PROJECT
APPRAISAL
5. An important element in an institution's assessment
of the need for new or refurbished accommodation is the quantification
of the overall space requirement. This should take account of
the size of the existing estate, the efficiency with which that
estate is being used, and the demand for new space. Monitoring
the usage of available space can raise fundamental questions about
the real need for additional space. Previous work by the National
Audit Office on the management of space at three higher education
institutions in Wales had indicated that the average utilisation
rate was in the range of 19 to 22 per cent.[3]
In their more recent examination of building projects in the English
higher education sector, the National Audit Office found that
four of the ten institutions they visited had not attempted to
quantify their overall space requirement, and seven of the ten
institutions visited had not undertaken regular monitoring of
the utilisation of their accommodation space through surveys.[4]
6. The Committee asked the Funding Council whether
they were satisfied, in the absence of such information, that
institutions were right to commission the new buildings that they
did. The Funding Council replied that by and large they were pretty
satisfied that institutions had a good knowledge base to establish
their needs. But they said that the nature of the accommodation
which universities used was quite complex, and it was quite a
difficult exercise to quantify needs for even the simplest kinds
of accommodation such as lecture theatres and classrooms.[5]
7. Once a need for new facilities or refurbishment
of existing accommodation has been assessed, higher education
institutions should undertake a rigorous analysis of the options
available so that they can select the option that best meets their
objectives.[6] The National
Audit Office identified option appraisal as an area of weakness,
with appraisals reviewed containing technical errors and misleading
assumptions. They further found that only one of the ten institutions
visited had established a requirement to undertake option appraisal
as part of their internal decision-making processes. The Funding
Council had issued guidance on appraising property options in
1993, which was based on Treasury guidelines, and were currently
reviewing their guidance on option appraisal.[7]
8. The Committee asked the Funding Council whether
their revised guidance would encourage institutions to carry out
option appraisal as part of their internal decision-making processes
and to ensure that such appraisals were technically sound. The
Funding Council said that they believed that academic institutions
were well used to a proposition being followed by a lot of debate
about whether a particular solution was the right one or not,
and that they were fairly certain that such debate, which might
not be recorded, preceded the projects examined.[8]
9. The Treasury told us that they hoped that institutions
would have available to them guidance which followed the techniques
set out in the Treasury guidelines. They went on to say that they
thought that what was needed was tailor-made guidance which was
going to apply to the particular types of investment and particular
situations of institutions in the sector. The Funding Council
told the Committee that they would be producing something which
was user friendly to the sector and issuing it this year.[9]
10. We asked the Funding Agency why their invitation
to institutions to bid for funding for poor estates did not include
a requirement for an option appraisal, but instead stated that
institutions may be asked for one. The Funding Council agreed
that there did need to be option appraisals, and that they should
be working towards that.[10]
The Committee asked whether there may be occasions when the Funding
Council would apply some form of sanction in order to ensure that
option appraisals were being carried out. The Funding Council
replied that they would do this through incentives. They acknowledged
that if institutions were obtaining funding from the Funding Council,
it would be reasonable for the Funding Council to require them
to have a mechanism for appraising the project. They added, however,
that this was not to say that every institution, wherever the
money was coming from, must produce an option appraisal, although
they thought that most of them would want to do that anyway.[11]
11. Between 1993 and 1996, borrowing accounted for
half of the funding for major building projects in the English
higher education sector. The National Audit Office's discussions
with financial institutions who were active in the higher education
sector indicated that lenders were now highly aware of the business
opportunities in the higher education sector, and fully expected
to find themselves in competition with other lenders. Any institution
which failed to use a competitive tender process for the acquisition
of loan finance was therefore unlikely to achieve the best possible
value for money. The National Audit Office found that for two
of the ten projects they examined, however, the institution had
approached its existing bank and taken what was offered.[12]
12. The Committee asked the Funding Council whether,
as an umbrella organisation, they should have in place some rules
to encourage and require competitiveness in loan finance. They
replied that they recommended such competition, but did not require
it. It was the Funding Council's view that to tell people what
to do was not the best way to achieve value for money. Telling
people what to do resulted, in their view, in compliant organisations
in which there would be high accountability and low autonomy which
was not the objective.[13]
Conclusions
13. The Committee are concerned that some of
the institutions visited by the National Audit Office did not
have information on the efficiency with which they are using their
existing estate, or had not quantified their accommodation requirements,
before starting new building developments. It is difficult to
see how, without such information, institutions can be sure that
their decisions to invest in new accommodation are sound. We therefore
recommend that the Funding Council do more to ensure that institutions
undertake more comprehensive assessments of the need for new building
projects before the decision to proceed is taken.
14. If institutions are to select the option that
best meets their objectives, it is important that they undertake
a rigorous analysis of the options available. It is worrying that
there were significant weaknesses in the option appraisals undertaken
by institutions, and that these were not carried out in any scientific
manner. The Committee are not at all convinced by the Funding
Council's argument that such assessment could be dealt with by
informal debate. We look to the Funding Council to publish their
revised guidance on option appraisal without further delay, and
to ensure that this reflects the appraisal techniques contained
in the Treasury's guidance, tailored to reflect the particular
circumstances of higher education institutions. In view of the
importance of option appraisal to the decision-making process,
we are concerned that the Funding Council do not require institutions
to provide an option appraisal when requesting funding for poor
estates. We recommend that this should be made a mandatory requirement.
15. Between 1993 and 1996, borrowing accounted for
half of the funding for major building projects in the English
higher education sector. There are significant opportunities for
higher education institutions to obtain competitive deals on loan
finance, and it is therefore unsatisfactory that some institutions
looked no further than their existing bank when obtaining finance.
Accordingly, we recommend that the Funding Council make it a requirement
for institutions to ensure that loan finance is selected following
a rigorous process of competitive tender.
3 C&AG's report (HC 452 of Session 1997-98), paras
2.9, 2.12 Back
4
C&AG's report (HC 452 of Session 1997-98), paras 2.10-2.11 Back
5
Qs 1-2 Back
6
C&AG's report (HC 452 of Session 1997-98), para 2.14 Back
7
C&AG's report (HC 452 of Session 1997-98), paras 6, 2.16,
2.21-2.22 Back
8
Q3 Back
9
Q13 Back
10
Q34 Back
11
Q103 Back
12
C&AG's report (HC 452 of Session 1997-98), paras 2.27-2.28 Back
13
Qs 46-48 Back
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