The HMRC Estate Contents

3HMRC’s STEPS contract

24.HM Revenue & Customs (HMRC) is preparing for the end of the STEPS contract in 2021, which covers two-thirds of its current estate. This is a 20-year private finance initiative deal, which HMRC set up in 2001 with Mapeley STEPS Contractor Ltd (Mapeley).58 The Committee of Public Accounts previously took evidence on the STEPS contract in 2004 and 2010. In the 2010 report, the Committee concluded that HMRC had failed to achieve value for money, as it had not secured all of the benefits available and had no plan for obtaining the savings available from allowances in the contract to vacate properties.59

Learning lessons from the STEPS contract

25.HMRC told us that it had learnt a number of important lessons from failings in the STEPS contract. HMRC received an upfront cash pot (£370 million) from selling two-thirds of its estate to Mapeley.60 However, HMRC had had to make higher lease payments to Mapeley, to cover Mapeley’s costs of financing the £370 million. HMRC pointed out that Mapeley would have incurred significantly higher borrowing costs than Government would have borne.61 HMRC told us that it now had significant doubts over whether the fundamentals of the STEPS deal, which sold properties to a company, and then leased them back from that company, could ever be demonstrated to be value for money.62

26.HMRC considered that the biggest obstacle to receiving the required accommodation standards in the properties it leased from Mapeley was that the STEPS contract wrapped up together all aspects of leasing and facilities management of the estate and is paid as a single sum. However, any lapse against standards in one activity within the contract covered only a relatively small part of HMRC’s overall payment to Mapeley and were therefore not material to the overall deal.63

27.HMRC told us that it had deducted around £700,000 a year from the lease payments to Mapeley, due to failures to perform up to the contract standards, which was 0.5% of the total annual contract value.64 HMRC said that any penalties it had imposed had not incentivised Mapeley to improve performance in a particular area, as they had not been a material amount of its overall payment.65 While HMRC considered that Mapeley’s performance had been improving, there remained shortfalls against required standards in facilities management, such as cleaning and security. HMRC staff in the offices affected had highlighted these problems regularly, and HMRC told us that it had raised the concerns with Mapeley.66

28.HMRC considered that one of the challenges and risks which it had to bear, through to the end of the STEPS contract, was whether Mapeley could remain financially viable. It added that a further challenge was whether Mapeley would be able to afford the significant investment to maintain standards of the estate, as the contract was so big. HMRC acknowledged that the taxpayer may suffer a high cost if Mapeley defaulted on the contract, which could be as high as £200 million.67 HMRC told us that it was keeping this risk under close scrutiny, and that it was managing the risk, to enable the contract to run through to its end. HMRC added that it had received a commitment from Mapeley to see the contract through to its end in March 2021.68

29.HMRC told us it had confidence in the business continuity arrangements it had made, should Mapeley default on the STEPS contract. It considered these arrangements should enable it to continue using the offices covered by the contract. HMRC said that it had also made, and tested, business back-up plans with suppliers and contractors to service the buildings.69

30.HMRC said that over the life of the STEPS contract since 2001, it did not have sufficient property expertise. As a consequence, it had recently recruited experienced property professionals to prepare for the end of the STEPS contract in 2021 and ensure it had good in-house expertise.70 It considered that more conventional measures to manage its estate, for example through more normal leases and facilities management contracts instead of the nature of its large private finance initiative deal with Mapeley, would be intrinsically lower risk.71

31.The Government Property Unit said it had no plans to enter into a large private finance initiatives, like the STEPS contract. The Government Property Unit emphasised that in future building contracts, it wanted to maintain its flexibility and to ensure that the buildings remained fit for purpose. It considered that entering into a large contract might not give it the flexibility it wanted.72

59 Committee of Public Accounts, PFI: The STEPS Deal, Twentieth Report of Session 2004–05, HC 553, June 2005; Committee of Public Accounts, HM Revenue & Customs’ estate private finance deal eight years on, Thirty Second Report of Session 2009–10, HC 312, April 2010

60 C&AG’s Report, para 2.2

64 Q 137, C&AG’s Report, para 2.10

25 April 2017