BBC Property: LST partnership arrangementsdownloads.bbc.co.uk/bbctrust/assets/files/pdf/our_work/govs/VFM_L... · BBC Property: LST partnership arrangements BBC response to the Ernst

British Broadcasting CorporationBroadcasting HouseLondon W1A 1AA

BBC Property:LST partnership arrangements Ernst & Young review presented to the BBC Governors’ Audit Committee,May 2005, and a response to the review from the BBC

This report is available online atbbcgovernors.co.uk

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At the request of the BBC Governors’Audit Committee, the BBC’s propertypartnership with Land Securities Trillium(LST) has been subject to an independentvalue for money study to assess whether it is achieving best value for licence feepayers and making the optimal contributionto the organisation’s overall effectiveness.

This study is part of a programme ofstudies assessing value for money acrossthe BBC. A key constituent of the overallprogramme is the appointment of externalagencies to undertake independentreviews of selected topics.

Ernst & Young (E&Y) has evaluated thepartnership arrangements between theBBC and LST, which involved propertytransfer, construction and financing of newbuildings at White City in London,construction management (CM) servicesacross the UK and facilities management(FM) in London and Scotland. It should benoted that this review coincided with aninternal review, instigated by BBC Property,which has resulted in significant re-engineering of the partnership. E&Y delivered a follow-up review of the keychanges in the partnership since the fieldwork on their original review.

The decision to enter into a long-termproperty partnership arrangement wascentral to the BBC’s transformationalLondon property strategy agreed by theBoard in 2000 and was intended to enable the BBC to achieve best value in delivering the strategy, including a substantial development and refurbishment programme.

The partnership with LST approved by the Board in 2001 offered the BBC an innovative approach to realising its property strategy.The partnershipprovided access to third-party finance,private sector skills and expertise in themanagement of substantial constructionprojects. It also provided cost certainty and

savings over the existing in-housearrangements, together with animprovement in the quality of facilitiesmanagement and constructionmanagement services.

The Board welcomes the report’s findingthat the partnership offered the BBC aninnovative solution to realising its propertyvision. Upon entering into the partnership,the Governors recognised that theproposal represented a radical departurefrom the BBC’s previous approach toproperty management.

The partnership has delivered a number ofmajor benefits to the BBC and the coreservices provided have delivered value formoney.The Governors are pleased thatE&Y’s review has confirmed this.TheBoard recognises, however, that the reportis critical of the state of the partnership atthe time of the review (November 2004)and accepts that the vision established atthe outset has not been fully realised.

At the time of E&Y’s original review therelationship between the BBC and LSThad not developed beyond the originalscope. In May, the Board of Governorsapproved significant change to thepartnership arrangements, which will seethe BBC benefit from the opportunity tore-tender facilities management provision,whilst maintaining the expertise of LST in the construction of its major buildingprojects.The new arrangements willprovide greater value for money forlicence fee payers.

The Board welcomes the follow-upreview’s commendation of the settlementwith LST which locks in savings over thefour years to March 2006, secures furtherbenefits in reduced rentals from therestructuring of the White City leases andavoids a substantial penalty payment arisingfrom the agreed termination of the FMand CM elements of the partnership with LST.

The report notes that the settlement with LST has secured for the BBC anopportunity to negotiate a new deal withnew service providers.This will allow theBBC to restructure the provision of its FMand CM services, thereby addressing theissues raised in E&Y’s original report, andto build on the value generated from theprevious arrangements.

The attached response from BBCmanagement outlines what actions arebeing taken to address the report’sconclusions. It has been considered andapproved by the Board of Governors.

Board of GovernorsJune 2005

BBC Property:LST partnership arrangementsBBC response to the Ernst & Young Value for Money study and follow-up review of recent

developments with the partnership

Response to the report’s key findings

Prior to the partnership with LST, followinga prolonged period of underinvestment,the BBC estate was in poor condition, notstrategically located and unsuitable tosupport the core business into the future.Facilities Management (FM) services werewidely regarded as poor quality andunreliable.Working in conjunction withRothchilds, DTZ and Partnerships UK over a period of three years, the BBCdeveloped and implemented plans toprocure a private sector partner withwhich to develop its estate into onesuitable to support the long-term futureneeds of the business.

In evaluating the partnership, E&Yconcludes that the partnership offered theBBC an innovative solution to realising itsproperty visions, that the arrangements todate have delivered a number of majorbenefits and that the core servicesprovided by the partnership have materiallyimproved and deliver value for money.

The original E&Y report also highlightedthat there were some aspects of the dealwhich, if unaddressed, could have erodedsome of the financial benefit of the originalpartnership arrangement. Many of thesepoints had already been identified by BBC Property through a partnershipreview which was already under waywithin the BBC.

Subsequent to E&Y’s fieldwork on theoriginal report, all of the points they raisedhave been resolved in negotiation withLST and, following successful exploitationof the bond markets, the partnership hasbeen refocused only on delivery of itsmajor construction projects. All otherservices are now being subject to a newEU procurement exercise and LST will notbe bidding as their business model relieson total property outsourcing.

E&Y’s follow-up review considers the keychanges in the partnership since its originalreview and makes some valuablerecommendations for a managed transitionto new service providers.

The E&Y reports have highlighted thefollowing key findings:

•The original study acknowledges thatthe partnership has delivered a numberof major benefits. In particular, theWhite City development was deliveredahead of time and on budget.Thisincluded a substantial element of costcertainty and risk transfer for the BBC.

• In its original report, E&Y concludedthat the business case on which LSTwas appointed offered significantfinancial benefits, with the overall dealbeing procured following a competitive,market-tested tender process.Therewere, however, assumptions madewithin the original business case whichcould have eroded some of thefinancial benefit of the originalpartnership arrangement. In theirfollow-up review, E&Y noted thesettlement of the floor areas disputewith LST, notwithstanding which thepartnership will have saved the BBC£33million over previous estimates ofin-house delivery for the period toMarch 2006.The report also notes “animpressive outcome” for the BBC insecuring an exit from the original dealwith LST while avoiding the substantialtermination penalty payment under theoriginal partnership agreement.

•The follow-up review acknowledgesthat the restructuring of the White Cityleases has provided the BBC withfurther NPV benefit of £63million fromthis deal, due to reduced rentals.

•E&Y has recognised that the coreservices provided by the partnership –facilities management and construction

management – represent reasonablevalue for money and that benchmarksappear broadly in line with marketnorms.The report notes that a keychallenge for the BBC will be tomaintain or improve on this value inany new deal.The BBC has targetedsavings in the re-procurement of FMand CM services which will contributeto BBC Property’s value for moneytarget of £42million (by 2008).

•The study concludes that because thepartnership has not expanded asenvisaged at the outset of the deal, themaximum possible value is not beingobtained.Throughout the life of thecontract to date, the BBC hasconsidered a number of plannedservice expansion areas – such asfurther lifecycle risk transfer, moreproperty ownership, and other services.Expansion of the deal has only takenplace, however, where the delivery ofthat service can be shown to delivereven greater value for money to theBBC. In most cases this has not beenpossible. Consequently the BBC hasrestricted the scope of the partnershipto the original contract.

•Overall, the original study recognisesthat the partnership needed to changein order to deliver optimum value tothe BBC during the remaining term ofthe contract.The restructuring of thepartnership allows the BBC to bank thesavings to date and search for more vianew FM-and CM-only contracts ofshorter duration.

•The partnership will now focus only on construction of the BBC’s majorbuilding projects.White City Phase 2 iscompleted and Pacific Quay in Glasgowand Broadcasting House in London arewell under way. Other service providerswill provide FM and CM services to theBBC from 2006 onwards.

BBC Property:LST partnership arrangementsBBC management response

Responding to therecommendations and conclusions

E&Y has made valuable observations andrecommendations within its originalreport. Some of these have beenaddressed through the re-engineering ofthe partnership and noted in E&Y’s follow-up review, and some will be addressedthrough the procurement of new FM andCM service providers.

•Whilst the partnership has delivered somemajor benefits to the BBC, fundamentalimprovements are required to obtain thefull benefits.

The BBC accepts E&Y’s findings thatthe partnership arrangements neededto change in order to obtain maximumvalue from the deal. Indeed, prior to theE&Y study, the key actions had alreadybeen initiated by the BBC’s internalproject (Project Prospect).The follow-up review by E&Y acknowledges thesignificant change to the partnershiparrangements since the fieldwork fortheir original report.

•Re-engineer the deal

As observed by E&Y in its original report,some aspects of the deal between LSTand the BBC required resolution so thatthe partnership would operate moreeffectively. Specifically:

- Settle all outstanding issues: The E&Yfollow-up review acknowledges thatkey disagreements between theparties have been resolved by anagreement signed in March 2005,and minor commercial issues will beresolved on termination.

- Agree lifecycle risk: The BBC will putin place, through a newprocurement, a self-delivered capitalplanning approach that will align withthe shorter-term service provider

arrangement.The report acknowledgesthat the BBC’s service requirementshave been substantially clarified.

- Establish effective performancemanagement provisions: Performancemanagement and penaltyarrangements were being renegotiated, but are not nowrequired, given the settlementagreement. LST has now deliveredsavings on some services and furthersavings have been targeted in the renegotiation of the originalpartnership deal.The E&Y follow-upreport acknowledges that theproposed performance managementsystem has been simplified, but thatit is difficult to reach a definitive view until new service providers arecontracted.The report recommendsan independent audit regime andthe BBC will include thisrequirement in its procurement of new service providers.

- Review partnership processes andcontrols: E&Y notes that keyprocesses and controls that impacton the effective management of thepartnership should be reviewed andimproved.This activity is now notnecessary for the partnership, butthe recommendations from the E&Y report will be built into therequirements in the procurement of new service providers.The reportnotes that securing this opportunity,at no cost to the BBC, is of majorbenefit, although inevitably not risk-free.

•Effective management

E&Y recommends that concurrent with a review of the deal, the BBC and LSTshould seek a number of people andprocess improvements:

- Create a BBC Property ‘Smart Client’unit: E&Y notes that BBC Propertyneeds to develop its own skills and

responsibilities. BBC Property has nowcompleted a restructuring exercisewhich has included extensive newrecruitment. All key roles andresponsibilities have been reassigned.

- Engage the BBC user/occupier : This will be a key action during the EUprocurement exercise to be carried out during the second half of 2005and first half of 2006.

- Enable the preparation of valuablemanagement information: E&Y notesthat BBC Property was alreadymaking progress in this area and therefocusing of the partnership withLST on major construction projectsonly means that the managementinformation will be specified by BBCProperty but actually provided bynew service partners.This will be afeature of the procurement exercise.

In the four years since the partnershipbegan, service quality has improvedmarkedly and the BBC has saved£33million.The partnership has built verysuccessfully the new BBC buildings atWhite City and work is under way on the major developments at Pacific Quay in Glasgow and Broadcasting House in London.

Overall, we are pleased with the successesthe partnership has delivered for the BBCto date, but the availability of low-costbond financing from third parties removedone of the main drivers for the overallpartnership approach. As the majorconstruction projects were specificallycovered by separate contracts with LST,the rest of the relationship amounted to a traditional outsourced FM and CMcontract. Such a narrow scope does not fitwith LST’s business model and the BBCbelieves it can achieve greater flexibilityand value for money for these serviceswith shorter contracts in the open market.We will continue to be in partnership with LST, but only in relation to majorbuilding projects.

E&Y’s follow-up report also details that theBBC is changing its service provider, butnotes that there are associated risks thatwill require a managed transition.

• The BBC must map out a strategy,milestone plan and control framework

The E&Y report recommends that a planbe put in place for the transition ofexisting arrangements that protects asmuch value from the existing deal aspossible, manages communications, identifiesthe future needs of the BBC, minimisesdisruption to business continuity andensures appropriate resource is in place to meet the workload needs of transition.

The BBC has been working withprofessional advisers as well as in-housespecialists in procurement, legal andcommunication, in developing its servicerequirements and plans for procurementof new service providers.

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MAY 2005

BBC PropertyValue for Money Study

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Contents

Section Page

A Moving to the future — May 2005 brief update i on the development with the BBC property Partnership

B Preface 1

Summary Background 2 Summary Conclusion 3 Key Findings 3 Recommendations 7

1 The Partnership offered the BBC an innovative 8 solution to realising its property vision

2 The Partnership has delivered a 12 number of major benefits

3 Assumptions were made within the original 16 business case upon which LST were appointed, which could erode some of the benefits of the deal and which are still to be fully quantified

4 The core services represent reasonable value 22 for money

5 Because the Partnership has not evolved as 24 planned, maximum value is not being obtained

6 The Partnership needs to change 30

Appendix 1 Scope and methodology 38

Appendix 2 Procurement process 40

Ernst & Young LLPMay 2005

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The Ernst & Young (E&Y) value for money report on the partnership arrangements with Land Securities Trillium (LST) was agreed in April 2005 based on the findings of field work concluded in November 2004.

The British Broadcasting Corporation (BBC) has clearly spent a considerable amount of time and effort since April 2004 reviewing how the original Partnership arrangements (The Partnership) with LST should be re-engineered. Significant change to the Partnership has occurred since the E&Y value for money study fieldwork concluded in November 2004. This update paper highlights these key changes and how they relate to the issues raised in our initial report. Detailed on pages 1 to 43. Our headline conclusions can be summarised as follows:

The exit of existing obligations is agreedThe BBC can exit from the original deal - The BBC has succeeded in delivering a termination to the existing Contract of service (“CoS”) arrangements and an opportunity to renegotiate. In doing so, the BBC has also avoided incurring a substantial penalty payment should termination arise, representing an impressive outcome to initial negotiations with LST.

Settlement of the floor areas disagreement - The BBC has settled the disagreement over floor areas, resulting in a payment of £16.2m to LST covering over four years of the contract to 31st March 2006. This settlement inevitably reduces the savings the BBC forecast at the outset of the Partnership. Nevertheless, taking this settlement into account, the BBC used the original bid model and associated assumptions and has calculated that the Partnership will have provided an NPV saving of £32.6m over the previous in-house delivery of services to March 2006.

Based on our previous work, it was clear that a settlement was required to enable the BBC to move forward in seeking to re-engineer the deal.

Restructuring of the financing of White City - Whilst not reviewed as part of this report, the refinancing of White City by LST with the BBC’s agreement is a significant change to occur since our report. The BBC has calculated that this provides them with a further NPV benefit of £63m for this element alone, with the BBC also re-acquiring its freehold interest in White City.

The BBC has secured an opportunity to negotiate a new dealAn opportunity to negotiate - The BBC and LST have agreed upon the “Settlement Agreement”. This document provides the BBC with an opportunity to undertake a full renegotiation of its service arrangements. The agreement provides that the BBC and LST, in the first instance, must use “reasonable endeavours” to reach a mutually acceptable new agreement. If this is not possible, either party can terminate the CoS on 31 March 2006.

The BBC has outlined its expectations of a new arrangement – A detailed Statement of Requirements (“SoR”) has been developed outlining how the BBC envisages a new service provider arrangement would work. LST has confirmed it has decided not to participate in the re-tender process given the proposed structure which is a pure service arrangement.

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Moving to the future — May 2005 brief update on the development with the BBC property Partnerships

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The BBC is changing its service provider but with associated risksThe BBC is beginning a process to procure an alternative service provider(s) –The BBC is planning to place an OJEU notice seeking bids from parties interested in providing the BBC with Facilities Management (“FM”) and other specialist services based on its SoR

The BBC is faced with challenges in procuring a revised service provision - The current situation represents both a significant opportunity and risk to the BBC. There will be challenges in the transitional stages of establishing a new deal with an alternative third party service provider(s) requiring careful management.

