In 2001 the Inland Revenue and HM Customs & Excise, now HM Revenue & Customs (the Department), signed a 20-year contract with Mapeley STEPS Contractor Limited, one of several companies in the Mapeley Group, transferring ownership and management of 60% of its estate. At contract signature the Department expected to pay £3.3 billion (2009 prices) over the 20 years of the contract. To date it has paid 20% (£312 million) more than expected, and now expects to pay £3.87 billion over the 20 years. Moreover, signing a contract which involved tax avoidance through an offshore company has been highly damaging to the Department's reputation.
The cost increase stems from changes in building specifications, increased provision of services and slower than expected use of allowances in the contract for vacating defined amounts of space each year. The Department has failed to achieve value for money so far, as it has not secured all the benefits available over the first eight years and had no plan for obtaining the savings available from the vacation allowances. If it had used all the allowances as soon as they became available each year, it could have saved £1.1 billion to £1.2 billion (2009 prices) over the life of the contract. Possible savings have now fallen by some 25% to around £900 million over the 20 years. The Department now has a major programme of office closures underway up until 2011 but it needs to develop a plan for the remainder of the contract, covering its estates strategy and use of the vacation allowances.
While the Department got a good price for the contract, it has not managed the contract well and we are concerned that it has not demonstrated adequate commercial skills or business acumen. In particular, it has failed to establish an effective partnership with Mapeley, even though the Committee highlighted the need for this in 2005. For example, the Department has not obtained key information on Mapeley's financial position and profitability, and has not monitored overall costs or Mapeley's viability, even though it could incur substantial costs in the event of contractor default.
There were good reasons why the Department needed to manage this contract much more proactively. Mapeley was a new company and had put in a low bid based on speculative returns from increases in property values, with minimal operating profits. The Department should have recognised the importance of tracking Mapeley's financial position as, early in the contract, Mapeley sought financial assistance from the Department to deal with serious cash flow problems. There is an ongoing and urgent need to establish a more effective partnership as the Department's office closure programme creates financial pressures for Mapeley, exacerbated by the economic downturn and falling property values.
The Department is seeking to obtain better value from the remainder of the contract and we welcome the constructive way in which the current senior management has responded, setting work in train to strengthen its estate management function, resolve outstanding commercial issues and develop partnership working with Mapeley.
On the basis of a report by the Comptroller and Auditor General, we examined the Department and Mapeley on: managing costs and benefits; managing the contract effectively; working in partnership; and contracting with an offshore company.