Provision of South East London services accommodation under a private finance initiative - update

Report: 12
Date: 6 December 2001
By: Commissioner

Summary

This report is for information, and confirms details of the South East London Private Finance Initiative (SEL PFI) contract completed on 26 October 2001.

A. Recommendations

To note the SEL PFI contract has been signed for three new Borough Police Stations and two Sector Bases in South East London, together with related Support Services.

B. Supporting information

1. The SEL PFI contract with Equion was formally signed by the Clerk to the MPA, with financial close on Friday 26 October 2001.

2. On 20 February 2001 the MPA Finance, Planning and Best Value Committee (FPBV) gave their approval to conclude negotiations and award a contract for the SEL PFI. This resolution was endorsed by the full Authority at its meeting on 20 March 2001. The approval was sought in advance of the final negotiations as a consequence of concerns having been expressed by MPA members about the impact of PFI with regard to outsourced staff and services.

3. The approval was based on an Equion offer, dated 8 February 2001, of £11.8 million per annum (at April 1999 prices), that was valid to 1 March 2001. This price was reaffirmed on 31 August 2001 and was fixed to 12 October 2001.

4. On 9 October 2001, towards the end of the final negotiations, but prior to the contract award, a paper was presented to the MPA Co-ordination and Urgency Committee detailing the results of the final negotiations. The paper indicated areas where the contract details had varied from those anticipated when committee approval was received. The paper concluded that:

• for Equion to maintain the annual unitary charge reported to Committee, the contract needed to be concluded by 12 October 2001.
• in terms of payment, performance and residual value, final arrangements were considered to improve the position in favour of the MPA generally, with some items necessary to satisfy both the MPA Auditor and the conditions agreed by Committee.
• the fundamentals of the outline property structure described to Committee remained unchanged but commercial pressures had resulted in Equion insisting on an improvement in the marketability of the 125-year head lease. In the absence of early termination, the ability to sell the head lease appeared not to have any significant impact on the MPA, until the 25 year contract concession period had expired and then only in respect of the lessee. However, it enabled Equion to maintain the current price as approved by Committee.

5. The Committee noted the intention to seek to conclude negotiations on all outstanding issues to enable the contract to be signed on 12 October 2001.

6. There were a number of conditions that needed to be satisfied prior to financial close and concluding these proved difficult. Finalising the contract was delayed, with the MPS and its consultants engaged in detailed and lengthy negotiations. Partly in recognition that much of the reason for this delay was beyond the control of the MPS, Equion extended the validity period of their price, maintaining the unitary charge originally reported to Committee.

7. This is the second PFI contract signed on behalf of the MPA and MPS. Construction work is due to commence towards the end of November 2001, with construction completion planned at Deptford for November 2002; Sutton Phase 1 in June 2003; both Bromley and Lewisham in August 2003; and Sutton Phase 2 in January 2004. Payments will commence upon occupation of each building with relevant Support Services outside these buildings transferring in tandem with the transfer of Support Services at Sutton Phase 2. Generally, Support Services at the new stations are phased in two months after they have been accepted, to facilitate a seamless transition.

Post-contract variations to PFI police stations

8. Both PFI contracts allow for variations, which will be paid for by way of a lump sum payment or an adjustment to the unitary charge. A number of changes (omissions/additions) to the scheme designs will need to take place due to the MPS organisation moving forward with standards of accommodation (e.g. design of locker rooms and front offices), and these will be reported to Committee in due course.

C. Financial implications

The prevailing swap interest rate agreed for inclusion in the contract was 5.3025%. This is below the rate of 5.76% identified when the MPA gave approval to conclude negotiations and award a contract.

The annual fixed payments have therefore reduced to £11.594 million per annum from £11.8 million per annum (at April 1999 prices); to this must be added consumables, such as prisoner feeding. In addition the MPS will be directly responsible for the payment of rates and energy, leading to a total project cost of some £13.5 million per annum at April 1999 prices (excluding any consumables). There will also be one-off costs arising from planning obligations. The costs fall within those stated in the report to the MPA of 20 March 2001.

KPMG (on behalf of District Auditor) has advised that the contract should result in the costs of the project being "off balance sheet" and, therefore, not count against the MPA's capital allocation. The Inland Revenue has confirmed that Stamp Duty in respect of the property transaction has been assessed at £75.

In any contract, liability to Stamp Duty is assessed on the basis of the consideration paid for the property element of the transaction. In the case of South East London PFI Inland Revenue has confirmed "That only nominal amounts of duty will be payable in this matter. The Land Agreement will be regarded as an Agreement for lease for the Head Lease, and the various Underleases to be granted. The Land Agreement will be liable to fixed duty of £5 for each lease that it acts as an Agreement for. The leases granted pursuant to the Agreement will not be liable to duty but will be denoted with the duty shown on the Agreement". The total cost is anticipated to be £75.

D. Background papers

Co-ordination and Urgency Committee – 9 October 2001 Paper: Provision of South East London Services & Accommodation under a Private Finance Initiative: Review of Progress to Award of Contract.

E. Contact details

Report author: Trevor Lawrence, Director of Property Services.

For information contact:

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

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