The BBC must achieve a managed transitionThe BBC must map out a strategy, milestone plan and control framework – At this important juncture in negotiations, we believe time spent by the BBC in the development of an overall strategy to procuring a new service provider arrangement will ultimately prove critical. Linked to this strategy, the BBC should also consider planning the milestones it is seeking to achieve over the next 12-18 months. These should include a detailed procurement plan and details of the planned transition from LST as the current service provider.

In tandem, the BBC should ensure that it has a control framework in place for measuring progress, providing the necessary assurance and transparency to BBC management over ongoing activities. We envisage this framework would link to overall BBC internal audit planning and assurance procedures.

A plan needs to be put in place for the transition of existing arrangements – The full impact of unwinding the current service provision arrangements needs to be fully understood and there are a number of important risks to be managed by the BBC. Outlined below are some of the challenges we believe the BBC faces in effectively managing these:

Protecting as much value from the existing deal as possible

Our previous study of the existing deal with LST contained a number of positives and the BBC was believed to be receiving reasonable value for money in a number of areas. A key challenge for the BBC will be

to maintain or improve upon the value of the existing Partnership in any new deal.

Controlling internal and external communications surrounding the deal

The Partnership, as a market leading arrangement, is high profile within the property industry. Combined with the BBC’s own high profile, the need to carefully manage messages to external media and also back to BBC Business Units is paramount.

Identifying the future needs of the BBC

The BBC business is going through significant organisational change concurrent with technological changes in the media industry. In agreeing a new property deal, the alignment of the BBC property strategy to overall corporate strategy is crucial. A successfully aligned new property deal should enable, rather than frustrate, future corporate change.

Minimise disruption to business continuity

Is a dynamic, 24/7 organisation, the BBC business has greater challenges than most in maintaining the continuity of its core (broadcast) operations. The effective transition of service provider and operational arrangements will be crucial to maintaining continuity.

Appropriate resourcing to meet the workload needs of transition

BBC Property is now a ‘thin client’ geared up to manage strategy, with delivery often outsourced to service providers, both operational and ‘professional’. The BBC may need some assistance during the transition.

1.0 IntroductionAs part of the series of reviews assessing value for money across the BBC, E&Y were commissioned to undertake a value for money study to examine the economy, efficiency and effectiveness of the BBC’s Partnership with LST. The fieldwork for this study was completed in November 2004 and was representative of the Partnership at that date.

Given the complex nature of the Partnership arrangements and the dynamic environment that the Partnership operates within, there has been a change in the overall relationship and commercial nature of the Partnership since our fieldwork was completed. These changes have been made in the spirit of improvement, providing a platform upon which to build a long term solution for the BBC. The nature of the BBC’s continued relationship with LST is dependent on the structure and form of a new deal.

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MO V I N G TO T H E F U T U R E — MAY 2005 B R I E F U P D AT E O N T H E D E V E L O P M E N T W I T H T H E BBC P R O P E RT Y PA RT N E R S H I P

In order to recognise the changes made to date and continuing efforts for improvement, the BBC engaged E&Y to undertake this brief review of the current status of the Partnership in the light of the findings contained in the value for money study.

The purpose of this review is to provide an independent view of current situation for the BBC Audit Committee meeting of May 27th 2005.

2.0 Scope and limitationsThis review is of limited scope and does not constitute a detailed update of the findings contained within the E&Y value for money study. The aim of the review is to provide the BBC with a view of the key changes, both achieved and being pursued, in the light of the issues raised in our initial report.

It is necessary to consider the findings contained in this report, in the context of the scope of work set out in our engagement letter dated 26th April 2005. The two week timescale agreed with the BBC to complete the review has meant our approach is focused on the headline changes, rather than a detailed analysis of the financial and operational aspects of current arrangements.

Our initial report made reference to ongoing issues that at the time were of a commercial nature and, as such, prevented us from comment or conclusion given their sensitivity during that period. Subsequent to the completion of our fieldwork, the BBC and LST have agreed some major changes to the Partnership and further changes will be made to put in place alternative service provision arrangements. We have been asked to comment on the changes which are summarised in Tables 1 and 2.

Table 1: A commercial settlement has been concluded

Allows for a restructuring of the leases on the Media Village in a cost effective manner that delivers significant benefits back to the BBC.

Settles the most significant commercial issues outstanding from the original Partnership agreement.

Allows for a consensual termination of the Partnership at no cost to the BBC should the parties fail to agree on a new deal.

Allows for a renegotiation of the original CoS which gives both parties the opportunity to refocus the Partnership.

It was agreed that this review would only make limited comment on the restructuring of the White City lease due to the following:

The White City development was subject to a separate value for money study conducted by the National Audit Office (“NAO”); and

The BBC were advised by a number of leading firms on the refinancing, including Barclays Capital (Financing), DTZ (Property Valuation), KPMG (Accounting) and Linklaters (Legal).

Table 2: The renegotiation of the deal will continue with several key areas of focus

Clarifying the service offering including agreeing the transfer of lifecycle risk.

Reviewing the term and pricing of the deal.

A new approach to construction management.

Revising the PMS provision.

Simplifying operational processes and control.

At the time of this review, agreement has been reached on areas summarised in Table 1, covered within the Settlement Agreement.

The situation regarding the areas in Table 2 is fluid, however these will form the basis of negotiating deals with new suppliers. Our review of ongoing issues is therefore focused on the approach being taken by the BBC and as such any conclusions drawn will inevitably be subject to further change as procurement and commercial negotiations progress.

2.1 Documentation reviewedIn the preparation of this paper, we have reviewed the following key documents:

Settlement Agreement, dated 3rd March 2005

Invitation to Negotiate

BBC Statement of Requirements (“SoR”)

BBC Governors paper GPC(05)6

LST response to BBC dated 5th April 2005

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In addition to the above, we have also had access to the following documents:

Appendices to the SoR

Other BBC Governors papers EB(05)71, GPC(05)4, BG(05)7, GPC(04)6

Investment Proposal Approval Sheet 6th January 2005

Meeting Minutes: Governors Property Committee 23rd September 2004, Board Meeting 27th February 2005

BBC and Land Securities Group PLC, Joint Press Statement

3.0 Key changes and current positionThe major changes to the Partnership are addressed using the summary of changes provided in Tables 1 and 2:

Commercial settlements reached (Table 1).

Negotiations underway (Table 2).

We have summarised these further below into three principal areas of renegotiation:

Restructuring of the White City lease.

Settlement Agreement.

Renegotiating the CoS.

3.1 Restructuring of the White City lease (concluded)The restructuring of the White City Media Village lease was completed as at 23rd March 2005, replacing the existing finance provided by Land Securities with a bond.

In summary, this involved the replacement of the existing finance arrangements and a repurchase of the White City land and buildings. As part of this restructuring, a long term lease was granted in favour of bond holders with the BBC taking an occupational leaseback for 30 years.

3.2 Reaching a settlement agreement with LST media services (concluded)The Settlement Agreement brings to a conclusion a number of ongoing disputes between the BBC and LST. The major terms of this settlement are summarised below:

A mutual termination of the CoS and Partnership contract on 31 March 2006.

Compensation of £16.2m to LST in full and final settlement of the ongoing floor areas disagreement covering over four years to 31 March 2006.

The implementation of the LST ‘Clean Bill of Health’ demonstrating to the BBC that all aspects of plant and facilities are maintained to the standard required under the CoS and are health and safety compliant.

3.3 Commencement of the renegotiation of the CoS (ongoing)The BBC has made considerable effort in attempting to structure a renegotiation process with LST, consistent with a new bidding process which sets out revised arrangements based upon the BBC’s current requirements. The BBC issued an Invitation to Negotiate (“ITN”) to LST on 1st February.

The BBC issued LST with a comprehensive 80 page SoR detailing the scope and standard of services expected, together with clarification of the terms under which these are proposed to be supplied. The SoR was issued on 29th March 2005 with a requirement LST confirm its intention to respond by 1st April 2005. The deadline for a full response to the SoR was 18th April 2005.

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LST responded to this SoR on 5th April 2005 stating that it was not prepared to enter into a service provider arrangement with the BBC on the basis provided. LST assessed it could not deliver competitively priced, value for money traditional FM services on a short term contract as specified by the SoR. The BBC is currently planning to place an OJEU notice seeking bids from parties interested in providing the BBC with FM and other specialist services based on its SoR.

4.0 Key changes in the context of the E&Y Value for Money StudyEach of these areas of change is assessed in the tables set out over the following pages. We have assessed changes in the following way:

Major change areas.

How change relates to the findings from the E&Y value for money study.

Benefits achieved or forecast.

Potential risks and issues.

The changes themselves are classified as: those where agreement has been reached and those subject to ongoing negotiations.

4.1 Commercial settlements reachedTable 3 over the page contains details of those items on which the BBC has secured change through legally binding agreements. The majority of these changes were formally agreed within the Settlement Agreement between the BBC and LST Media Services. Changes to the leases on the Media Village, were secured including the issuing of a bond. These arrangements were finalised by 23rd March 2005.

4.2 Commercial negotiations underwayTable 4 contains details of areas subject to ongoing discussions for which no agreement has been reached. The discussions underway are primarily focused on developing a new CoS, securing changes to the operation of construction management (“CM”) and FM services. The BBC has clarified its expectations of services provision in the SoR, dated 29th March 2005.

LST has stated in its response to the BBC SoR that it is not prepared to proceed with an arrangement of this nature. The comments made on areas subject to discussions are therefore representative of the requirements of the BBC. Any conclusions drawn are subject to ongoing negotiations and may vary once the BBC has reached agreement with a service provider.

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Table 3: Commercial Settlements Reached

1. A restructuring of the leases on the Media Village in a cost effective manner that delivers significant benefits back to the BBC

Change Key findings in original E&Y Value for Money Study

Benefits Now Secured Remaining Risks and Issues

The restructuring of the leases. Previously, White City was financed and owned by LST as part of its development of White City 2.

The changes made by the BBC at White City, as of 26th March 2005, can be briefly summarised as follows:

Unwinding the existing Partnership with LST.

A transfer of the White City freehold from LST back to the BBC.

The grant of a long lease by the BBC to a Special Purpose Vehicle (“SPV”) as security for the bond issue.

The BBC entered into a 30 year occupational lease at a rent based on the SPV payments under the bond.

The Media Village (White City) was not explored in detail within our initial report, however, the following findings can be highlighted:

The White City development was a success (2.1)

The White City development was delivered ahead of time and on budget (2.1.1)

Full risk transfer has been achieved on White City (2.1.2)

Development funding on Broadcasting House and Pacific Quay is not provided by LST (5.2.3)

“When the White City development Partnership was created, alternative sources of funding available to the BBC to implement its property strategy were more limited than at present. In recent years, interest rates have reduced and financing options with lower yields have been available for high calibre credit covenants such as the BBC. As a result, external property development funding became more attractive when compared to financing through the Partnership model.”

Whilst White City was highlighted as one of the Partnership successes, the BBC has leveraged additional benefits from unwinding the existing arrangements to enable a refinancing. In summary, the BBC has achieved the following:

An additional financial benefit (calculated by the BBC to be an Net Present Value of £63m over the life of the finance arrangement).

The BBC regains the freehold interest in White City.

The restructuring of the leases on the Media Village is consistent with the type of finance structure used for the Broadcasting House and Pacific Quay developments, which took advantage of new, alternative financing options not available at the time White City was developed and financed. The BBC approach to the restructuring of the White City lease is also consistent with comments made within our report on this subject (5.2.3).

The following issues have been considered by the BBC as part of the restructuring of the White City lease:

An absolute, unconditional and irrevocable obligation to pay rent GPC (05)4.

No option to determine the lease early or vacate part (other than for a sub letting).

The funder has the right to forfeit the occupational lease if the BBC becomes insolvent or breaches the covenant to pay rent.

The BBC considered these issues before entering the transaction and decided that the associated risks were acceptable.


2. Settlement of the most significant commercial issues outstanding from the original Partnership agreement



A significant issue at the time of our initial report was the floor areas disagreement. The Settlement Agreement provides for:

The full and final settlement of disputed claims in relation to the measured property areas (also refer to section 3.2).

The terms contained in section 2 of the Settlement Agreement state:

“the BBC pay LST (via the property vehicle) £16.2m in full and final settlement of all claims related to the difference between the measured areas and those assumed by LST Media Services”.

This covers over four years to 31 March 2006.

The section of the CoS relating to these areas is to be deleted entirely (Schedule 8, Part 7, Paragraph 1).

Key ongoing disagreements have hindered the effective management of the Partnership (6.2)

The floor areas disagreement is unresolved (6.2.1)

“Both partners view the outcome of the disagreement as being of substantial importance to the future value of the Partnership.”

There are other more minor commercial issues that also require resolution (6.2.2)

Settle all outstanding issues – There are a number of disagreements which are absorbing management time and creating tension. These need to be resolved as soon as possible to allow focus on more positive agenda items. (Executive Summary, Recommendations).

The agreement reached over the floor areas dispute provides:

The BBC has certainty over the benefits secured.

An opportunity for the BBC and LST to substantially improve existing management level relations.

Enables the management on both sides to refocus efforts on the management of service delivery.

An improvement in the delivery of existing services, where these were assessed to be suffering as a result of the floor areas dispute.

lA key factor enabling the BBC and LST to reach agreement in a number of other areas within the Settlement Agreement.

Factoring compensation into the cost of existing services may set an unhelpful precedent in negotiating a re-priced agreement.

This risk could be mitigated by ensuring sufficient commercial pressure is exerted on third parties during any negotiations on re-pricing. Furthermore, it is acknowledged that the settlement reached over the floor areas disagreement was likely to be a key factor in reaching agreement on other issues.

Although, more minor in nature, other issues between the BBC and LST such as working capital remain. It is acknowledged that the agreed termination of the CoS mean these issues will disappear shortly.

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3. A consensual termination of the Partnership should the parties fail to agree on a new deal, at no cost to the BBC



Assuming no LST default, the Partnership and CoS were only terminable by the BBC being prepared to pay an onerous exit penalty.

This penalty was deliberately set at a prohibitive level, based on LST profits over the remaining term of the CoS. This penalty has been estimated by the BBC to be in the region of £600m (Source: Governors Paper GPC(05)6). Please note, this figure also includes a substantial sum for the transfer of White City back to the BBC.

In spite of the above, the partners have agreed a consensual termination as part of the Settlement Agreement (also refer to section 3.2). Specifically, the BBC and LST have agreed the following, covered by section 5 of the Settlement Agreement:

The CoS and Partner Contract will terminate on 31st March 2006.

4 months prior written notice of termination is required from either party.

No payment is due in connection with a termination.

The contract does not always provide practical solutions to issues arising under its arrangements (5.3)

“Although there are exit arrangements, the 30 year commitment under the COS does not offer any practical methods for the contractual terms to change effectively and quickly in the changing environment that the BBC now finds itself operating in.”

The BBC decided that it was willing to commit to Scope A services whether or not the Partnership expanded (5.3.2)

“In the event of a deterioration or breakdown in the relationship, the long term nature of the BBC’s commitment under the Partnership precludes it from seeking alternative solutions for scope A activities over the 30 year term and the BBC did not seek to include an exit or formal renegotiation on the basis that the initial scope of the Partnership did not expand.”

The settlement reached offers the BBC an exit from the existing Partnership and the opportunity to seek alternatives with no penalty payment. In summary:

Seek entirely new service provision, having made reasonable endeavours to first reach agreement with LST.

Securing this provision, at no cost to the BBC, is of major benefit.

