The New Labour government, keen to establish a market in the sale and lease-back of government buildings, announced a A$9 billion (£3.6 billion) private finance initiative deal with Mapeley Group in March 2001. It included 700 buildings of the Inland Revenue, HM Customs and Excise, and the Valuation Office Agency in the Strategic Transfer of the Estate to the Private Sector (STEPS) project. It was similar to an earlier private finance initiative project by the Department of Work and Pensions for the Newcastle Estate. Under sale and lease-back, the state sells buildings that are maintained by private sector property management companies for 21 years, who then find other tenants/uses.
Mapeley immediately transferred the freehold and long-lease properties to Bermuda. Mapeley is owned by Fortress Investment Group, USA, Soros Real Estate, Netherlands and Delancy East Ltd, UK, but it is now based offshore in Bermuda. The Strategic Transfer of the Estate to the Private Sector is expected to save A$860m (£344m) over the 20-year contract period. However, Mapeley estimated that it would have had to increase its bid price by A$137.5 (£55m) to bring the STEPS properties onshore: in other words, the Inland Revenue lost A$137.5m (£55m) income because of the deal. But the shareholders of Mapeley are non-UK resident and do not have to pay UK capital gains if they sell their shareholdings – this is a potential additional loss of income for Inland Revenue. Inland Revenue knew about the offshore plan during preferred bidder negotiations, but HM Customs and Excise were not informed until after the contract was signed!
Seven months into the contract, Mapeley demanded more money based on errors in pricing its bid and the level of contract variations, and claimed an annual shortfall of A$67.5m (£27m). Mapeley’s bid was some A$1,250m (£500m) lower than two other bids. The Departments refused to pay and the firm’s shareholders injected additional finance. Four years into the contract the performance management system had still not been agreed. By April 2004 the Departments had spent an additional A$32.5m (£13m) on consultants for the STEPS project.
Yet the National Audit Office made no comment on the offshore aspects of the deal except that the A$137.5m (£55m) was “not material”. However, they did recognise that the STEPS business model “has a high degree of fixed costs and is therefore very sensitive to any future shortfalls in forecast income”. Civil servants appearing before the Committee of Public Accounts could not give any assurances on whether the A$860m (£344m) savings will be achieved or not. Despite all the pitfalls with this project, the National Audit Office claimed that “STEPS had demonstrated a number of benefits both for departments and for bidders, for example, reduced costs and a more attractive portfolio of properties” (National Audit Office, 2004). The evidence shows only that it may have reduced costs in the first four years of a twenty-year contract. The only certainty is that the private sector gets an ‘attractive portfolio of properties’ from such deals.
National Audit Office (2004) PFI: The STEPS Deal, HC 530, Session 2003-04, May, London.