VACANT OFFICE PROPERTY
THE ACCUMULATION
OF VACANT
PROPERTY
(i) Responsibilities
5. From April 1990 forty per cent of the
Government's Civil Estate became the responsibility of occupying
departments. Property Holdings, a directorate of the Department
of the Environment, became responsible for managing the other
sixty per cent. This consisted mainly of general purpose office
accommodation and was known as the Common User Estate (paragraph
2).[2]
6. Until September 1994 departments were
able to hand back any building on the Common User Estate, or a
lettable unit within a building, to Property Holdings, subject
to a minimum of six months' notice but without any financial penalty.
However, departments had to be satisfied that the costs of surrender
had been taken into account in their business cases. [3]In
July 1993 the Efficiency Unit embarked on a scrutiny to establish
how to devolve as much responsibility as possible to departments
and agencies for the management of their accommodation, including
acquisition and disposal.[4]
(ii) Management of the Problem
7. In the four years to March 1996 the amount
of vacant office space on the Common User Estate more than doubled,
from 440,000 square metres to 962,000 square metres, of which
PACE inherited 830,000 square metres. The remainder passed to
departments.[5]
8. We asked PACE why this alarming increase
could not have been contained. They told us that there had been
several factors. Primarily there was the reaction to the Efficiency
Unit scrutiny and to the expectation that responsibility for property
would be handed back to departments.[6]
Departments had to give notice by September 1994 of any property
they would be handing to PACE, an agency to be set up on 1 April
1996.[7]
9. PACE told us that this measure was coincident
with major changes in the shape and direction of the Civil Service,
which had come down from 750,000 staff in the 1980s to about 500,000.
This reduction involved a requirement to rationalise and to restructure;
in addition executive agencies were taking greater control of
their own devices and being more strategic about their property
needs. Alongside that there were privatisations and market testing
which resulted in property moving out of government. Several events
all came together which resulted in a large swathe of property
in the hands of PACE over which it did not have control during
the two-year period before it was created.[8]
10. As it seemed to us that all these changes
were predictable, we asked PACE whether preparations could have
made for them. PACE said that this could have been managed if
the accommodation had been in their hands to dispose of. However
there had almost been an interregnum between 1994 and 1996 when
things were on hold waiting for the properties to come to PACE
for disposal.[9]
11. We asked why departments had been able to shed empty
property on PACE and their predecessors at six months notice.[10]
In 1990 departments entered into a formal agreement with Property
Holdings which included the six-month notice period.[11]
PACE told us that the requirement for six months' notice was to
encourage departments to be exercised about the cost benefits
which could accrue if they parted with accommodation.10
The scheme was introduced when the property market was very buoyant.
At that time there was an expectation that, given six months'
notice, Property Holdings would be able to find an alternative
use for the property or dispose of it reasonably quickly. However,
soon into the 1990s, the market went very sour and the procedure
did not work. PACE told us that Departments could now no longer
give notice and surrender accommodation.[12]
12. PACE accepted that the lack of incentives
on departments to bear the cost of their property was in one sense
a main cause of the problem. They also considered that the way
in which the estate had been managed in the past had contributed
to it. It was not entirely a question of departments taking over
responsibility and suddenly realising that they had more accommodation
then they needed.[13]
13. As there was clearly a problem waiting
to happen, we asked the Treasury what they had done to ensure
co-ordination in the handling of vacant property. They told us
that, before PACE was set up, one of the incentives for departments
to get rid of surplus property was through charging them rent.
This confronted them with one very important element in the cost
of owning property.[14]
The Efficiency Scrutiny had taken place because the procedures
were not working as well as they might have been. The scrutiny's
proposals represented an improvement over what had been going
on before.[15]
(iii) Cost to the Exchequer
14. In October 1995 PACE's advisers Jones
Lang Wootton estimated that the leasehold properties PACE were
expected to inherit could, in the most likely outcome, cost the
Exchequer £334 million.[16]
PACE told us that, since they had been set up in March 1996, the
size of the vacant estate had diminished by about 40 per cent.
The number of empty properties had fallen from 384 to something
like 222 and liability for outstanding leases was now about £260
million.[17]
15. In the three-year period to the end
of March 1999 PACE expect to spend a total of £324 million
on vacant properties, including the opportunity cost to the Exchequer
of holding vacant freeholds. This expenditure would be offset
by receipts from disposals and short-term lettings amounting to
£77 million.[18]
Prior to the setting up of PACE in April 1996 the estimated cost
of empty property did not include the opportunity cost to the
Exchequer of vacant freehold property.[19]
16. We asked PACE what had been the cost
of empty property since 1990. [20]They
told us that the gross cost would be near £500 million.[21]
As this excluded the cost of the buildings handed back to departments,
we asked PACE what that property cost and whether much of it was
still empty. They told us that some of it was still empty; but
the only figure they could provide was the cost of rent which
amounted to about £29 million a year.[22]
This suggested to us that, over the six-year period, the gross
cost of vacant property might be £680 million.[23]
PACE told us that receipts from disposals over the six-year period
were some £150 million (PAC 89).[24]
(v) Conclusions
17. We are particularly concerned that,
from 1990 to 1994, departments were free to hand back unwanted
accommodation to Property Holdings at six months' notice and without
financial penalty, and move to different accommodation. This arrangement
had been introduced at a time when the market was buoyant; few
difficulties were expected in securing the disposal of property
no longer needed.
18. However it should have been clear that
this arrangement gave departments no incentive to take the wider
Exchequer interest into account, particularly when the property
market turned sour from the early 1990s. In our view the six-months
rule should have been abolished as soon as its disadvantages had
become clear, more should have been done to bring home to departments
the implications of their property decisions for the Exchequer,
and departments should have been made fully accountable for their
actions in this area of their business.
19. Little was effectively done to address
these issues until an Efficiency Unit scrutiny was put in hand
in 1993. We are disturbed that it was not until April 1996 that
the Efficiency Unit's scrutiny recommendations were put fully
into effect. We are particularly concerned that departments were
given notice that the six months rule was to cease after September
1994; it was all too predictable that this announcement would
encourage them to notify surrenders of a considerable number of
properties since the opportunity to transfer the liability to
others would thereafter be denied to them.
2
C&AG's Report, paragraph 2 Back
3
C&AG's Report, paragraph 9 Back
4
C&AG's Report, paragraph 11 Back
5
C&AG's Report, paragraph 5 Back
6
Q2 Back
7
C&AG's Report, paragraphs 13-14 Back
8
Q2 Back
9
Q3 Back
10
Q24 Back
11
Q28 Back
12
Q26 Back
13
Q4 Back
14
Q5 Back
15
Q6 Back
16
C&AG's Report, paragraph 48 Back
17
Q8 Back
18
C&AG's Report, Figure 5 Back
19
Q46 Back
20
Q8 Back
21
Qs 31 and 33 Back
22
Q35 Back
23
Q37 Back
24
Q38 and footnote Back
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