The BBC can re-consider the provision of FM and CM services in engineering a new deal. By building upon the positive aspects and seeking to eliminate the negative, the BBC can use its experiences in operating the Partnership delivery model created in 2001.

The BBC is required to engage a new third party service provider and the following risks need to be managed:

Loss of existing knowledge/expertise accrued within existing service teams.

Limited time to put complex new arrangements in place with a potentially detrimental impact on business continuity.

Achieving an effective managed transition during a period of substantial change.

Delivering a new deal on financially advantageous terms.

viii

ix


4. Provision for a renegotiation of the original Partnership agreement which gives both parties the opportunity to refocus the Partnership



The original CoS and Partnership agreements contained no automatic right of renegotiation. The ability to bring about a renegotiation was therefore subject to the mutual agreement of both parties.

In addition to the termination provisions contained within the Settlement Agreement (as described in the previous section) there is also an obligation on the BBC and LST to:

“use reasonable endeavours to negotiate a mutually acceptable new contract to replace the CoS” (Section 9, Settlement Agreement).

Re-engineer the deal - Certain aspects of the commercial arrangements require re-working to make the Partnership operate more effectively for both the BBC and LST. This is commonly required in long-term partnering contracts. (Executive Summary, Recommendations).

One of the key recommendations made within our initial report was to re-engineer the existing arrangements between BBC and LST. The Settlement Agreement provides the BBC with an opportunity to undertake a full renegotiation of existing arrangements, pending a termination of the CoS on 31st March 2006.

Given the BBC had no automatic right of renegotiation under the CoS, the agreement to use “reasonable endeavours” to reach a mutually acceptable new agreement is an important step forward.

In addition to being a potential benefit, the renegotiation (pending termination of the existing arrangements) also represents a significant risk to the BBC due to:

The current reliance on LST as a service provider (and consequently its network of sub contractors)

It is therefore important that the BBC puts in place contingency plans for the ongoing delivery of FM and CM services to effectively manage risk.

Abbreviations

BBC British Broadcasting Corporation SoR Statement of Requirements

LST Land Securities Trillium SPV Special Purpose Vehicle

E&Y Ernst & Young FM Facilities Management

NPV Net Present Value CM Construction Management

CoS Contract of Service KPI Key Performance Indicator

OJEU Official Journal of the European Union PR Public Relations

NAO National Audit Office PMS Performance Management

ITN Invitation to Negotiate


xBBC PR O P E RT Y – VA L U E FO R MO N E Y RE P O RT

Table 4: Negotiations Underway

1. Clarification of the service offering including agreeing the transfer of lifecycle risk


Benefits Forecast Risks and Issues

The BBC’s proposed scope of services is clarified within the SoR, including those no longer required and the service profile for each ‘in-scope’ site. LST, within its response to the SoR, concurs that the range of services has been substantially clarified.

The BBC proposes a new approach to dealing with the transfer of lifecycle risk based on dealing with the in-scope portfolio in three tiers:

Tier 1: Full lifecycle risk transfer to service provider (White City Properties).

Tier 2: Maintained in accordance with an agreed Capital Plan (most of remaining London Estate).

Tier 3: Maintained in accordance with the tier 3 mechanism, the service provider being responsible for the first £5,000 expenditure on any repair or replacement.

This approach would leave the BBC with full risk transfer on lifecycle items at White City only. The majority of the remaining London estate would be maintained by the service provider in accordance with an agreed and budgeted capital plan. Outside of these arrangements, a mechanism for repair and replace decisions for lifecycle items is adopted on a case-by-case basis.

Agree lifecycle risk – Fundamental to the effective transfer of risk is the question of lifecycle, for which a solution is required at a price that represents value for money. A misalignment of objectives will lead to replacement responsibility and asset management decisions residing with the BBC (Executive Summary, Recommendations).

Transfer of lifecycle risk on the in-scope estate (excluding planned vacations) has not occurred (5.2.1)

“Allocating risks to the party best able to manage them was a key BBC objective in creating the Partnership. The transfer of risk on the repair and maintenance of lifecycle items (building fabric, plant and equipment) represents an important issue to the BBC, particularly considering the legacy estate.”

In seeking to re-align a new deal to a more typical, shorter-term service provider arrangement, the full transfer of lifecycle risk is of less significance in aligning the objectives of the BBC and its service provider (as was the case under the existing Partnership).

The objectives under the arrangements for Tier 2 and Tier 3 properties are less focused on achieving full risk transfer, more on managing and delivering a capital plan, on budget and to plan.

The BBC envisaged full lifecycle risk transfer under the original deal. The approach proposed within the SoR does not seek to fulfil this objective, but has the following benefits:

Reduces the current uncertainty over whether wholesale lifecycle risk will be transferred outside of White City.

Explicitly links lifecycle services with a new capital plan (to be agreed).

Consistent with changes being made to the overall nature of the BBC-service provider relationship.

The BBC retains ultimate control of broadcast critical areas which include specialist plant and technology more appropriately managed by a specialist service provider/in-house.

Although it is agreed that the BBC’s service requirements have been substantially clarified, lifecycle risk transfer will not occur in a contract of a term of only 5 years.

The availability of an adequate budget for capital expenditure will be required to effectively implement this element of a new deal.


2. Review the term and pricing of the deal



The BBC is seeking a substantially reshaped deal, closer to a more typical, short-term service provider arrangement, as opposed to a long-term Partnership.

The SoR is based on the following:

10-year contract term.

A BBC break option after 5-years.

A re-pricing of all aspects of a new service provider arrangement in line with the revised scope, both in the supply of FM and CM services.

Outside White City, the major elements of the Partnership are long term FM and CM contracts (5.4.1)

“In practical terms, with the exception of White City, the Partnership consists of a 30 year FM contract on the BBC’s London and Scottish estate and a 30 year CM contract covering the whole of the UK, which is an unusual approach. Outsourced FM and CM contracts are not uncommon, although typically differ substantially in terms of the length of contract. Shorter terms, often between three and seven years, represent more usual market practice, providing the ability to re-tender in the market on a regular basis. In this way, the flexibility to re-tender service provision and amend the scope of contract at regular intervals is retained by the employer.”

A more flexible approach to FM and CM supply arrangements should yield the following benefits:

Flexibility – The BBC will have the option of an exit from a new deal after 5-years, allowing it to seek alternatives and is better able to respond to the changing needs of the BBC business.

Test of Value for Money – By following a robust procurement process for the re-pricing of the scope of services determined in the SoR, the BBC can test value for money in the open market.

In substantially reducing the term of a new deal and obtaining further flexibility, the BBC is also exposed to risks in re-pricing the deal:

LST pricing strategy was based on longer term profitability anticipating losses in the first few years. Based on a shorter term arrangement, the price for these services may increase.

Capital expenditure may be incurred initially to manage unwinding the CoS and set in place a new arrangement.

Should the BBC be required to put in place temporary measures for service provision, the BBC may be exposed to service providers charging a premium.


xi

xiiBBC PR O P E RT Y – VA L U E FO R MO N E Y RE P O RT


3. Introduce a new approach to construction management



The BBC is seeking to focus and clarify the supply of CM services within the SoR. The make-up of CM services is to be streamlined, including the removal of lifecycle services (to be dealt with separately). CM services will now comprise:

Minor projects, with a value of between £25,000 and £500,000.

No guaranteed minimum amount of work is specified.

Although revisions are proposed, the structure of the B1/B2/B3 approvals process remains in place.

The BBC is prepared to negotiate detail around CM services in a number of areas.

A 2% reduction in fee rates across the project value bandings.

The performance measurement system (“PMS”) associated with CM services is also to be revised using 8 KPIs with the objectives of ensuring projects are delivered: on budget; on time; safely; efficiently; free from defects; to agreed specifications and fit for purpose.

Centralised property construction budgets.

Planning processes within the BBC prevent the efficient delivery of CM services by LST (6.3)

“CM enables the delivery of construction projects across the national BBC estate. CM services are funded by the business unit requiring the project to be completed and there is no central co-ordination of these projects. This issue has created inefficiency at LST in two areas, the impact on Measured Term Contractors, and LST resource planning.”

There is a robust but cumbersome process of project authorisation (6.3.3)

“After initiation by the user the project often gets delayed as BBC Property and LST agree the level of information required to allow approval to the next stage. These delays often frustrate the user resulting in dissatisfaction.

Key performance indicators can encourage a focus on cost to the detriment of other elements (6.3.4)

“If the cost exceeds the approved budget, after allowing for increases due to client variations, then LST’s fixed fee is reduced by 2%. This encourages an undue focus on cost issues away from the other key areas of the project.”

Although areas of detail are still to be clarified, the BBC is seeking to achieve the following under its revised proposals for CM services:

Reduced scope, now focused on minor projects only (generally between £25,000-£500,000).

An unrestricted right of audit for the BBC.

Reduced fees across all project value bandings.

Construction risk transfer on price variations, following the receipt of tender submissions.

The BBC is also seeking to achieve a more balanced performance measurement system improving upon existing KPI’s which tended to encourage an undue focus on project costs.

In addition, by capturing project lead in times as a KPI, this system also appears to address the previously bureaucratic project authorisation process (outlined above).

Centralising property construction budgets will enable the BBC service provide to more accurately schedule CM works.

Managing the internal PR is an issue as the original Partnership was “sold” internally as a long term optimum solution for the BBC and its Business Units.

Communicating the new arrangements and procedures to BBC Business Units needs to be managed carefully.

xiii


4. Revisions to the PMS provision



Although the standard of service delivery across the BBC estate was generally perceived to have improved under the Partnership, performance measurement did not operate effectively. As a result, the BBC has sought to overhaul the PMS system to be operated as part of a new deal. As CM PMS is discussed above, this section focuses on the PMS provision of FM services only.

The approach to FM PMS proposed by the BBC can be summarised as follows:

Ensure standards are maintained, by encouraging the rectification of faults and works to eliminate their occurrence.

Revise the method and thresholds for calculating the penalty payment thresholds for under performance.

Introduce more formalised service activity certification requirements (these would remain the responsibility of the service provider).

Undertake the annual customer satisfaction survey ‘in-house’, used as a comparison to the PMS results to assess the robustness of the self certification process.

Establish effective performance management provisions – Performance management, penalties and benefit sharing mechanisms under the contract are not working effectively and need to be re-negotiated. (Executive Summary, Recommendations)

Performance Measurement Systems are incomplete (6.4)

Implementation of performance management systems has been more difficult that envisaged (6.4.1)

“Concerns over the link between performance measurement and service provider behaviours led to suspension of the FM system between April and June 2004. It was hoped that suspension would empower LST, and in particular their sub-contractor service providers, to focus on service rather than measures.”

LST incurred penalties equivalent to only 0.25% of the Unitary Charge during 2003/2004 (6.4.2)

“The BBC considers that these (penalties) do not reflect current standards and are insufficient to adequately penalise poor performance.”

“It should be noted there is no independent audit or certification of the performance scores... It is commonplace and usual good practice to independently verify performance measurement when the ‘thin client’ organisation is unable to perform this role itself.”

The BBC considers that the existing penalty arrangements are not sufficiently reflective of performance and the revised system would appear to:

Penalise under performance in FM service delivery more appropriately, being more clearly linked to BBC KPI’s.

Introduce a more formalised, self certification process to check the standard and completion of activities. This is expected to increase the integrity and reliability of performance management information.

Whilst the proposed PMS system is simplified, the number of services, weightings, buildings and measures across FM PMS remains substantial and without an operative system which will not be in place until new service providers are contracted, it is difficult to reach a definitive view on whether the proposed arrangements are sufficiently transparent to allow the BBC to easily track KPI’s.

Although the self-certified PMS results are a core element to the calculation of performance penalties, there is no requirement for an independent audit to be conducted to check the validity of these. The BBC, retains the right to audit its service provider or appoint an organisation to do this on its behalf. The level of benefit secured therefore will be largely dependent on how this process is managed in practice and the integrity of the self-certification process.

We would recommend the BBC consider the appointment of an independent consultant to undertake regular, planned audits.


xivBBC PR O P E RT Y – VA L U E FO R MO N E Y RE P O RT


5. Simplify operational processes and control



The BBC has re-structured its existing property management operating structure into six divisions, including a new day-to-day interface with its service provider. In addition, a new governance structure is to be introduced based on four tiers:

Senior Contract Board – Develop and agree strategic objectives and review annual performance.

Contract Management Board – Execute strategy, review quarterly performance, recommend contract variations and monitor key risk management activities (including broadcast continuity).

Operational Board – Review day-to-day performance, manage key risk management activities and dispute resolution.

Workplace Partner Board – Link customers with the service platform, review and manage day-to-day performance, meet customers regularly, management of day-to-day performance and undertake on key risk management activities.

Although the specific representatives from the service provider are yet to be determined, details of BBC management representatives are provided and it is envisaged that this profile will be mirrored by a service provider.

The BBC Divisions are not consistently committed to the Partnership arrangements and there is a lack of clarity on roles and responsibilities (6.1)

Review Partnership processes and controls – Key processes and controls that impact on the effective management of the Partnership should be reviewed and improved. These could include CM approval and delivery, performance management, issues resolution and customer interface and feedback (Executive Summary, Recommendations).

Clarity of organisational structure from the outset should assist in:

Defining the roles, responsibilities and interface between the BBC and its service provider.

Structured and disciplined governance would assist both the BBC and its service provider with areas such as succession planning which have in the past impacted the effective management of service delivery.

We believe clarity over the roles and responsibilities of these parties with the BBC customer is an important part of an effective service provider arrangement. The Workplace Partner function has an important role in ensuring the BBC customer understands the nature of any deal agreed together with the processes, controls and expectations of each party from the outset.

Effective and carefully managed communication with the BBC customer to clarify the roles of each party under a new arrangement should minimise to chances of misunderstandings occurring and unrealistic expectations being created.

PR E FA C E

1BBC PR O P E RT Y – VA L U E FO R MO N E Y RE P O RTBBC PR O P E RT Y – VA L U E FO R MO N E Y RE P O RT

This report is one of a series of studies that assess value for money across the British Broadcasting Corporation (BBC). The programme of reviews was selected by the BBC Governors’ Audit Committee.

This report was prepared by Ernst & Young for the Governors of the BBC, for and only for the BBC in accordance with the terms of our Engagement Letter dated 23rd July 2004 and for no other purpose. We have not audited the financial model or any of the information provided to us as part of this review. We do not accept or assume any liability or duty of care for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

The report examines the economy, efficiency and effectiveness of the Property Partnership (the Partnership) between the BBC and Land Securities Trillium (LST) in terms of delivering best value for money for the Licence Fee payers. The BBC is a dynamic and high profile organisation that is continually undergoing change and it should be noted that there are currently a number of initiatives both under way and planned surrounding BBC Property and the Partnership, and the findings included in this report are those reflected from our fieldwork and are applicable as at November 2004.

Subsequent to the fieldwork on this report being carried out, the BBC and LST have concluded negotiations on a commercial settlement that:

allows for a restructuring of the leases on the Media Village in a cost effective manner that delivers significant benefits back to the BBC

settles the most significant commercial issues outstanding from the original Partnership agreement

allows for a renegotiation of the original Partnership agreement, which gives both parties the opportunity to refocus the Partnership

allows for a consensual termination of the Partnership at no cost to the BBC, should the parties fail to agree on a new deal

The renegotiation of the original deal is underway and key areas for focus are:

clarifying the service offering, including agreeing the transfer of lifecycle risk

reviewing the term and pricing of the deal

a new approach to construction management

revising the PMS provision

simplifying operational processes and controls

‘As a fellow traveller, I have seen the BBC transform itself in the space of a few years from a frankly shoddy property owner into a modern public client. So much so that it was selected as No. 1 ‘Client of the Year’ by the RIBA Journal in 2002, winning the design profession’s Oscar.

