Press Notice No. 20 of Session 2004-05, dated 14 June 2005
TWENTIETH REPORT: PFI: THE STEPS DEAL (HC 553)
Mr Edward Leigh MP, Chairman of the Committee of Public Accounts in the previous Parliament, said today:
"In negotiating the STEPS deal, HM Customs & Excise and the Inland Revenue accepted by far the lowest price on the table. A potential saving of almost £500 million was clearly attractive but there were significant weaknesses in the way the deal was negotiated which should be avoided in future PFI arrangements.
"The low price offered by Mapeley reflected, in part, its desire to get a foothold in the property management business. It left little room for manoeuvre if the company's fortunes took a turn for the worse, which came to pass. Faced with Mapeley's financial difficulties in 2001-02, the first year of the contract, the Departments found they had not looked at possible termination scenarios or developed a fall-back position to ensure business continuity.
"Matters are still not straight. Four years into the contract there remain outstanding issues and the performance measurement system, vital to any PFI arrangement, has yet to be fully implemented.
"Much has been made of Mapeley's off-shore status and the implications in terms of tax avoidance. In this case, the savings represented by the Mapeley bid far outweigh the potential tax loss. Nonetheless, it is incredible that the Inland Revenue, of all Departments, did not during contract negotiations find out more about Mapeley's structure. Departments entering PFI arrangements need to know more about whom they're doing business with and ensure that potential losses to the Treasury are taken into account when assessing overall costs and benefits."
Mr Leigh was speaking as the Committee published its 20th Report of the 2004-05 Session, which examined the STEPS estate management PFI deal entered into by HM Customs & Excise and the Inland Revenue.
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.
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.
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