HM Revenue and Customs' estate private finance deal eight years on - Public Accounts Committee Contents

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

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