The BBC has not been driven purely by its prodigious cultural appetite. It refl ects the Corporation’s business plan to respond to the fast-changing world of media. It recognises that those outdated, poorly maintained buildings spread across Britain no longer satisfy the demands of the BBC’s sophisticated producers and consumers, nor do they stand up to the high standards offered by the competition. It refl ects a commitment to the realisation of its assets through the consolidation of its property portfolio in new landmark buildings that will serve the Corporation well into the 21st century.’

Building the BBC: A Return to Form (part of the Introduction by Ricky Burdett, Architectural Advisor to the BBC).

Preface

2

BackgroundIn November 2001, the BBC entered into a unique 30 year property partnership arrangement with Land Securities Trillium (LST) worth £2bn in real terms. The partnership arrangements between the parties involved property transfer and construction of new buildings at White City, construction management services (CM) across the UK and facilities management (FM) in London and Scotland. The detailed arrangements are numerous and complex with many factors to consider. A findings based approach has therefore been adopted for this report to ensure a clear focus on the key issues.

In order to implement the Partnership, a property vehicle was established (fig 1 below) the details of which have the following practical implications:

The provision of a number of services (including repair and maintenance, FM, and lifecycle replacement) are sub-contracted by the property vehicle to LST direct. LST procures and/or delivers these services into the BBC and the property vehicle is designed to oversee and manage delivery.

Although initially restricted to the BBC’s existing London and Scottish estate, the arrangement provides the opportunity for the expansion of services provided by LST, both in terms of scope and estate.

The property vehicle also has responsibility for the provision of CM services to the BBC. Unlike the scope for other services, CM is provided across the whole BBC estate within the UK.

Additionally a development partnership, White City Development Partnership (WCDP), which is a special purpose vehicle, was created between BBC Property Limited and LST (Media Services Limited) in order to develop a new facility for the BBC. The BBC transferred the undeveloped part of the White City site into WCDP.

The remaining part of White City (the existing buildings) was transferred to the main partnership vehicle and the BBC agreed a leaseback for a term of 55 years.

The BBC received an upfront payment of £20m.

The BBC has guarantees from Land Securities plc for obligations under the WCDP and for the purchase price of the land and from LST for the obligations under the Contract for Occupational Services, including the sub-contractors.

Since the inception of the Partnership, the BBC and its markets have undergone, and are still undergoing, significant changes. During this three year period, the property funding and property services outsourcing markets have also changed and the combination of these dynamics has inevitably impacted upon the way in which the Partnership has been applied and operated.

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3BBC PR O P E RT Y – VA L U E FO R MO N E Y RE P O RT

Summary ConclusionThere can be little doubt that, prior to the Partnership with LST, the BBC estate was poorly maintained and that a step change was required to radically improve the quality of accommodation and associated services.

The Partnership offered the BBC an innovative solution to realising its property vision and, whilst difficulties have been experienced during the first three years of the contract, the arrangements have delivered a number of major benefits including a paving of the way for a rationalisation of the estate in London.

Establishing the most beneficial bid and finalising the deal with LST was an iterative and complex process. The business case justifying the appointment of LST was strong and the BBC transferred many risks to its partner but, with the benefit of hindsight, there were assumptions and scope of service issues which have resulted in commercial issues between these parties. Some of these issues remain today and are still the subject of disagreement and negotiation between the BBC and LST.

Notwithstanding the above, the core FM and CM service elements have been market tested and benchmarked and are believed to represent reasonable value for money.

At the outset there was an anticipation and expectation that the Partnership would grow and respond to the changing needs of the BBC. Generally, this has not happened and, as a result, the full potential value of the Partnership is not being realised.

The challenges experienced to date have resulted in frustrations for both the BBC and LST and the recent settlement should be seen as an opportunity for change. (Please see comments in the preface on page three which reflect the changes now agreed between the BBC and LST).

Key Findings

The Partnership offered the BBC an innovative solution to realising its property vision.In the late 1990s, the BBC was faced with substantial challenges in remaining at the forefront of broadcasting following the rapid evolution of new technologies. The BBC also realised its estate had suffered a period of underinvestment, was in a poor condition, not strategically located and unsuitable to support the core business into the future.

It was clear that a strategic approach to delivering a step change in the BBC estate was needed; doing nothing was not an option and minor changes were unlikely to represent good value or address the issue. The BBC Board of Governors decided it was time to act in a far more radical way that would assist the BBC in its quest to be at the forefront of programme making for years to come.

Delivering the level of improvement desired by the BBC required a realignment of its estate, supported by a substantial development programme. The BBC was confronted with substantial hurdles in delivering this strategy. The finance, skills and resources needed to upgrade and develop new buildings on the scale planned was not available within the BBC. The BBC was further restricted by financial constraints of its existing debt capacity set out in its Charter (which was inadequate in any instance) and the desire not to adversely impact on the Licence Fee.

The Partnership between the BBC and LST was innovative, ground breaking and offered the BBC a catalyst for change to address a prolonged period of underinvestment when it was entered into in November 2001. It offered the BBC a method of meeting its objectives of supporting the change needed in the broadcasting business, while offering a number of additional significant potential benefits:

Access to third party finance, without recourse to the BBC’s borrowing limit, as a means of financing the substantial redevelopment and refurbishment programme required.

Access to private sector skills and expertise to manage substantial construction projects including a TUPE transfer of some BBC staff involved in delivering property services.

Increased certainty in the cost of FM services over the long term.

An improvement in the quality of service delivery for FM and CM services.

Access to a flexible, experienced team of property and construction experts providing innovative and ‘state of the art’ input.

Cost savings over the existing in-house delivery arrangements.

4

The Partnership has delivered a number of major benefitsThe Partnership has already been successful in several areas, delivering the following achievements to date:

White City - Successful management and funding of the White City development was a major factor leading to the creation of the Partnership with LST. Using the development partnership vehicle as the funding structure was intended to form the blueprint for future developments. White City is now completed and the majority is occupied by the BBC. It is a state of the art development widely perceived by BBC staff and management alike as a major success.

Better Service - Prior to the creation of the Partnership, FM services within the BBC were delivered in-house by a substantial property team. Anecdotal evidence from interviews with BBC management and end users suggests that an indifferent delivery of FM services had been apparent, particularly across the London estate. Year on year there has been a clear improvement in customer satisfaction with FM service delivery since the Partnership has been in place.

Cost Certainty - A substantial element of the Partnership with LST is based on a Contract for Occupation and Services, for which the BBC has agreed a fixed charge (Unitary Charge) for the long term provision of FM services.

Staff Transfer - Prior to the Partnership, the BBC in-house property team comprised a substantial number of staff managing and delivering FM and CM services across the business. The creation of a partnership with a private sector specialist service provider offered the BBC an opportunity to transfer a substantial proportion of these in-house staff that had been carrying out non-core activities.

Assumptions were made within the original business case upon which LST were appointed, which could erode some of the benefits of the deal and which are still to be fully quantifiedThe BBC considered the Partnership with LST to be the most cost effective of all the market bids. The overall cost at that time was understood to be a minimum of £124m less than the BBC in-house comparison. The submitted bids and in-house comparison included the BBC desire to enhance the quality standards of FM services.

Approval to the Partnership with LST was sought in June 2001. The BBC Governors approved the deal, subject to Government (Department Culture, Media and Sport) approval, finalisation of the legal structure, completion of negotiations and sign off by two Governors.

A series of scope changes and contract adjustments occurred during the post bid negotiations with LST. As the BBC has passed on risks in relation to health and safety and other areas, it was decided by the BBC at this preferred bidder stage that in order to get risk transfer, the following additional services needed also to be transferred to the LST contract. These services were the “assumed services” and included asbestos management, security and lift maintenance. This resulted in a significant increase in the LST contract sum of £159m (£7.6m per annum) to £828m. A significant proportion of the increase was due to these assumed services. These services were transferred to LST at the then prevailing BBC cost with a view to LST using their expertise to reduce the charges over time. The BBC have produced documentation to illustrate that the in-house BBC comparator also increased in line with the additional specification and scope of services being requested. Although it is normal practice for post bid negotiations to occur in transactions of this type, it should be noted that inevitably under these circumstances, price competition for these changes was limited.

In requiring prospective partners to price the cost of delivering FM services to the estate, the BBC did not verify or warrant the information given to the bidders in relation to the size of its in-scope estate. This was a conscious decision by the BBC as they decided that it should be the bidder’s responsibility to undertake the necessary due diligence. Any increase in costs resulting from subsequent changes in floor areas was considered to be at the risk of bidders and was a cost that they would ultimately have to bear. LST had the view, however, that although they priced on the floor area information received, if the information subsequently turned out to be incorrect, an adjustment to their bid price

4

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would be made. Although not directly comparable to the bid data, the discrepancy between the actual and assumed areas is between 17% and 40% depending on the basis of the measurement. As a result of this difference between the bid data and the actual measurements, an issue has now arisen between the BBC and LST as to whether the additional floor areas has led to LST being entitled to further payment as a result of additional costs incurred by LST in delivering FM services to the estate.

A financial settlement had not been reached at the time of our fieldwork and the outstanding commercial issues had the potential to reduce some of the cost savings from the deal. Although these savings are still substantial, the outcome of the recent negotiations is integral to forming an assessment of the overall benefits of the Partnership.

Although LST are obliged to demonstrate value for money from all CM services before the BBC agrees to the work, no forecast of the likely quantum of these services over the term of the contract was undertaken in approving the terms of the Partnership. This is discretionary spend, and therefore, not contractually committed and the business case was based on FM savings rather than CM services, but we would expect a forecast based on estimated or historic volume. To date, the volume of CM work has been substantial, the cost of which has amounted to almost the same level as the Unitary Charge on which the original analysis was based. This high proportion of CM costs in early years may prove unrepresentative however as the backlog of upgrading works is delivered and as the Unitary Charge increases.

The core services represent reasonable value for money*The initial cost of the LST offer, in isolation, was assessed by the BBC to represent value for money. Despite the issues referred to above and the lack of an expansion to the scope of the Partnership, evidence suggests that the current services being provided represent reasonable value for money:

The combination of services was competitively procured in the open market.

Benchmarking undertaken by independent specialists suggests that the FM services provided are value for money overall.

Based upon the broad scope of services and profile of projects, the CM rates appear reasonable.

LST are obliged under the contract to demonstrate value for money for CM and have processes for benchmarking, open book tendering and competitively procuring term contractors.

(*Note that resolution of the current floor areas disagreement could impact this statement).

Because the Partnership has not evolved as planned maximum value is not being obtainedThe Partnership is not operating or evolving as envisaged and the arrangements in their current form are not offering the BBC maximum value for money.

Improvements in the delivery of services have been made through the creation of the Partnership but strategic arrangements of this kind offer even greater opportunities to leverage further value from economies of scale and alignment with a single service provider. The BBC highlighted this as an objective in entering the Partnership.

Table 1: Mix of current service providers

FM ProviderTransfer Property

Ownership

Lifecycle Maintenance

CM Service < £100k

CM Service > £100k

Development Finance

Estates Management

London & Scotland

LST BBC BBC LST LST BBC/Bond LST

White City I & II

LST LST LST LST LST LST LST

English Regions

Haden Young

BBC BBC LST 3rd Party BBC BBC

Northern Ireland

Alfred McAlpine

BBC BBCLST/3rd

PartyLST/3rd

PartyBBC BBC

Wales Select BBC BBC LSTLST/3rd

PartyBBC BBC


6

The Partnership has not developed since 2001 and the BBC’s current arrangements comprise of a mixture of different services, providers and geographic areas of responsibility (illustrated in Table 1). It should be noted however that LST were given the opportunity to expand the current service from just Scope A into other areas such as Nations and Regions FM provision, Broadcasting House and Pacific Quay finance and full lifecycle responsibility. The costs to the BBC, proposed by LST, for each of these, was not considered by the BBC to be competitive and so alternative arrangements were put in place. Current arrangements, therefore, do not offer the BBC the most effective property services delivery model.

Generally, the intended risk transfer within the Partnership has been achieved, but the risk for the replacement of lifecycle items has not been transferred, with the exception of White City. Instead of LST providing lifecycle services across the London and Scottish Estate they provide a planned preventative maintenance service which results in a division of responsibility between LST and BBC.

The overall result is a 30 year FM and CM only outsource contract with a total property outsource provider that does not maximise the benefit that such an organisation can potentially bring. The existing situation is not ideal to either partner and casts doubt on the long term viability and sustainability of the Partnership in its current form.

The Partnership needs to changeIrrespective of the overall delivery model, the Partnership could offer more value for money and a number of issues are apparent with its current operation.

It has been difficult to achieve clarity around certain aspects of partnership financial information in undertaking this review, and in certain key areas clear financial information has not been available from LST. An example of this is the lack of clarity around the overall profitability of the deal to LST. As the arrangement is based on trust and open book accounting, difficulties in being able to accurately determine mutually agreed facts is a cause for concern.

The effectiveness of the Partnership to date has been hindered by a number of key ongoing disagreements which have created tensions rather than the planned partnership approach. Management time has recently been spent on the resolution of these matters rather than generating innovation and enhanced service quality.

There have been delays in the implementation of performance management systems and significant elements remain outstanding. Performance measures drive behaviour, and key elements of the performance management system are not directly linked to critical areas of service delivery such as broadcast continuity. There are opportunities to increase the efficiency and effectiveness of parts of the performance management system.

Property services on the whole appear to have improved against in-house BBC delivery standards prior to the creation of the Partnership. One of the key benefits that the BBC perceived in LST, however, was the prospect of ‘world class’ service including the ability to deliver innovation and efficiency improvements in service delivery. There appears to have been little innovation introduced by LST and greater benefit sharing has therefore not materialised.

The complex nature of this partnership makes the need for clear communication of the arrangements and a willingness to commit by the occupiers and users an important factor to facilitate effective operation. Communication between the BBC customer (the business occupiers), BBC Property and LST could be improved. There is also evidence that some BBC divisions and users are finding current arrangements cumbersome. There may be an opportunity to improve the empathy and commitment of the users towards the Partnership.

Since commencing the arrangements in 2001, key individuals responsible for the Partnership have subsequently moved on from both organisations. This type of arrangement relies as much on relationships and knowledge of the background as it does on the legal contracts. The vision established at the outset has yet to be fully realised.

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SU M M A RY

7

Recommendations

Although we recognise there have been some major benefits to the BBC through the creation of the Partnership, we have set out the following recommendations aimed at improving current arrangements.

Whilst the Partnership has delivered some major benefits to the BBC, fundamental improvements are required to obtain the full benefits

The BBC vision for the Partnership, which was outlined within the detailed Information Memorandum, was to create “a commercial relationship based on trust, cooperation and representing a genuine partnership”.

Both parties recognise that change is required. There is a determination to improve the arrangements and a willingness to explore opportunities to develop the Partnership for the benefit of both parties, but it is impaired pending the resolution of ongoing disagreements. A fundamental step change will require full support of senior management from both the BBC and LST.

We have identified a number of operational management issues to be addressed and changes to be made to create a sustainable Partnership.

Re-engineer the dealCertain aspects of the commercial arrangements require re-working to make the Partnership operate more effectively for both the BBC and LST. This is commonly required in long term partnering contracts. This should include a focus on the following areas:

Settle all outstanding issues – A number of disagreements, which are absorbing management time and creating tension, need to be resolved as soon as possible to allow focus on more positive agenda items.

