Provision of South East London services and accommodation under Private Finance Initiative

Report: 8
Date: 8 March 2001
By: Commissioner and Treasurer

Summary

This report recommends the award of a contract for the provision of new operational buildings and associated services in South East London.

A. Recommendations

Subject to the cost increase being no greater than indicated and an audit opinion that the underlying assets will not appear on the MPA balance sheet, the Authority is invited to:

1. award a contract for the design, build, finance and operation of the South East London PFI project to a single purpose company (Support Services South East London Ltd) ultimately wholly owned by Equion plc (formerly known as Laing Hyder plc) based on the offer dated 8 February 2001; (the offer price is contained in the exempt report on the confidential part of the agenda);
2. to note the proposal that capital receipts from the sale of buildings should be retained for general funding of the capital programme and not for the South East London PFI Scheme;
3. to sanction an increase in budget provision of up to £9.66 million per annum dependent on the availability if PFI credits;
4. to authorise the granting of 125 year leases for the sites owned by the MPA at Bromley, Lewisham, Sutton and Deptford (as part of the South East London PFI Project) to a single purpose company (Support Services South East London Limited) ultimately wholly owned by Equion plc (formerly known as Laing Hyder plc);
5. to agree to the MPA entering into a Funders' Direct Agreement with the financiers (Dresdner Bank) providing the finance for the design and construction of the South East London PFI Project;
6. to agree to the MPA entering into a Certificate in favour of the Project Company under the Local Government (Contracts) Act 1997 pursuant to which the Authority confirms that the transaction effected by the Contract and the Lenders' Direct Agreement is within the Authority's powers;
7. to note that the documentation referred to above, and such other documentation as the Authority may need to enter into in connection with the said transaction, needs to be in such form as may be approved by the Commissioner or an appropriate officer on behalf of the Authority, including provisions as to corrupt practices which whilst not consistent with Regulation 14 of the Authority's Contract Regulations, are consistent with the Treasury Taskforce Guidance relating to PFI projects;
8. to note the estimate of pensions contributions of between £0.7 million to £2.0 million and potential liability in respect of redundancies;
9. to note that MPA costs are subject to:
   • adjustments in respect of costs incurred in obtaining the necessary easements, party wall awards, access rights from adjoining landowners and statutory undertakers, movement of services (gas, water, electricity, sewerage), section 106 agreement at Lewisham (£303,000);
   • direct costs relating to rates, energy and communications;
   • monthly contract payments commence in 2003/4 (planned acceptance date) and continue for 25 years after which the current contract expires;
   • contract payments are subject to adjustment in respect of:
   • market interest rates prevailing at Financial Close;
   • benchmarking and market testing of facility management services (eg: cleaning, catering);
   • adjustments in respect of poor performance or unavailability;
   • inflation (RPI) adjustment to half of Annual Unitary Charge and a fixed escalator of 2½ per cent on the balance.

B. Supporting information

Summary of proposals

1. The Commissioner provided a detailed report to the Finance Planning and Best Value Committee of which the following paragraphs are a summary.

• Negotiations on a PFI contract for the provision of new operational buildings at Bromley, Lewisham, Sutton and sector bases for Deptford and Brockley have now been concluded. Planning consent has been secured for all sites. The proposed contract is for the design, build, fund and operation of the police stations and includes catering and a limited range of 'Police Support Services'.
• The contract forms part of the MPA Estate Strategy for the modernisation of the estate and provides an opportunity for the rationalisation of a number of old and less efficient buildings. The designs offer modern accommodation and suitable utilisation. The contract represents value for money, offers a reduction in annual costs in some areas and further efficiencies both in staff and other costs. It also potentially releases operational officers for other frontline duties. The proposed property structure offers considerable flexibility both during and at the end of the 25-year contract.
• Since 1996, on eight separate occasions authority has been given by MPS senior management to various aspects of this PFI project culminating in November 1999 with approval from both the MPS Policy Board and the MPC to negotiate with, and award a contract to, the preferred bidder now called Equion. At that time it was recognised the project would require a further £6 million (approx.) per annum and the quoted price may be subject to further adjustments.
• This estate rationalisation will require an increase in the current budget provision and the exact amount is dependent on current price negotiations and any capital receipts that the MPA is prepared to contribute to the scheme. At present an order of costs estimate for the purposes of decisions is that the proposed contract may increase current budget provision by some £9.66 million per annum at December 2000 prices. In addition the MPA will need to make a one off pension contribution of between £0.7 million and £2.0 million (maximum potential) in respect of the staff transferred.
• The proposed PFI contract offers benefits in terms of: 3 new police stations; 2 two sector bases; accommodation rationalisation for Serious Crime Group and Mounted Branch; occupation flexibility during and at the end of the 25 year contract; disposal of 14 less efficient properties; value for money when compared to the public sector comparator; a reduction in annual costs for the (limited) range of police support services with an assured level of staffing together with the release of operational officers currently employed on these duties; a contract designed to motivate the PFI supplier and significant transfer of risk currently with the MPS.
• The consequences for not proceeding are likely to result in a significant claim, an increase in capital allocation needed to replace old buildings, an immediate revenue increase for maintenance, and adversely impact on the reputation of the MPA possibly effecting future privately funded projects.
• Authority is requested to award a contract to Equion subject to the cost increase being no greater than indicated and an audit opinion that the underlying assets will not appear on the MPS balance sheet. Authority is also sought to rescind an earlier decision to contribute £3.3 million from the sale of buildings and to use the capital receipts in support of the capital programme and not for the South East London PFI Scheme.

