It is almost a year since the implementation of Project Prime – the largest property-based PFI thus far – and, with the Inland Revenue and Customs & Excise about to embark on a similar process themselves, the question must be whether any private sector companies will adopt a similar regime for the provision of their property needs.
The Department of Social Security (DSS) disposed of all liabilities in respect of all its properties and abandoned the complex web of contracts it had previously had for the provision of its facilities management (FM) services.
Instead, it entered into a single contract with one service provider, Trillium, under which the DSS was given the right to occupy fully-serviced accommodation on a basis which allows it a considerable measure of flexibility in vacating properties surplus to its needs – including part of its estate which was vacant on day one of the contract.
It only has dealings with one supplier and only pays according to the quality of service provided, measured through an objective performance-measurement regime.
Prime stemmed from someone thinking the unthinkable: why is the DSS involved in the property business? This is a question that many could ask of their own businesses.
The reasons for the DSS pursuing Prime have direct resonance with issues facing many large businesses in the UK and elsewhere. The concept and the rationale behind it are certainly exportable:
l The business has to maintain a large management function to deal with the day-to-day management of both its property portfolio and FM services. These areas divert resources from the main focus of the business and consume significant resources in a largely uncontrolled fashion;
l The needs of the business change over time, altering the requirement for the amount and types of property needed. Landlords are usually inflexible with their demands for a long-term full repairing and insuring (FRI) lease;
l If property is held freehold, carrying it on the balance sheet consumes capital and it is not always possible to dispose of it as quickly as would be liked;
l There is confusion among myriad contracts as to who to call when there is a problem with the provision of services and negotiations will have to be carried out with a large number of landlords;
l Procuring new property involves a significant diversion of resources to ensure it meets requirements.
A Prime-style solution for the private sector would provide the solutions to these issues:
l A business could dispose of all obligations relating to its existing property, including property surplus to requirements. Freeholds could be transferred and leaseholds dealt with under the same 'virtual assignment' structure we invented for Prime.
This would dispose of all liabilities for property, including property surplus to requirements, freeing the business from the need for capital for property.
The properties could be paid for either by a cash 'fee' as an entry price to the contract or by reductions in the cost of services throughout the contract, as the need for the service provider to borrow to fund the cash fee disappears;
l Internal property and FM management organisations could be replaced by a slimmed-down contract management function. The service provider, an organisation specialised in the provision of serviced accommodation, would take over all these responsibilities;
l Instead of suffering rent reviews that moved with the market, prices could be linked to standard indices reflecting the costs incurred. Incentivisation for good levels of service and savings and penalties for failures to perform to an acceptable level could be introduced;
l A single point of contact would replace earlier confusion, possibly, as in Prime, using a single help desk to meet all property and FM services queries or complaints, with help desk operatives empowered and with budgets to deal with issues themselves rather than 'passing the buck' to someone else;
l Flexibility in vacation of property can be achieved, although clearly the greater the flexibility, the greater the cost;
l New property being procured and handed over on a turn-key basis in accordance with specific output requirements.
By an application of PFI principles, it should be possible for businesses with large property holdings incidental to their core businesses – banks, insurance companies, large trading houses, for example – to achieve significant savings, better services and a more efficient organisation.
Certainly there are costs – mostly at the front end – but these need to be viewed in the context of costs that would have been paid over the period of the proposed contract in connection with properties and service contracts.
Also, freed of the constraints of the EC procurement regime that afflicts government, it should be possible to devise a regime to ensure that the market is tested for the best price without incurring the massive costs that can afflict the PFI.
It is possible to split requirements into a number of contracts or to put a limited number of properties onto the market at a time.
However, this is likely to compromise the benefits to be achieved and, if an efficient performance-monitoring regime is put into place, then concerns about being too reliant on one organisation can be countered.
An increasing number of organisations are now setting up an FM capability, recognising that there is a distinct mood of change and that they must be ready.
The scheme outlined would threaten the FRI lease and existing property companies will need to adapt.
At present, no large UK private sector company has entered into the Prime-type contract, although a number have contemplated it.
However, it cannot be long before someone tries this solution and, once it has been shown to be successful, others are bound to follow.
David Lane is a partner at Lovell White
Durrant and acted for the DSS in Project Prime.