Property & Asset Rationalisation - Legal Challenges and Opportunities for Smarter Government and Operational Efficiency

In thisthird article looking at the legal challenges facing public sector organisations to deliver Smarter Government and Operational Efficiency, we consider property. In these times of economic efficiencies, there is one very clear message coming through from Government: “Property is important!”

11/01/2010

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Mark Calverley

Partner

In this third article looking at the legal challenges facing public sector organisations to deliver Smarter Government and Operational Efficiency, we consider property.

In these times of economic efficiencies, there is one very clear message coming through from Government: “Property is important!”

Why? Because the value and cost of running the public sector estate produce eye watering numbers. So any savings in relation to the public sector estate will have a significant effect on the Government’s bottom line.

This Alert looks at the legal issues that arise when public sector organisations want to make savings and what Bevan Brittan can do to help.

The value and cost of running the public sector estate

The book value of the public sector estate is estimated at £370 billion. Of this £240 billion relates to Local Government property (including Council Housing) and £130 billion to central Government and public corporations. Of this £130 billion the largest proportion relates to the NHS estate, worth £35 billion, and the Defence estate worth £18 billion. Although some of these assets have a higher market value than book value this is not the case for hospitals, courts etc. and therefore the market value of the public sector estate is estimated at £100 billion (excluding Local Government housing).

The public sector estate has estimated annual running costs of more than £25 billion, equivalent to five per cent of total public sector current expenditure.  This includes the cost of running the freehold estate as well as leasehold and Private Finance Initiative (PFI) property.

As to how the bottom line might be affected by efficiency savings, compared to an estimated 2007-08 running costs of approximately £25 billion, the Government estimates that there could be savings of up to £1.5 billion a year plus a further £0.5 billion from collaborative procurement of FM by 2013-14. This could rise to a total of around £5 billion by the end of a 10 year period (excluding energy efficiency savings).

In addition there could be proceeds from sales in the region of £20 billion (excluding council housing) over an initial 10 year period.

How can efficiencies and savings be made?

Clients are generally adopting a three step process to delivering cost savings and efficiencies to the public sector estate.

First: know your estate. Secondly, review your options. Lastly, implement your plan.

Know your estate

One of the principles in the Government’s 2009 Report in the Operational Efficiency Programme is is “Know your property”. Organisations should – but often currently do not – have up to date and relevant data on their estate. Indeed the estimates given above for the value of the Public Sector estate are acknowledged as best guesses. Accordingly there should be good data and guidance to allow the costs and use of property to be quantified and understood, to ensure that property use is in accordance with best practice standards.

We can help organisations by providing an electronic Estates Terrier to collate information on their estate in an easy to find internet based location, with all the necessary legal information relating to title, plans, tenure, and for leasehold interests details of break clauses and rent reviews. Importantly we can add a reminder for when key dates are due so that you can plan ahead to dispose of assets where they may not be needed in the future.

Review your options

A public sector organisation is likely to have one of three options: dispose; dispose or dispose!

It’s how a disposal programme is going to be structured that is raising a number of legal questions for our clients.  The key ones are as follows:-

Do we have the vires to dispose?

This is not always a straightforward question. NHS organisations and Local Authorities are used to disposing of surplus assets although even here there are issues about the price at which surplus assets can be disposed of and the extent to which they need to be fully marketed.

Local Authorities can utilise their Section 123 powers in certain circumstances but Estatecode suggests that NHS organisations must sell at full market value. In fact we are dealing with a number of cases where the overriding requirement is one of value for money rather than strictly a market value test and this could help NHS organisations who may have impairment problems if the asset’s book value is lower than its market value.

The disposal of operational assets (with a simultaneous lease back to the existing occupier) raises more difficult legal issues about the vires of public sector bodies to dispose of operational assets that are currently being used in connection with their functions. We are working on a number of cases where public sector bodies are looking at operational asset disposals and can guide you through the legal minefield.

How do we engage the private sector?

Many public sector bodies have very well run estates departments with excellent skills and resources. But this is not the case for all public sector organisations and a number of Chief Executives are looking at their estate in the light of the Operational Efficiency Programme (and statistics suggesting that the public sector estate is up to 30% less well utilised than the private sector estate) and asking how existing resources can be supplemented by private sector asset management, estate management, and property development skills.

One of the consequential legal issues we are dealing with relates to whether a public sector organisation is in danger of unlawfully delegating its functions by passing ownership and/or responsibility for its estate to the private sector.  We are dealing with a number of such cases and can pass the benefit of our knowledge and experience to you.

Can we set up a new Propco?

Another area where our advice is being sought is whether – if the public sector has decided that it wants to engage the private sector – this should be done through a contractual structure or by the establishment of a Joint Venture Company (such as a LABV or a Strategic Estates Partnership) where the public sector organisation takes an equity stake in the Joint Venture Company. This raises issues about the vires of the public sector taking a shareholding and a myriad of other legal issues which we can help you with.

Doesn’t it make sense for a joint strategy with our other local public sector organisations?

This is another area where our clients are seeking our advice as many can see the benefits of a combined approach to an estates strategy which crosses NHS organisational boundaries (and instead links in to a Local Authority boundary) or to a Local Authority approach which crosses a number of Local Authority boundaries. The Total Place initiative is an example of this.

One of the problems where public sector organisations work together is that their powers and functions are sometimes not completely consistent and there is a need for advice on how to set up a structure which allows the governance arrangements of the participants to work in harmony. We have a lot of experience of dealing with this type of issue and can pinpoint the most effective legal structure for you quickly and efficiently.

Can we use disposal proceeds for capital projects?

We may be entering an era when the buzzword is “efficiency” and not “new build”. However, there will still be a need for capital projects even if these may be more likely to be refurbishments of existing estate rather than expensive new construction projects. But even if the need for capital is reduced it may still exceed what is available. For this reason many public sector organisations are looking to a disposal programme not only to reduce operational running costs but also to deliver a capital receipt that can be used to improve the state of retained assets.

The problem is that it is not always as easy as it might appear for public sector organisations simply to use disposal proceeds and often there is a requirement for in-year expenditure. We can discuss these issues with you to ensure that your estates strategy delivers not just a revenue but also a capital solution.

Implement your plan

We are vastly experienced in implementing estates related projects for Local Authority and NHS organisations alike. When you have decided on the right structure to deliver a more efficient estate we can work with you on how the project will be procured; finalising the commercial deal and reaching contractual close.

Summary

Whether your organisation is planning an innovative joint venture arrangement with the private sector or simply a phased disposal of some surplus assets, the one thing that is certain is that “Do nothing” is no longer an option when it comes to the public sector estate.

We have not just the broad experience of issues affecting the public sector that you would expect from Bevan Brittan but a detailed knowledge of the specific legal issues that will affect you and solutions to them.

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