2 Managing the contract effectively
7. The Department got a good price for the contract
but has not managed it well. It has generally reacted to risks
and issues as they arose, and was currently negotiating with Mapeley
to resolve a number of commercial issues that dated back as far
as the start of the contract.[10]
The Department did not have a good understanding of the profitability
of the deal or the benefits realised by Mapeley. Lack of information
on Mapeley's financial position also weakened the Department's
ability to negotiate and form an effective partnership.[11]
8. Under the contract, the Department does not
have full visibility of Mapeley's financial information. It signed
the contract in 2001 in line with guidance on information rights
in place at that time. In 2007 HM Treasury issued updated guidance,
suggesting departments negotiate greater information rights, including
full access to financial information. The Department was working
with Mapeley to obtain information rights in line with the updated
guidance, including appropriate safeguards relating to freedom
of information and data protection. Mapeley assured the Committee
it would provide full information.[12]
9. Mapeley approached the Department seven months
into the contract with a series of financial claims and requested
more money to deal with a serious cash flow problem. Mapeley was
a new company entering the market and had put in a low bid based
on speculative returns from increases in property values to establish
itself. It expected minimal operating profits. The Department
and Mapeley finally resolved these claims in December 2005. The
Department agreed to make additional payments to Mapeley in respect
of specification errors in the information the Department provided
about the size of its estate and changes to service requirements.[13]
10. The Department's plans to vacate properties
created financial pressures for Mapeley exacerbated by the economic
downturn and falling property values. Mapeley approached the Department
in January 2009 with concerns about the financial pressures from
these plans. It said that it had been seeking to get as much clarity
as possible on the buildings and timings involved, and to resolve
some outstanding commercial issues. It confirmed that it could
afford the contract, and it was not seeking any relaxation or
additional financial assistance from the Department beyond what
it was entitled to under the contract. It would manage the vacation
programme by selling vacated freehold buildings, and re-letting
vacated leasehold buildings. The Department stated that it would
not bow to pressure to provide assistance.[14]
11. The Department has no rights to voluntarily
terminate the contract, but a Mapeley default would end it. The
Department drew up a business continuity plan to manage the risk
of Mapeley default in 2003, but did not keep this up to date.
In 2008 it stepped up its monitoring of Mapeley's viability, and
in 2009 it set up a Commercial Stability Analysis Function to
monitor the viability of its estates contractors, and updated
its business continuity plan. The Department also assessed its
liabilities in the event of Mapeley default. It estimated that
it could incur one-off costs of £40 million-£110 million,
because in the event of default, various liabilities of Mapeley
would revert to the Department.[15]
12. The Department has lacked the appropriate
commercial and legal skills to manage a contract of this size
and significance. It considered that when it let the contract
in 2001 the public sector tended to believe that contractors would
deliver everything in accordance with the contract and so scaled
down its capabilities, including strategic management. It was
now planning to improve its estates function, and had strengthened
its commercial and legal resources.[16]
13. HM Treasury recognised that a lack of commercial
skills was a problem across government, and it was working with
the Office of Government Commerce to tighten the criteria for
recruiting expertise in delivering complex projects.[17]
10 Qq 4, 24-31 and 42; C&AG's Report, paras 4 and
9 Back
11
Qq 5, 40, 86 and 89; C&AG's Report, paras 9, and 3.10, Recommendation
a Back
12
Qq 5, 6 and, 54; C&AG's Report, para 3.10 Back
13
Qq 39, 57 and 113; Committee of Public Accounts, Twentieth Report
of Session 2004-05, PFI: the STEPS deal, HC 553, para 8;
C&AG's Report, para 4, Figure 4, Appendix 2 Back
14
Qq 11, 13, 67-69, 107 and 110-112; C&AG's Report, paras 8
and 2.19 Back
15
Qq 34-37, 39 and 90; C&AG's Report, paras, 3.5, 3.9 and 3.11 Back
16
Qq 4, 14, 30, 42 and 59; HC (2004-05) 553, para 18; C&AG's
Report, para 9, Recommendation b Back
17
Qq 15 and 16 Back
|
