flexibility for changes in needs - Mapeley allows for up to 60% of the existing space to be vacated over the next 20 years, at no cost to the departments - and to reduce the departments' exposure to portfolio capital, maintenance and management risks. The freehold part of the estate, about 30%, is transferred to Mapeley, which is responsible for maintenance and normal refurbishment. It also takes on the leasehold burdens of the leasehold properties. Mapeley provides serviced accommodation to the department in return for payment of a unitary charge, calculated on the nature of each property. Another consortium, Servus, backed by Japanese bank Nomura, manages a number of government buildings such as the Royal Courts of Justice. Recently, it won a contract to manage the Department of Department of Trade & Industry's headquarters offices, beating off competition from Carillion, Dalkia, Building & Property, Workplace Management and Acqumen. Under this major five-year contract, Servus is responsible for services such as maintenance, cleaning, security guarding, catering and conferences, over one million square-foot of office buildings in London, Sheffield, Aberdeen and Glasgow. Other public bodies like the BBC are exploring the future role for their own properties. But the private sector too is following the lead set by the UK government, and looking for ways to cut costs by integrating facilities management and property. A second aim is to release under-employed capital: and since property is typically a third or more of the fixed costs of the major companies, there are obviously big opportunities here. The high-street banks, many facing pressure from internet banks and other financial-services providers who have a lighter property portfolio, are among the leaders. It has been reported that Abbey National, has talked to Mapeley, Trillium and Servus for ways of selling its entire £460m property portfolio (including 221b Baker Street, the fictional address of Sherlock Holmes). Lloyds TSB, with portfolio of more than 3,000 properties including 2,500 branches estimated to be worth £1bn, has done the same. Firms such as Bell Canada, Cable & Wireless, London Electricity and British Telecom have all contracted out some of their estate management. The BT contract is a £2 billion deal to acquire and manage some 64.5 million square feet of UK commercial premises, comprising 7,500 properties across the UK. The company's proposal to out-source its entire property portfolio to the private sector is the biggest example to date of the property outsourcing trend. Once again, private companies are drawn to this arrangement as a way of:
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