Agree lifecycle risk – Fundamental to the effective transfer of risk is the question of lifecycle, for which a solution is required at a price that represents value for money. A misalignment of objectives will lead to replacement responsibility and asset management decisions residing with the BBC.

Establish effective performance management provisions – Performance management, penalties and benefit sharing mechanisms under the contract are not working effectively and need to be re-negotiated.

Review Partnership processes and controls – Key processes and controls that impact on the effective

management of the Partnership should be reviewed and improved. These could include CM approval and delivery, performance management, issues resolution and customer interface and feedback.

Effective managementConcurrent with a review of the deal, the BBC and LST should look to improve a number of people and process areas;

Create a BBC Property ‘Smart Client’ unit – A key objective of the property partnership was to allow the BBC to become a ‘thin’ client. BBC Property should have clearly defined responsibilities as an advisor to the BBC business to ensure that the Partnership is delivering value for money for the BBC. It needs to create clarity regarding its role, have total confidence in its people and have a clear transition plan to achieve a sustainable Partnership.

Engage the BBC User/Occupier – The Partnership is perceived as being ‘owned’ in BBC Property and the BBC users need to understand the service level obligations, the constraints under which services are delivered and take some ownership of the relationship.

Enable the preparation of valuable management information – Key management information that allows the effective delivery of the service and understanding of overall performance needs to be collated and regularly reported. This could include overall financial performance, forward work forecasting, activity based reporting and key metrics such as ‘broadcast minutes lost’. BBC Property is currently making progress in this area which should enable a prompt resolution to this issue.

It is paramount that both partners can reach consensus on the reality of current performance and share a renewed commitment to the aspirations set down three years ago (or an updated vision).

It is recognised that changes to the deal will affect the risk and reward structure. If this cannot be agreed with LST at reasonable and acceptable levels then it may be necessary to go back to the market. Abandonment of the Partnership at this stage would put an end to one of the most innovative property partnerships in recent years, would lose the opportunity to capitalise on major investments already made and would have a major impact on both organisations.

Actions had already been initiated by the BBC to understand the major areas of difference and investigate the agendas that exist on both sides. This report is intended to assist this process by highlighting those issues and identifying improvements that can be made to increase the value for money delivered to the BBC through this Partnership.

BBC PR O P E RT Y – VA L U E FO R MO N E Y RE P O RT 7

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The Partnership offered the BBC an innovative solution to realising its property vision

1.1 The Partnership arrangement was based on a clear set of objectives which supported wider corporate aimsIn order to clearly understand the rationale for the creation of the Partnership, it is important to first consider the wider strategy of the BBC.

During the late 1990s, the BBC was seeking to achieve a step-change and respond effectively to new challenges in broadcasting, created by the evolution of new technologies. The BBC recognised the location, condition and design of the BBC property portfolio had an important role to play in facilitating its strategic objectives.

“We have plans to refurbish many of our buildings in the next five years to bring

them up to 21st century standards with the aim of making the BBC a more stimulating environment … We can make the BBC a better place to work and, as a result, make better programmes and give the Licence Fee payers, the people who pay our wages, a better and more innovative service.”

Greg Dyke, BBC Director General, on his appointment, 1st November 1999

In response to the wider strategic change within the BBC, a strategy for the long term direction of the estate was developed and articulated within the BBC’s 2020 Vision paper. The Vision outlined how the BBC estate needed to change to better support the core business and assist in facing future broadcasting challenges. BBC Governors endorsed the 2020 Vision for the future of BBC property in May 1998.

In delivering its accommodation and construction services strategy for the early part of the 21st century, a benchmark standard for the future of the BBC estate was outlined within the 2020 Vision. The Vision itself was based on five core principles aligned to the BBC’s corporate strategy:

Flexibility:

Buildings designed with more than one function in mind.

To move in or out of buildings as the BBC’s needs change.

Technology:

Be capable of accommodating all media.

Easy use of best technology.

Adjust with the technological needs.

Open-plan working.

Talent (attracting and retaining):

An attractive, comfortable and safe working environment.

Buildings located in easily accessible locations.

Buildings must strengthen the core BBC brand values.

Audience:

Offer the public opportunities to experience the BBC in action.

Cost:

Assist in saving money, not wasting it.

Be capable of being run efficiently, not least in energy terms.

Be imaginative in the creation of funding strategies.

1.2 The estate was in poor condition, inefficient, and a legacy of under-investment meant the BBC faced significant challenges in delivering its strategyHistorically, the BBC had under-invested in its estate and as a consequence was faced with a number of challenges in making the 2020 Vision a reality. Many BBC staff, in particular those in London, were accommodated in poor quality buildings and it was clear to the BBC that significant parts of its estate were in need of substantial refurbishment.

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The London estate was also inefficient from an operational perspective, with buildings located on a disparate and ad hoc basis. As a result, the BBC developed a property strategy for the London estate. In seeking to realign this estate, a recommendation was made for a consolidation

from seventeen sites into three major complexes. This three site strategy was based principally around Broadcasting House, Television Centre and White City. The strategy is summarised in the following diagram:

The aim of this ambitious plan was to improve the estate, deliver operational efficiencies (including economies in the provision of FM services) and other cost savings resulting from the vacation of existing accommodation.

Substantial redevelopment and refurbishment projects were required at the three major sites to accommodate staff displaced in the rationalisation. As a result, considerable

investment was central to the implementation of this strategy. In order to quantify and compare the additional capital investment required with that needed to maintain the existing estate, the three site strategy was compared with a ‘standstill’ option. The ‘standstill’ was based on continuing with the occupation and maintenance of the existing estate. The BBC assessed the cost of both options over a 20 year term as shown in Table 2 below:

Fig 2: Strategy for the London estate

BBC Governors endorsed the Vision for London and the recommended consolidation of the London estate into three major sites in February 2000.

The three-site strategy was estimated to increase the net annual cost by £10m equating to an additional £105m (20 year NPV) compared to the standstill option. This strategy therefore required an additional 11% expenditure to be incurred over the next 20 years.

Table 2: Standstill compared with the three-site strategy

Strategy Net Cost (20 year NPV) Net Annual Cost

Standstill £990m £94m

Three-site Strategy £1,095m £104m

Television Centre 1.0m sq ft

Other W. London 1.3m sq ft

Central London 0.8m sq ft

Brock House 29,000

Overall reduction 9%

Western House 43,000

New Egton House 160,000

Henry Wood House 89,000BH 464,000

Woodlands 320,000

White City II 550,000

White City 401,000

TVC 1,000,000

Source: BBC

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SE C T I O N ON E: TH E PA RT N E R S H I P O F F E R E D T H E BBC A N I N N O VAT I V E S O L U T I O N TO R E A L I S I N G I T S P R O P E RT Y V I S I O N

Benefits of Estate Management PFI Deals

Operational benefits

Flexibility: These deals give departments flexibility in their occupation of estates, allowing them to vacate a large proportion of their estates without being charged and to occupy additional space as required by evolving business strategy.

Focus on core business rather than estate management issues: Reduced staff numbers in estate related functions are expected. Staff may also be transferred to the private sector contractor.

Facilitating strategic thinking: Promoting a long-term focus on business need and how the estate can best be used to serve that need.

Transfer of risk: Risks transferred usually include rent increases, costs exceeding budgets, losses on property development, costs associated with vacation of flexible properties, compliance with health and safety regulations and service delivery below set standards.

Consolidation and rationalisation with a single service provider: Prior to these deals, departments had to deal with fragmented service contracts. These estate management deals consolidate these to a single contract with one service provider who deals with sub-contractors.

Standardised services across the estate: A single point of access for service delivery issues is usually created via a helpdesk, often available 24 hours a day, 7 days a week. Helpdesks generally deal with reported faults such as replacement of light bulbs, emergencies such as a broken lift and service requests for porterage and room bookings.

Incentivising performance: A payment mechanism that makes deductions for poor performance is used to incentivise the contractor to maintain standards of service delivery.

Professionalism in estate management: Experts in estate management are brought in. They are best able to take advantage of the property cycle, deal with estate management risks and bring cost effective management of the property portfolio. This frees the public sector from dealing with rent reviews, lease negotiations and disposal of surplus property with multiple landlords.

Other Government departments: There may be opportunities for other government departments to occupy space within the state and share the benefits of the deal.

Financial benefits

Cost reduction: Cost savings are to be expected through reduced facilities management (FM) and maintenance costs, lower capital expenditure, receipts from the disposal of surplus property, and potential savings on utility charges and the purchasing of items such as furniture.

Upfront payment: A capital release from the sale of the properties can be made in the form of a one-off up-front payment from the contractor at the start of the contract.

Profit share: There are opportunities for further gain by including profit-sharing mechanisms in the contract.

1.3 Financing limitations demanded an imaginative funding solutionFunding the planned London consolidation presented the BBC with its most significant challenge given the BBC’s financial limitations. These can broadly be summarised as follows:

The BBC Charter prohibits the corporation from borrowing more than £200m; and

This borrowing limit was designed to cover short term working capital requirements rather than long term structural funding.

To be consistent with the 2020 Vision, the BBC assessed that the following additional financing restrictions should also apply in meeting the investment needs of its estate:

Not to commit its existing debt capacity; and

Not to impact on the Licence Fee.

In essence, the BBC was seeking to deliver the core objectives of a consolidated and upgraded estate financing without recourse to the BBC’s borrowing limit and with no impact on the Licence Fee.

Given these parameters, the BBC realised that an imaginative funding solution would need to be developed. In order to assist the BBC, the Governors endorsed the continued engagement of NM Rothschild to explore potential funding solutions.

Two alternatives were identified as potential financing options for the BBC Vision for London:

Self-finance through a substantial sale and leaseback(s) of existing freehold properties.

The introduction of external finance through the creation of a property partnership with a private sector partner.

At this stage, neither option was discounted but the BBC envisaged a number of additional benefits from a financing solution involving a partnership with a private sector organisation. Many of these benefits are common to other public-private property partnerships. Included below is a summary of these highlighted within the National Audit Office report ‘PFI: The Steps Deal’:

Source: National Audit OfficeTable 3: Benefits of estate management PFI deals


1.4 The BBC decided to seek a property partner as a catalyst for changeA recommendation was made to BBC Governors in February 2000 to commence a procurement process in order to explore the creation of a partnership with the private sector. The BBC articulated an extensive mix of objectives, aspirations, evaluation criteria and requirements for a partnership with the private sector. In any project of this scale it is crucial to define clear objectives on which success can be measured.

The commercial objectives of the BBC contained within the detailed Information Memorandum communicated to bidders were clear and unequivocal:

Provide continuously the accommodation and services required to support the changing BBC business needs.

Allocate risks to the party best able to manage them.

Achieve the best value solution for the BBC overall.

Show no increase in borrowing on the BBC’s balance sheet as a result.

Share in the value created.

These objectives are relatively subjective and difficult to measure but they nevertheless provide a basis for assessing the degree of success achieved to date by the BBC in creating a successful property partnership.

1.5 Most risks were transferred although lifecycle remains an issuePrior to creating the Partnership, the BBC was responsible for virtually all property related risks. These risks have an impact individually and there are complex interdependencies between them particularly where they arise in the vicinity of occupied buildings and core business operations. The following summary identifies a number of the key property related risks:

FM operating risk (including Health and Safety).

Cost/price increases.

Planning and design risk.

Construction risk.

Vacant space and occupancy.

Business continuity.

Lifecycle risk.

Planned Preventative Maintenance responsibility (building fabric and plant).

Leading up to and during the bidding process, the BBC recognised that the scale and complexity of their proposals carried significant risks. Considerable time and effort was spent by the BBC Property team and its external advisors to identify these risks and put mitigation strategies in place.

In May 2000, DAP Consulting carried out a review of the partnership proposals which included an evaluation of risk transfer. This review was generally supportive of the BBC risk mitigation proposals but did draw attention to the need to remain alert to constantly changing circumstances.

In creating the Partnership, the BBC sought to transfer the responsibility for the majority of the risks identified above, particularly construction risk on White City. Many of these risks, including the operation and costs of FM services, appear to have largely been transferred to LST at the outset.

Lifecycle risk, outside of White City, has not been transferred. It was intended to transfer lifecycle responsibility for the rest of the estate; this has not been achieved as the BBC did not believe that the price proposed by LST for such a transfer represented value for money.

Instead of LST providing lifecycle services across the London and Scottish Estate they provide a planned preventative maintenance service which results in a division of responsibility between LST and BBC. For example, LST is responsible for the day-to-day maintenance and replacement of items under £5,000, whereas the BBC is responsible for replacement of items in excess of this cost threshold. As a result, in some cases it may be more cost effective for LST to request that an item be replaced by the BBC rather than it being repaired at a cost below £5,000.

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2.1 The White City development was a successWhite City is the only element of the BBC’s existing estate to be operated as a total property outsourcing arrangement, involving property transfer and consequently lifecycle risk.

The development constituted the first major project identified within the BBC’s Vision for London and was therefore a key milestone in the BBC’s planned consolidation of the London estate. There was a need to create this new space at that stage because of lease expiry dates elsewhere in the estate.

Managing a development of this scale represents a major risk to any corporate occupier, requiring in-depth development, project and construction management expertise. Unplanned increases in the budget and timescale for the White City scheme had the potential for serious implications on business continuity for the BBC as a whole.

Successful management and funding of the White City development was a major factor leading to the creation of the Partnership with LST, and the development partnership vehicle used as the funding structure was intended to form the blueprint for future developments. White City is now

completed and the majority is occupied by the BBC. It is a state of the art development widely perceived by BBC staff and management alike as a major success.

As a significant development in its own right, White City II (Media Centre, Broadcast Centre and Energy Centre) is the subject of a National Audit Office review. This report therefore does not seek to duplicate the detailed assessment to be covered by that review but merely highlight the key findings relevant to the Partnership.

2.1.1 The White City development was delivered ahead of time and on budgetThe development of White City represented a key opportunity to implement a cornerstone of the BBC’s property strategy and begin to deliver the quality of estate outlined within its 2020 Vision.

The development comprised two principal buildings; the Broadcast Centre and Media Centre, together with various other perimeter buildings. Initial design work on White City commenced in early 2000 prior to the creation of the Partnership. Preparation work continued throughout 2001, including enabling works on site and the securing of detailed planning consent.

The Partnership has delivered a number of major benefits

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White City - exterior

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Table 4: Percentage of satisfied customers

Area/Building 2002/03 2003/04

Scotland 67.0% 72.3%

TUV/West London 63.5% 69.9%

Central London 67.5% 71.9%

White City Media Village, London 64.9% 69.2%

Overall 64.8% 70.8%

In tandem with the BBC’s progress on the development, negotiations continued with the Partnership, for which White City was to form a central part. Management of the development was transferred on completion of the Partnership legal agreements and construction work commenced on site shortly afterwards.

The development was completed ahead of time, as follows:

Broadcast Centre – Completed October 2003 on schedule.

Media Centre – Completed January 2004 16 weeks early.

The phased occupation of the buildings took place from October 2003 and continues into 2005. The BBC is levied an annual Unitary Charge on White City based upon availability for occupation. The development was delivered on budget at a ‘not to exceed’ cost of £243m, excluding enhanced fit-out, furniture and migration costs.

2.1.2 Full risk transfer has been achieved on White CityThe Partnership arrangements with LST have achieved a high degree of risk transfer on the development and management of White City. There were major development and construction risks on the scheme which had potential financial and operational implications for the BBC core business. These risks were managed successfully by LST and subsequently by the Partnership.

LST is responsible for the whole life costs and long term management of White City and the interests of each of the partners over the long term are aligned to the effective maintenance and operation of the property. Maintenance and replacement of lifecycle items have been transferred to LST on this development in contrast to the remainder of the London and Scotland estate.