2. The Treasurer presented a report to the Finance Planning and Best Value Committee on the financial implications of the South East London PFI scheme, having regard particularly to the effect of the Authority's recent decision not to pursue C3i as a PFI scheme.

3. Factors which needed to be taken into account in considering the affordability of the scheme were as follows:

• since C3i is no longer being pursued as a PFI project, the essential replacement of the current command and control systems will inevitably consume available capital resources to the extent that schemes to modernise the operational estate, such as the S.E. London proposals, could not be financed through a conventional capital route;
• 'PFI credits' may be available through the Home Office to offset the revenue consequences of the proposed contract under consideration. Prior to the establishment of the MPA a decision had been taken to limit application for 'PFI credits' to C3i. Whilst such credits are not transferable, the Home Office has been approached in regard of 'PFI credits' for this project now that the credits for C3i are no longer applicable. 'PFI credits' provide a stream of revenue over the life of the contract through increased SSA, estimated in this case to be an average of £5m per year. This would reduce the affordability gap to an average of £4.66m per year. There is no guarantee that PFI credits will be approved;
• significant resources would be required to upgrade the existing premises that are due to be replaced as a result of this contract should it not proceed;
• withdrawal is likely to result in a claim from the preferred supplier of several million pounds for abortive bid costs;
• the additional budgetary provision is not required until 2003/04. This allows a further two years to bridge the affordability gap, offset by the revenue from PFI credits should they be awarded. The MPA and the MPS are committed both through Best Value, given its statutory duty, and through the efficiency and effectiveness review to identify opportunities for the more effective use of resources. In addition, the aim of the efficiency and effectiveness review is to focus opportunities for the more effective allocation of resources to support direct service provision. Adequate facilities are an important element of this.

4. Ideally the affordability of this project should be considered in the context of the Authority's medium term financial position. However initial medium term projections will not be available until the next meeting of the Finance Planning and Best Value Committee.

5. On balance, if the project is regarded as of high priority, if the Authority is satisfied as to the overall structure of the scheme, and if PFI credits are available to limit the additional revenue costs it should be possible to manage the costs within the total resources available in three years time.

6. The definition of the project as PFI with its consequent accounting treatment off balance sheet and the potential for PFI credits is dependent on the opinion of the Authority's external auditor, District Audit. This opinion will not be formally given until the completion of negotiations when the contract has been agreed. However, we are given to understand that the current proposals meet the criteria for definition as PFI which will allow treatment off balance sheet.

7. This is the third PFI project that members have considered in a short space of time, C3i and the Firearms Training Centre being the other two. All have raised similar issues, including that of affordability. Given the outlook in respect of available capital resources, PFI must remain an option for future procurements.

8. However, it is now appropriate for the Authority, in collaboration with the MPS, to review and analyse the lessons that can be learned from these three projects before any further PFI procurement is commenced. This review should include dialogue with other authorities that have successfully completed PFI procurements.

Finance, Planning and Best Value Committee

9. The full reports on these proposals were considered by the FPBV Committee on 20 February 2001. All Members of the Authority have previously received these reports and, where not exempt, they have been publicly available on the agenda for that committee. In addition, a briefing session to which all Members were invited, and which addressed the proposals in detail, was held prior to the FPBV Committee.

10. Detailed consideration of the proposals is the responsibility of that Committee, within its terms of reference. However, given the importance of this project it was felt appropriate for the final decisions to be taken by the full Authority.

11. In considering this issue the FPBV Committee asked for further details on the human resources issues to be included in this report to the Authority, and these are attached as Appendix 1.

12. The FPBV Committee agreed to support the recommendations which are detailed above. In doing so, it recognised the importance of this project and the consequences of not proceeding.

C. Financial implications

There are no direct financial implications in the current year. Additional budget provision of up to £9.66m will be required from 2003/04 for 25 years, dependent on the availability of PFI credits.

D. Background papers

Further information is available from F Allum.

E. Contact details

The author of this report are Trevor Lawrence, MPS and Peter Martin, MPA.

For information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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