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In April 2001, HM Customs & Excise and the Inland Revenue (the Departments) transferred the ownership and management of most of their estates to Mapeley, a private sector consortium in a 20-year Private Finance Initiative (PFI) deal. The Departments expect to reduce running costs over the life of the deal and will have flexibility to vacate up to 60% of the estates, irrespective of the cost of breaking residual lease terms, which will be borne by Mapeley. Mapeley can also arrange additional accommodation and has provided over thirty additional buildings in the first three years of the contract.
Figure 1: Properties transferred to Mapeley
Source: C&AG's Report
Mapeley won the competition for the deal because it had been considerably cheaper than the next best bid and was also lower than the estimated cost of retaining the estates in the public sector.
Mapeley was a new company that wanted to enter the commercial property market. Its bid was based on speculative returns from increases in commercial property values over a 20-year time horizon, with operating profits expected to be minimal. Mapeley also assumed that it would win other business on the back of the deal, but has not yet succeeded in doing so.
On signing the contract with the Departments, Mapeley transferred the freehold and long-leasehold properties to a company based in Bermuda. As a result, any capital gains made by Mapeley on the sale of the properties will not be captured under the current UK tax regime.
Seven months into the deal, Mapeley told the Departments it faced a serious cash flow problem and asked for additional money. The Departments refused. Following favourable movements in the commercial property market and the injection of further funds by its shareholders, Mapeley's financial position has improved. The Departments and Mapeley are, however, still negotiating a number of outstanding claims and the performance measurement system, agreed under a contract signed nearly four years ago, is not yet working satisfactorily.
On the basis of a Report by the Comptroller and Auditor General[1] the Committee took evidence from the Departments and Mapeley on the negotiation of the deal and on the management of risks following deal signature.
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