2.2 The annual customer survey shows FM performance has improved year-on-yearPrior to the creation of the Partnership, FM services within the BBC were delivered in-house by a substantial property team. Anecdotal evidence from interviews with BBC management and end users suggests that an indifferent delivery of FM services had been apparent, particularly across the London estate.

The personnel responsible for delivering FM services to the London and Scottish estate include a substantial number of in-house BBC FM staff transferred under Transfer of Undertakings, Protection of Employment (TUPE) arrangements to LST as part of the Partnership deal. It was envisaged that outsourcing the responsibility for the provision of FM services to a leading private sector property services organisation would achieve improvements in the quality of service.

Year-on-year customer satisfaction with FM services is tracked through an independent survey conducted independently by Leadership Factor. This survey is the principal mechanism for LST and BBC Property to obtain feedback from end users on the quality of FM service delivery. A sample of 800 BBC customers, occupying buildings to which LST deliver FM services, are canvassed annually (split equally across central London, TVC, White City Media Centre and Scotland). The results of the customer survey are contractually linked to the penalty system and the results of the survey are considered a priority by LST.

The results of the Leadership Factor customer surveys for the past two years are summarised in Table 4:

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There has been a clear improvement in customer satisfaction with FM service delivery.

A formal survey has not been conducted as part of this review but a number of users within BBC business units have been interviewed. Anecdotal evidence during these interviews was mixed and not necessarily consistent with the findings in the customer survey. The majority did, however, express the view that the quality of services has improved relative to in-house delivery pre-partnership.

Section six of this report discusses issues relating to the management and operation of FM services but overall the Partnership appears to have delivered improved FM services across the BBC London and Scottish estate.

2.3 The BBC achieved a substantial element of cost certaintyAs a creative and dynamic organisation, the BBC has many competing interests and pressures on its annual budget. There is real pressure to demonstrate the ability to consistently deliver annual cost certainty, particularly in non-core, support functions such as property and facilities services.

The Partnership with LST is based on a Contract for Occupation and Services for which the BBC has agreed a fixed charge (Unitary Charge) for the long term provision of FM services.

Inflationary pressure on costs assumed at the outset of the Partnership is factored into the Unitary Charge on an ongoing basis and the annual charges are fixed. As a result, the risk of fluctuations and cost pressures in the market for the provision of FM services has been transferred, becoming the responsibility of LST. To illustrate the financial impact and associated risk transfer, the BBC ran the following risk sensitivities:

SE C T I O N TW O: TH E PA RT N E R S H I P H A S D E L I V E R E D A N U M B E R O F M A J O R B E N E F I T S

Table 5: Illustrative value of risk transfer

Annual compound

increase in FM

Annual compound increase in the cost of major plant and

building fabric

Increase in White City development

cost

Adjusted cost to in-house BBC

Adjusted LST cost

Diff

Base Case (Case1)

- - - £793m £669m £124m

Case 2 2.5% 5% 7.5% £1,033m £669m £364m

Case 3 5% 10% 15% £1,423m £669m £754m

Note: Lifecycle risks in relation to White City only

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Based on scenario analysis of the cost increase assumptions, the potential value of risk transfer to the BBC is shown above as being between £364-754m over the full term of the Partnership. LST is committed to absorbing these cost increases. This will be a substantial benefit in the event of cost increases of this scale.

2.4 BBC achieved a TUPE transfer of a significant number of in-house staffPrior to the Partnership, the BBC in-house property team comprised a substantial number of staff managing and delivering FM and CM services across the business. The creation of a partnership with LST offered the BBC an opportunity to transfer a substantial proportion of these in-house staff that had been carrying out non-core activities.

In creating the Partnership with LST, the BBC successfully achieved a full transfer, under TUPE legislation of approximately 350 in-house staff. The transfer of these staff

to LST provided both the BBC and the transferring staff with a number of benefits:

BBC reduced fixed costs associated with employing in-house staff delivering and managing non-core activities. (We are unable to substantiate the level of cost saving achieved based on the information available.)

BBC reduced exposure to resourcing fluctuations resulting from the variations in service requirements of a larger corporate occupier.

BBC took advantage of economies of scale provided by a more efficient service provider.

BBC gained access to broader skill base and innovation by engaging a specialist with a core focus of FM and CM service delivery.

Transferred staff had the potential of a more attractive career path and progress within a larger dedicated FM and CM organisation.


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3.1 The Partnership was procured following a competitive, market-tested tender processWhen the BBC sought to procure a private sector partner as a means of realising its property vision, the market for large strategic property partnerships was in its infancy. In order to attract sufficient interest the BBC clearly communicated its objectives and aspirations of a partnership to the market.

Throughout the procurement process, the BBC developed an alternative self-delivery option involving a series of sale and leaseback transactions as a potential means of delivering its property vision.

The following sections summarise key stages of the procurement process which is set out in greater detail at Appendix 2.

3.1.1 The BBC sought partnership proposals from the market and received substantial interestIn order to encourage the maximum number of expressions of interest from the market and avoid imposing onerous commitments at the outset on bidders, the BBC followed a two stage procurement process.

In early 2000 in accordance with European Union procurement rules, a preliminary Information Memorandum, seeking outline proposals from the private sector, was issued on behalf of the BBC by NM Rothschild. This provided information to the market, setting out the envisaged basis of partnership, describing the BBC’s overall objectives and basic information on the estate.

In operating a two-stage process, the BBC and Rothschild’s, were able to evaluate the different approaches taken before requesting more detailed proposals from a short listed group

of bidders. Five consortia were short listed in July 2000 as part of the second stage, and each was issued with a detailed Information Memorandum setting out the scope of services upon which to bid.

3.1.2 A structured evaluation of the bids took placeDetailed bids were received by the deadline of 31 August 2000. In order to properly assess the legal, technical and financial aspects of each bid, an evaluation panel of specialists was assembled. The panel consisted of the BBC in house specialists and external advisors.

A series of assessments were undertaken by the team to evaluate each bid with an overall focus on the qualitative and quantitative aspects of each proposal:

Quality and non-financial aspects

This area focused on technical, operational and managerial aspects of the proposals. The technical capability of consortia, their approach and compatibility with the BBC was assessed to ensure that lowest cost was not the only consideration.

Price, risk transfer and financial aspects

The second assessment involved an evaluation of the detailed financial, pricing and risk transfer proposals of consortia. Specifically, the robustness of the financial model underpinning the pricing and the overall financing structure of consortia was assessed to ensure a partner with sufficient financial strength to sustain a long term partnership was appointed.

In order to compare the relative merits of the consortia, a scoring exercise was undertaken by the panel. A summary assessment of the bidders was presented to BBC Governors on October 2000, together with a recommendation to undertake a more detailed financial assessment of the proposals submitted by the Insight (LST) and Foresite (Amey) consortia.

Assumptions were made within the original business case upon which LST were appointed, which could erode some of the benefits of the deal and which are still to be fully quantified

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In order to cover all key areas of the proposals, panel members were mixed to form teams with responsibility for evaluating 13 defined aspects of the submissions, including human resources, performance measurement, financial model, contractual issues and financial structure. The full list of work streams is included in Appendix 2.

A comprehensive assessment took place over a number of months leading to a recommendation to BBC Governors in March 2001 to enter into exclusive negotiations with the preferred bidder, LST.

3.2 The business case appeared to offer significant financial benefitsThe recommendation put before BBC Governors in March 2001 set out the general background to the scheme and the scope of activities covered. Approval to the Partnership with LST was sought in June 2001. The BBC Governors approved the deal, subject to Government (Department of Culture, Media and Sport) approval, finalisation of the legal structure, completion of negotiations and sign off by two of the BBC Governors.

The BBC undertook detailed analysis to provide an objective comparison of cost between in-house delivery and the LST bid, comparing how the BBC costs for Scope A activities compared with LST. (Scope A activities were those to which the BBC and the partner were committed from contract signature and which were fully priced at that point.) The analysis included the transfer of the White City site, development of the Broadcast Centre and the Media Centre with associated infrastructure at White City, operation of FM services for all of London and Scottish estates, lifecycle risk for White City, management of lifecycle for the rest of London and Scotland, and the provision of CM services across the UK.

The business case put to Governors stated that LST costs were £124m less than the costs the BBC would incur if they carried out the in-scope activities themselves (LST £669m compared to BBC £793m).

Table 6: Comparison between the BBC and LST costs

Net Present Cost to the BBC BBC Does it Itself LST

FM £566m £445m

Lifecycle £36m £16m

Property Vehicle / Central Costs £20m £23m

White City Capex £191m £210m

Residual Value (£20m) (£30m)

Other (incl financing) £0m £25m

Transfer Payment for White City N/A (£20m)

Total Net Present Cost to the BBC £793m £669m

At the time of the deal, the BBC negotiated an upfront payment of £20m which would be repaid annually over the Partnership term. A further £15m was also transferred in consideration of costs incurred by the BBC to that date on White City development and planning activities.

The LST bid was for a fixed Unitary Charge and does not change with upward adjustments to baseline cost. This was a particularly attractive aspect of the LST offer which provided not only value for money but risk transfer and cost certainty. The potential financial benefit to the BBC of this element of risk transfer is highlighted earlier in this report, within Section 2.

Within the contract there were built in mechanisms and assumptions relating to continuous improvements. The initial continuous improvement benefits were assumed within the bid model and have therefore been taken regardless of whether any actual improvement or innovation has been achieved. Additional benefit sharing, as described in the contract, has not happened.


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3.3 Clarity surrounding floor areas was not resolved during the bid process and this is currently the subject of disagreementIn requiring prospective partners to price the cost of delivering FM services to the estate, the BBC did not independently validate the size of its in-scope (London and Scottish) estate for provision to bidders. This was a conscious decision by the BBC as they decided that it should be the bidders’ responsibility to undertake the necessary due diligence, and any increase in costs resulting from subsequent changes in floor area was at the risk of bidders and is a cost they would ultimately bear.

LST took the unwarranted and unverified BBC information on floor areas as the basis for calculating the annual Unitary Charge in their build up to a costed proposal for the provision of FM services and assumed that if this information subsequently turned out to be incorrect, an adjustment to their bid price would be made.

This issue is the basis of the current “areas disagreement” between the BBC and LST and is centred on the overall area of the estate being taken from the in-house BBC PADS system. PADS is principally a space charging system, excluding communal space, car parks and other non-useable spaces. The area generated from PADS represented net useable area (NUA) and therefore it was not a reflection of the net internal area (NIA) or gross internal area (GIA) of the estate.

Both the BBC and LST have subsequently commissioned independent surveyors to undertake a measuring exercise in accordance with the Royal Institute of Chartered Surveyors Code of Practice across the in-scope partnership estate. Although not directly comparable to the bid data, the discrepancy between the actual and assumed areas is between 17% and 40% depending on the basis of the measurement. As a result of this discrepancy between the bid data and the actual measurements, an issue has now arisen between the BBC and LST as to whether the additional floor areas has led to LST incurring an increase in cost of delivering FM services to the estate and being entitled to further payment as a result of additional costs for delivering FM services to the estate.

Broadcasting House — interior


3.3.1 The additional cost resulting from the floor areas debate could impact on the financial benefits of the PartnershipThe pricing of a reduced floor area has a potential material impact on the cost of the Unitary Charge to the BBC and may reduce the financial benefit perceived by the BBC in 2001. The amount by which the in-scope estate was understated is now agreed. The current disagreement between the BBC and LST is whether the additional floor areas has led to LST incurring an increase in cost of delivering FM services to the estate and being entitled to further payment as a result of additional costs for delivering FM services to the estate.

The contract contains the following provision:

“This assumption simply seeks to confirm that the properties in the Model match the in scope properties. The Property Vehicle will seek to price any properties in scope which are not in the model. GIA assessment will be carried out by the Property Vehicle where required within the first six months of the agreement. Where GIA is significantly different from that given in the model, the Property Vehicle will have the right to recalculate the Unitary Charge for the property concerned by applying the relevant £/m2 for the FM Service(s) against the revised GIA.”

The BBC and LST have interpreted this clause in different ways and both have taken independent legal advice. Our review does not seek to interpret the clause or the advice received by either party. However, in forming a definitive view as to whether the contract offers value for money, the outcome of this matter is critical.

Discussions to resolve the matter continue and agreement of any potential financial impact of the incorrect floor area information has not been reached at the time of writing this report. Any references to potential settlement or financial outcome of the discussions have been deemed to be commercially sensitive. It should be noted that the outcome of the current areas disagreement may have a material impact on the evaluation of value for money.

3.4 Variable CM costs could have been forecast in the business caseAlthough LST are obliged to demonstrate value for money from all CM services, no forecast of the likely quantum of these services over the term of the contract was undertaken in approving the terms of the Partnership. Even though this is discretionary spend and therefore not contracted, we would expect a forecast based on estimated or historic volume. To date, the volume of CM work has been substantial, the cost of which has amounted to almost the same level as the Unitary Charge on which the original analysis was based.

3.4.1 CM expenditure currently exceeds the Unitary ChargeTaking the complete financial years of the Partnership (excluding anomalies), CM costs represent a significant proportion of BBC expenditure with LST, comprising between 38% and 46% of total Partnership expenditure (see graph below). The corresponding proportion of Unitary Charge (including the development charge for White City) was between 38% and 39%, the remainder from the cost of variable services (paid for on an ‘as used’ basis).

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Fig 3: Proportion of annual Partnership costs

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3.5 The overall scale of the deal increased substantially through negotiations reflecting developments of scope and specification of servicesThe BBC considered the Partnership with LST to be the most cost effective of all the market bids. The overall cost at that time was understood to be £124m less than the BBC in-house comparison. The submitted bids and in-house comparison included the BBC desire to enhance the quality standards of FM services.

Approval to the Partnership with LST was sought in June 2001. The BBC Governors approved the deal, subject to Government (Department of Culture, Media and Sport) approval, finalisation of the legal structure, completion of negotiations and sign off by two Governors.

A series of scope changes and contract adjustments occurred during the post bid negotiations with LST. As the BBC has passed on risks in relation to health and safety and other areas, it was decided by the BBC at this preferred bidder stage that in order to achieve risk transfer on these items, the following additional services would also be transferred to the LST contract. These services were the “assumed services” and included asbestos management, security and lift maintenance. This resulted in a significant increase in the LST contract sum of £159m (£7.6m per annum) to £828m. Much of the increase

was due to these assumed services. These services were taken on by LST at the then prevailing BBC cost, with a view to LST using their expertise to reduce the charges over time. The information produced by the BBC (following a request at the time of this review) based on it’s financial model, illustrated that the majority of the in-house BBC comparator also increased in line with the additional specification and scope of services being requested. Although it is normal practice for post bid negotiations to occur in transactions of this type, it should be noted that, inevitably under these circumstances, price competition for these changes was limited.

SE C T I O N TH R E E: AS S U M P T I O N S W E R E M A D E W I T H I N T H E O R I G I N A L B U S I N E S S C A S E U P O N W H I C H LST W E R E A P P O I N T E D, W H I C H C O U L D E R O D E S O M E O F T H E B E N E F I T S O F T H E D E A L A N D W H I C H A R E S T I L L TO B E F U L LY Q U A N T I F I E D

Pacific Quay — interior

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BBC ‘do it yourself’ NPV £m

LST NPV £m

Variation NPV £m

Governors’ Report June 2001 793.6 669.1 124.5

Governors’ Report June 2001 (restated)*

793.6 689.1 104.5

Adjustment:

Residual benefit share - (2.2) 2.2

Additional services** 122.1 114.5 7.6

Revaluation diff - (1.6) 1.6

NPV adj reflecting movements in timing

21.3 26.4 (5.1)

Increase LST overhead - 1.9 1.9

Contracted Nov 2001 937.0 828.1 108.9

June – Nov 2001 increase 143.4 159.0

* This adjustment was the result of the BBC identifying a £20m error in the initial bid cash flows at the time of this review as a result of double counting the one off £20m payment

** See breakdown in table below

The majority of the movements (£122.1m BBC and £114.5m LST) related to additional services and scope changes as identified below:

Table 8: Breakdown of additional service cost

BBC ‘do it yourself’ NPV effect

over 30 years £m

LST NPV effect

over 30 years £m

LST Average annual NPV

£m

Increase in scope and cost of security 34.0 34.0 2.7

Increase in scope and cost of cleaning 11.9 10.9 0.9

Increase in service scope - additional portfolio management 3.3 3.3 0.2

Move post room Bush House to LST 1.1 1.1 0.1

Move switchboard services (Scotland) to LST 0.4 0.4

Move asbestos management to LST 15.7 15.7 1.1

Move lift management to LST 11.1 11.1 0.8

Move porterage to LST 10.3 10.3 0.7

Adjust cost of FM in WC2 26.4 23.8 1.5

Decrease net sublet rental 0.4

Remove lifecycle (excl WC) (4.4) (0.3)

Remove FM services (0.8) (0.8) (0.1)

Other services included / extended 8.7 8.7

Total 122.1 114.5 7.6

Table 7: Movement in costs from bid price

22

4.1 FM and CM service benchmarks appear broadly in line with market normsFM and CM services were procured by the BBC as part of the Partnership in a competitive, market tested process. The Unitary Charge (FM) and fee rates (CM) were fixed over the 30 year contractual term. The cost of services procured by the BBC can therefore broadly be said to represent the best available in the market, at that time, for the type of service arrangement created.

When considering value for money it is difficult to draw like for like comparisons as the Partnership provides a relatively unique scope of activities. In addition, FM and CM services are often relatively bespoke, being driven by individual occupier needs. Accurate benchmarking is therefore problematic.

4.1.1 Benchmarking with recognised FM consultants suggests the cost of FM services represents value for moneyIn order to measure the cost of services, the BBC and LST have engaged FM consultants to carry out benchmarking against market norms. Benchmarking is not an exact science, particularly in the case of the BBC which is a dynamic, 24/7 organisation that has relatively demanding service requirements. We would therefore not expect BBC services to be low cost, relative to the market.

The most recent benchmarking survey was undertaken by Johnson Controls in August 2004 and sought to compare the proportion (approx. 23%) of the Partnership estate included within Johnson Controls cost database. In the survey, the vast majority of FM services within the estate analysed were benchmarked (approx. 82% by cost).

At an individual service level, most are benchmarked as medium/lower quartile cost services compared to market norms. There are, however, exceptions where this is not the case including the cost of lift management services and overall contract management costs (including corporate overhead).

Lift management is an ‘assumed’ service, transferred to LST at the existing BBC cost level. With innovative management it may be possible to achieve efficiencies in the future. In the case of contract management costs, Johnson Controls consider there to be a number of exceptional items, including TUPE carrying costs, which is not reflective of a steady state and therefore not comparable. After stripping out these exceptional items, management costs decrease to the mid-point. The cost of LST overhead within the Nations and Regions proposal also suggests that LST overheads are generally high.

Overall, Johnson Controls consider that total cost performance compares favourably against the comparison sample being below the overall cost mid-point and representing good value for money.

Fig 4: Johnson Controls benchmarking results

Source: Johnson Controls

4.1.2 Based upon the broad scope of services and profile of projects, the CM rates appear reasonable The contract provides that LST receive a percentage CM fee based on the value of the works. The fees may appear high when compared to market norms but there are significant factors that should be taken into consideration:

The fee is fixed on each project at the end of the feasibility stage.

The fees were obtained competitively when the Partnership was procured and should not be viewed in isolation.

The core services represent reasonable value for money

SE C T I O N FO U R

LST FM Cost Benchmarking

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The service provided by LST is one of holistic project consultancy as required and is not limited by individual scope of services.

LST generally takes on the responsibility for up to two iterations (which is difficult to assess) of client design development.

There is no mechanism to vary the fee should an alternative procurement route be adopted such as design and build. On such a route the responsibility for design would pass to the contractor and be included within the construction cost. Therefore it would appear that in such circumstances duplication of cost could be a potential risk.

The total value of CM based projects with approved business cases (B2 stage) was £105m between contract start in 2001 and 30th June 2004, with approximately £10m of specialist services, transferred and managed projects.

The following graphs illustrate the distribution of projects by value and by number. This shows that 37% of the value is in relatively few of the projects over £1m, whilst 47% of all projects by number (less that £10,000 in size) account for only 2% of spend.

Fig 5: Distribution of projects by number

Source: LST

Fig 6: Distribution of projects by value

Source: LST

Under the contract, the CM service is provided by LST exclusively across the UK, provided that they can demonstrate value for money. However, outside of London LST have had difficulties providing a cost effective and efficient service and in some instances other service providers have been used.

The contract requires LST to prove value for money on each project that they submit for approval and this is achieved in two different ways:

For projects over £100,000 LST will normally go to the market for competitive tenders based upon a detailed design.

For projects under £100,000 LST will go to one of their Measured Term Contractors. The estimate will be based upon the tender rates submitted by these contractors. The final price will be reviewed elementally and benchmarked to a cost database provided by Currie & Brown, a leading quantity surveying practice.

The BBC user and BBC Property sign off the business case, which fixes the LST fee.

Press photograph of the BBC buildings

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5.1 Maximum value is not being achieved through the current mix of service providersIt was clear during the bidding stage that several areas, outside of the initial scope agreed, were needed for the BBC to maximise value from the Partnership. Almost all consortia also recognised this requirement at the detailed bid stage expressing a strong willingness for a broader partnership and recommending that additional areas be incorporated.

Strategic partnerships of this kind offer opportunities to leverage further value resulting from greater economies of scale through alignment with a single service provider. The BBC also recognised that expansion would offer these benefits.

Strategic expansion and the continued alignment of the Partnership to a single service provider arrangement would offer the BBC a more effective property services operating/delivery model, thereby maximising value from the Partnership. This growth has not materialised and the current, fragmented mixture of service delivery, developed over recent years, comprises strategic partnership, outsourced service providers and BBC in-house delivery (see diagram below):

Table 9: Mix of current service providers

Source: Ernst & Young

5.1.1 There were several areas which did not form part of the Scope A arrangementsAs part of the development of its approach to creating a partnership and subsequently refined during negotiations with LST, the BBC excluded a number of activities which were envisaged to form part of a future extended partnership.

Planned expansions to the scope of partnership activity and the associated Unitary Charge were highlighted as Scope B activities within the BBC Governors Transaction Approval paper in June 2001. In addition, further expansion possibilities, beyond Scope B, were identified:

Table 10: Scope B and further planned expansions

The implementation of developments within the Unitary Charge of developments at Pacific Quay, Broadcasting House and future phases of White City; and

Transfer of lifecycle risk for the remainder of the London and Scottish estates (in addition to White City)

Geographic extensions of the partnerships to the rest of the UK, referred to as Nations and Regions;

Implementation of developments outside of those specified within Scope B; and

The transfer of property ownership, possibly with the exception of the BBC’s most high profile buildings (Broadcasting House and Television Centre).

Because the Partnership has not evolved as planned, maximum value is not being obtained

FM ProviderTransfer Property

Ownership

Lifecycle Maintenance

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Development Finance

Estates Management

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LST BBC BBC LST LST BBC/Bond LST

White City II LST LST LST LST LST LST LST

Nations & Regions

Haden Young

BBC BBC LST 3rd Party BBC BBC

Northern Ireland

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SE C T I O N FI V E


5.1.2 Future expansion was a key partnership objective The BBC expected to expand the scope of the Partnership and this was confirmed within the detailed Information Memorandum issued during procurement. Although some of the areas were specified, the BBC also anticipated unforeseen future benefits would result from partnership evolution.

The BBC Governors Partnership Recommendation paper in March 2001 stated within a summary of Key Benefits of Partnership:

“The maximum benefit will come through extending the activities of the Partnership ideally in the medium term and integrating its activities fully within the BBC’s planning and operational processes.”

This statement was consistent with LST’s own objectives and expectations at the outset of the contract and that of almost all other bidders at that time.

5.2 The Partnership has not expanded as originally envisaged An option for the BBC was for the Partnership to expand both geographically and functionally, providing expansion areas offered value for money. It has not been expanded to any significant degree, outside of Scope A. Variations to the estate and services have been implemented but these have been limited in nature and relate to day-to-day estate management rather than any structural change. Evolution has been extremely limited in comparison to that originally intended and has not moved the Partnership towards a more recognised Total Outsource model.

To date, a number of expansion opportunities have been proposed and LST has submitted a number of detailed bids to the BBC, however few have been taken up as the BBC feel the proposals submitted have not offered value for money.

5.2.1 Transfer of lifecycle risk on the in-scope estate (excluding planned vacations) has not occurredAllocating risks to the party best able to manage them was a key BBC objective in creating the Partnership. The transfer of risk on the repair and maintenance of lifecycle items (building fabric, plant and equipment) represents an important issue to the BBC, particularly considering the legacy estate.

Following the establishment of the Partnership, LST undertook due diligence to establish the condition of the portfolio and the extent of backlog maintenance. A programme of building surveys confirmed that a historic under-investment by the BBC in its buildings has led to significant condition issues and the need for substantial capital expenditure.

LST subsequently prepared proposals to transfer lifecycle risk to the Partnership and a business case was submitted to the BBC in July 2003. Approval was sought for capital expenditure of £257m over the remaining 28 years of the contract, representing an annualised cost of £6.2m (indexed) to enable LST to take responsibility for lifecycle items.

To date, the BBC has not accepted the LST business case on the basis that it is not convinced that the cost proposed represents value for money. It is the view of the BBC that the onus of proving value for money for substantial annual expenditure on this scale rests with LST and that evidence of value for money was not clearly demonstrated in the business case submitted. The BBC has not undertaken a comparison with a third party or its in-house expenditure. At the time of the fieldwork, the business case remained open for discussion but the negotiations appeared to have reached an impasse.

The transfer of lifecycle risk was always considered to be an optional extension, and one that would only be taken up if it represented value for money to the BBC, but not having it as an integral service is still considered a significant issue to the Partnership. Most public-private partnerships provide for this kind of risk transfer, often as a result of property transfer, and it can be an effective means of aligning the interests of the partners. In addition, there are further implications for the effective functioning of the existing Partnership. The impact of lifecycle risk and penalties relating to broadcast continuity are explored further within section 6.4 of this report.

5.2.2 Operating FM services for the BBC Nations & Regions portfolio is not provided by LSTAt the outset of the Partnership the BBC and LST aspired to leverage the existing FM service delivery model for the London and Scottish estate to other parts of the estate. A number of advantages were envisaged in consolidating FM service delivery to a single arrangement with LST including achieving further economies of scale in procurement, central costs and in providing consistent service delivery across the majority of the estate, providing it offered value for money.

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Preliminary discussions to consider FM services for the BBC Nations and Regions portfolio were held in March 2002 and a comprehensive business case was submitted to the BBC on 23 May 2002 by LST. Discussions between LST, BBC Property and BBC Nations and Regions continued for several months following the submission. After assessing the existing in-house costs, the BBC considered the LST bid too expensive (£0.5m p.a. more than the in-house costs), mainly as a result of the LST overhead. A decision was then made by the BBC Nations and Regions Board to competitively tender the contract for FM services in the market and obtain a third party comparator and although a like-for-like comparison did not take place against the LST bid, the preferred proposal submitted by another provider showed a cost saving over BBC in-house delivery of £0.3m p.a. Based on the estimated cost (which offered initial and projected savings) and the negotiated contract structure (including a regular renegotiation opportunity), a decision was made in early 2003 to enter into an agreement with Haden Young.

5.2.3 Development funding on Broadcasting House and Pacific Quay is not provided by LSTA structure for development finance for White City was agreed as part of the initial partnership arrangement, including holding the completed development in a ring-fenced development partnership vehicle. The structure and financing agreed for White City was intended to be used as the model for future BBC developments, subject to it providing maximum value for money. Use of this funding structure on other projects is entirely at the discretion of the BBC.

When the White City development partnership was created, alternative sources of funding available to the BBC to implement its property strategy were more limited than at present. In recent years, interest rates have reduced and financing options with lower yields have been available for high calibre credit covenants such as the BBC. As a result, external property development funding became more attractive when compared to financing through the Partnership model.

A 100% debt funded securitisation solution was adopted for the BBC’s next substantial re-development, Broadcasting House, as it provided better value for money for the BBC (broadly estimated to be in the region of £200m gross rental savings over the life of the lease). The financing process for this development commenced at the end of 2002 following an analysis comparing the cost of capital within the LST

development partnership with alternatives available in the market. This route was available for Broadcasting House as UK capital markets had matured sufficiently to provide confidence in completing a day-one 100% debt capital markets financing and the BBC were willing to commit to a fixed rent start date and go through the rating agency process.

5.3 The contract does not always provide practical solutions to issues arising under its arrangementsThe BBC recognised the value of transferring just the Scope A services, and the major benefits that the contract has offered demonstrate that this, in itself, was value for the BBC. However, at the time of signing the contract, there were several outstanding issues regarding expansion of scope. To derive further benefit from the Partnership arrangements as set out in the COS, the scope of services would need to expand.

Although there are exit arrangements, the 30 year commitment under the COS does not offer any practical methods for the contractual terms to change effectively and quickly in the changing environment that the BBC now finds itself operating in.

5.3.1 Neither partner is contractually committed to expand the contractThe Partnership and supporting financial model were structured to deliver flexibility, enabling variations and extension to be implemented within the existing framework. There is, however, no defined timetable or route map to accommodate expansions, nor any specific obligations on LST or the BBC to crystallise the position. Specifically, the contract contains no timescale or trigger mechanisms in this regard which would otherwise provide leverage for expansion.

The mechanism and cost of any expansion must therefore be mutually agreed on a case-by-case basis. This gives the BBC an absolute right of refusal over expansion proposals. Neither partner has control over the timescale or scope for expansion and in this regard the Partnership is substantially geared towards mutual trust.

SE C T I O N FI V E: BE C A U S E T H E PA RT N E R S H I P H A S N O T E V O LV E D A S P L A N N E D, M A X I M U M VA L U E I S N O T B E I N G O B TA I N E D

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5.3.2 The BBC decided that it was willing to commit to Scope A services whether or not the Partnership expandedIt is clear that the ability of both partners to derive the maximum benefit from the Partnership is dependent on an expansion to the scope of activities. In order to maximise value for money, the BBC must place substantial trust in its relationship with LST over the long term.

In the event of a deterioration or breakdown in the relationship, the long term nature of the BBC’s commitment under the Partnership precludes it from seeking alternative solutions for scope A activities over the 30 year term and the BBC did not seek to include an exit or formal renegotiation on the basis that the initial scope of the Partnership did not expand.

5.4 FM and CM standalone services are being delivered by a total property outsource providerThe legal contracts themselves were developed to support a partnering, not contractual approach. However, the arrangements did not commit either party to important aspects of a total property Partnership at the outset.

As there was neither transfer of property ownership nor any significant risk transfer in relation to the lifecycle maintenance of the BBC portfolio, the evolution of the Partnership relied on the partners to agree these elements after the initial legal commitment.

5.4.1 Outside White City, the major elements of the Partnership are long term FM and CM contractsIn practical terms, with the exception of White City, the Partnership consists of a 30 year FM contract on the BBC’s London and Scottish estate and a 30 year CM contract covering the whole of the UK, which is an unusual approach. Outsourced FM and CM contracts are not uncommon, although typically differ substantially in terms of the length of contract. Shorter terms, often between three and seven years, represent more usual market practice, providing the ability to re-tender in the market on a regular basis. In this way, the flexibility to re-tender service provision and amend the scope of contract at regular intervals is retained by the employer.

5.4.2 The core business of LST is total outsourcing of property servicesThe core business of LST is total property outsourcing, enabling an organisation to transfer its short and long term property needs to a single specialist provider. Typically, LST seeks to take responsibility for the ownership, management and development of all or part of a client’s estate, enabling property assets and liabilities to be managed using an integrated property service model.

Standalone FM and CM services are not the core business of LST and do not fully exploit its range of skills as an organisation. LST acknowledges that they are unlikely to offer the most competitive prices and they do not currently seek to provide FM and CM commissions outside of an integrated model. The Chief Executive of LST, recently stated that his company ended their pursuit of a partnership with Bradford City Council because:

“There was not enough risk transfer. It was becoming more of a potential

management exercise rather than a property outsourcing in the true sense. We tried to persuade them that they could get better value by doing something more dramatic, but they didn’t want what we were offering. We felt that we probably wouldn’t have won it. The Carillions of this world could win that kind of deal.”

Source: Estates Gazette, Staying in STEPS, 04 September 2004

Expansion towards a total outsource model on value for money terms, an objective at the outset of the Partnership, would better align LST as service provider with the BBC. In the absence of expansion, doubts may exist over whether LST is the most likely partner to provide value for money in this type of arrangement.


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5.5 The Unitary Charge was intended to operate on an open book and good faith basis The Unitary Charge finances (principally FM services, development charges and lifecycle maintenance) are based on a comprehensive financial model comprising a detailed estimated income and expenditure profile. This model was created by LST and is used to determine the Unitary Charge levied upon the BBC over the 30 year Partnership term. It should be noted that variable charge items (ie. CM services and ‘Pay as You Use’ FM services) are not included within the model, as these fluctuate relative to consumption by the BBC.

5.5.1 Clear financial information has been difficult to obtain

In line with BBC requirements, the calculation of the Unitary Charge was intended to operate on an open book and good faith basis requiring the disclosure of key financial data by LST. For example, the financial model makes explicit the annual profit forecast allowed for by LST and the level of return estimated by LST in pricing the cost of Unitary Charge services supplied to the BBC.

It is not within the scope of this report to audit or perform due diligence on the Partnership finances and we have been

largely reliant on information supplied by LST. We have experienced some difficulty in obtaining clear financial information in a timely fashion which is perhaps a reflection on the current quality of management reporting information provided by LST to the Partnership.

In attempting to review the status of Partnership finances relative to the profit and loss forecast within the financial model, we experienced a series of delays and it is apparent that this level of information is not readily available as part of the management accounts of the Partnership. We have concerns that existing management information is not sufficiently transparent or robust to provide important financial data and we understand that this may have led to current delays in signing the statutory accounts. The BBC appears to have a lack of confidence in the financial information provided by LST to the Partnership.

We recognise that the introduction of a more comprehensive monthly management reporting package is planned but this is not yet agreed or operational. We would recommend the introduction of a clear management accounting and reporting package, updated on a consistent basis, as a Partnership priority. In the event of a Partnership renegotiation taking place, it is essential that clear, robust financial information is available to facilitate agreement.

BBC PR O P E RT Y – VA L U E FO R MO N E Y RE P O RT

Press photograph BBC building

5.5.2 LST do not reconcile Partnership finances to the original bid model or to their published accounts Within the financial model developed as part of LST’s proposal to the BBC, LST forecasted losses over the first two years of the Partnership before reaching profitability in FY 2003/2004 - based on earnings before interest and tax (EBIT) over Partnership financial years, as opposed to contract years. Included below is a summary of the profit and loss (EBIT) forecast within LST’s bid model and actual results over the first three years of the partnership.

Table 11: Reconciliation of bid model profit and loss to LST published accounts

Financial Years (£m’s)

2001/02 2002/03 2003/04 Total

Bid Model EBIT (12.9) (1.4) 2.3 (12.0)

Actuals per LST published accounts

(8.5) (11.3) 6.6 (13.2)

Variance 4.4 (9.9) 4.3 (1.2)

LST financial information setting out the annual EBIT level over the first three financial years shows an overall loss to LST of £13.2m, compared to a forecast loss of £12m within the financial model.

The responsibility for the provision of financial information to the Partnership rests with LST. At the time of this review it was not possible to obtain information on the actual expenditure incurred to date on the Partnership, and how it related to the bid model position or LST’s published accounts. The information contained in the table has had to be created by LST following our request. Had such information been available throughout the course of the Partnership, it would have addressed uncertainties over the actual profits and losses being made, and provide a much more transparent position on finances to both partners.

The requirement for the provision of financial information is set out in the Contract for Occupational Services. Although the requirement to reconcile LST’s annual accounts to the bid model is not explicit, not reconciling the profits or losses incurred by LST back to the original bid model and the published accounts, raises not only concern over the transparency of financial information available to the BBC,

but over the ability to readily identify profits that would form part of any benefit sharing arrangements included within the contract.

Although the figures have not been audited, they indicate that there have been significant variances from the profit and loss forecast by LST. These variances are both positive (years 1 and 3) and negative (year 2) and the overall net effect is that LST has incurred a loss of £1.2m in excess of forecast during the first three years of the Partnership. Much of the 2003/04 profit resulted from Unitary Charge income received early following the completion of WC3.

It should be noted that these figures make no allowance for any additional income resulting from a settlement on the floor areas disagreement. As outlined previously, the outcome of this disagreement may impact on the Partnership finances.

29

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6.1 The BBC Divisions are not consistently committed to the Partnership arrangements and there is a lack of clarity on roles and responsibilitiesIn a complex partnership of this type, clear communication of the arrangements and a willingness to commit by the occupiers and users are important to facilitate effective operation. Communication between the BBC customer (the business occupiers), BBC Property and LST, could be improved although service and satisfaction levels have risen. BBC users do not appear to understand the terms or nature of the deal with LST, and as such some are finding current arrangements cumbersome.

During negotiations, and in the transition to the Partnership, BBC Property could perhaps have more effectively engaged with the BBC customer in order to help them understand specific requirements and incorporate these into the formulation of operating systems as appropriate. At the time of the deal, BBC Property believed that they had an adequate understanding of the user requirements and indeed it was their role to interpret that requirement into the property need. In addition, it is understood that it would have been very difficult to have built into the agreement the greater level of complexity necessary to meet the requirements of each individual operating unit.

For the contract to operate effectively, BBC Property needs to achieve its aim to become a “thin client”, allowing LST to engage with the BBC businesses. In doing so, LST should understand their needs and respond with appropriate and market leading service.

6.2 Key ongoing disagreements have hindered the effective management of the Partnership *(* Note - this section of the report does not seek to assess the relative merits of each partners’ case or the outcome of these disagreements, but merely to outline their impact on the effective management of the Partnership.)

The BBC vision for the Partnership outlined within the detailed Information Memorandum was to create “a commercial relationship based on trust, cooperation and representing a genuine partnership”.

There are a small number of significant disagreements which currently exist between the BBC and LST. These issues currently demand a substantial amount of management attention as efforts are made to bring about a resolution and are therefore hindering the operation of the Partnership in areas such as the implementation and improvement of partnership performance management systems.

Both partners acknowledge considerable frustration with the current operation and future direction of the Partnership. This is illustrated by an extract from the minutes of the quarterly Property Vehicle Board meeting in August 2003, which states: “Agreement on major commercial issues is the key to resolving some of the operational and financial difficulties currently being experienced by the Partnership”.

It appears that much of the willingness to explore opportunities to develop the Partnership is being lost pending the resolution of disagreements. These disagreements will inevitably generate pockets of adversarial behaviour.

The Partnership needs to change

SE C T I O N SI X


6.2.1 The floor areas disagreement is unresolvedThe disagreement over the impact of LST basing its Unitary Charge on unwarranted and unverified information supplied to bidders during the bid process, is outlined earlier in this report. As a result of the discrepancy between the bid data and the actual measurements, an issue has now arisen between the BBC and LST as to whether the additional floor areas has led to LST being entitled to further payment as a result of additional costs for delivering FM services to the estate.

This disagreement has been ongoing with no agreement being reached at the time of our fieldwork for this report. Both partners view the outcome of the disagreement as being of substantial importance to the future value of the Partnership.

6.2.2 There are other more minor commercial issues that also require resolution LST have issues relating to the increased working capital charges being incurred from delays in payment by the BBC. In preparing its bid, LST proposed a minimal allowance for working capital charges based on the expectation of consistent prompt payment of invoices by the BBC. Delayed

payments are causing LST to incur unplanned costs through interest charges on partnership working capital. Conversely, the BBC has issues over the lack of transparency in partnership finances which are impacting on their ability to approve invoice payments. The lack of clear detailed financial information supporting invoices is leading to the need for more thorough audit of payments, resulting in delay.

The BBC also has issues relating to credits due, delayed vacation payments, delayed benefits and assumed services, and delays to any benefit sharing emerging.

6.3 Planning processes within the BBC prevent the efficient delivery of CM services by LSTCM enables the delivery of construction projects across the national BBC estate. CM services are funded by the business unit requiring the project to be completed and there is no central co-ordination of these projects. This issue has created inefficiency at LST in two areas, the impact on Measured Term Contractors, and LST resource planning.


6.3.1 There has been a significant reduction in workload for Measured Term Contractors Measured Term contracting is commonly used by the construction industry to deliver minor works, based upon a schedule of rates which can be applied to the project in question. Areas of the project not covered by the schedule of rates can be priced and agreed in advance of the project start and if necessary checked with one of the other Measured Term Contractors. There is no guarantee of workload, albeit when tendering for the works the contractors are normally provided with an indication of the likely spend. (In this instance LST describe minor works as those falling below £100k.)

On appointment, LST took over the existing Measurement Term Contractors from the BBC. At that time there were three contractors undertaking approximately £15m of workload per annum evenly distributed between them. LST decided that they would prefer to have four contractors sharing this value of work and undertook a retendering exercise. The new contractors’ prices were, on average, 12% lower than previously in place.

The overall workload currently being awarded to the Measurement Term Contractors is £4m per annum, which is significantly less than when the Partnership started. As a consequence of the lower volumes, the contractors have been resigning and the number has recently reduced to two. This issue impacts the flexibility and speed of response that LST can provide. An increase to the £100k threshold has already been considered, but for larger projects the Measured Term contract is less likely to deliver value for money.

6.3.2 Fluctuations in CM workload adversely impact on LST resource planningThe CM process appears robust but can be variable and may face delays to the project programme, which reflects the unpredictable nature of corporate occupier requirements. Typically, many large organisations have a fluctuating requirement for construction services; their needs will vary from year to year and may also fluctuate during the course of the year. This element of workload is usually generated by the

SE C T I O N SI X: TH E PA RT N E R S H I P N E E D S TO C H A N G E

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BBC business divisions in response to their current or forecast need. Under the contract, the BBC has effectively transferred the risk of fluctuating workload to LST. The communication of anticipated future requirements by the BBC does appear to be the source of some frustration to LST and the extent to which the BBC forward plan and co-ordinate this stream of work is unclear. As the risks around fluctuation have been transferred, it may not be high on the BBC’s agenda.

LST acknowledge that there is no contractual obligation for the BBC to provide a minimum or consistent level of CM workload but claim that this lack of information does not allow them to have visibility on future workload, making the CM delivery inefficient. Whilst the deal never provided any promise or guidance over the requirement for CM services, LST made assumptions of a requirement similar to that experienced prior to the formation of the Partnership. As requirements emerge, LST can be slow to respond depending on whether they have available capacity. This can lead to inconsistent and inefficient delivery to the financial detriment of LST and occasionally to the frustration of the BBC. Whilst LST understand the risks that they took on board at the start of the contract, there was an expectation that the BBC would do more to assist in the provision and regulation of this information. Going forward, this is an area which the BBC and LST may wish to improve.

6.3.3 There is a robust but cumbersome process of project authorisationLST has agreed a process for instigating and approving CM projects with the BBC. Sign off of the project in terms of programme, cost, scope of works and specification occurs at key stages on the project. At each stage, LST must provide a sufficient level of information, increasing in detail as the project progresses. This is then approved or rejected by a BBC panel assembled by BBC Property.

After initiation by the user the project often gets delayed as BBC Property and LST agree the level of information required to allow approval to the next stage. These delays often frustrate the user resulting in dissatisfaction.

6.3.4 Key performance indicators can encourage a focus on cost to the detriment of other elements

Performance measurement is covered in section 6.4 of this report. Of the six measures covering CM, the only one actually attracting penalties relates to cost performance. If the cost exceeds the approved budget, after allowing for increases due to client variations, then LST’s fixed fee is reduced by 2%. This encourages an undue focus on cost issues away from the other key areas of the project. Client variations are presumed responsible for any delays that occur on the projects and attract the cost of the time overrun if necessary. This is demonstrated by the graphs of project performance year to date.

The graphs, above and to the left, show the performance in time predictability relative to cost predictability with 0 being the worst score and 10 the best. The first graph shows the majority of projects scoring between 9 and 10 on the predictability of cost. The second graph across the same sample shows a wider distribution of projects in terms of time predictability with a significant proportion scoring only one.

KPI2 - Time Predictability

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6.4 Performance Measurement Systems are incompleteIn assessing value for money of any service, quality as well as cost must be evaluated in detail. Comprehensive and clear measurement of service provider performance is therefore an important factor in assessing whether services represent value for money overall. Performance measurement is a key tool in driving the desired behaviours from any outsource service provider. Ensuring that there is a clear link between customer requirements and service priorities is the best method of influencing effective delivery of services, thereby promoting overall customer satisfaction.

6.4.1 Implementation of performance management systems has been more difficult than envisagedA number of performance management principles agreed within the Contract remain outstanding at the third anniversary of the Partnership. There are three key areas of performance measurement used to assess how effectively FM and CM services are being delivered by LST:

Availability: In the event that accommodation becomes ‘unavailable’ for use by failing to meet certain basic criteria (lighting, heating etc) the BBC shall not be required to pay the Unitary Charge for the space for the period it is unavailable. Accommodation is divided into critical and non-critical, the penalties being substantially weighted in the event that critical space is unavailable.



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Fig 9: Implementation achieved compared with contractual timetable


FM Performance: LST incur penalties on a sliding scale relative to performance scores measured against a series of 85 weighted KPI’s outlined within the Contract. A proportion of the Unitary Charge is put at risk against each weighted KPI in the event of underperformance.

CM Performance: The Contract provides for the development of a performance measurement system, based on a number of KPI’s which were not specifically determined at the outset. These have subsequently been weighted against accommodation categorised into degrees of criticality to business continuity. The performance scores generated are then used to calculate penalties or reward.

It is these measures that drive financial penalties and, in some instances, incentives from a share of any upside benefit created by service provider innovation or efficiency. Ultimately, these are used as a tool to measure, and where necessary, ensure improvement in the quality and efficiency of service delivery.

Although the Contract contains details on KPIs, weightings and the mechanisms for penalties and benefit sharing, a number of areas were deferred and subject to detailed agreement, due diligence and benchmarking prior to being implemented. To date, agreement on the implementation for a number of these areas remains outstanding.

On the left is a summary comparing the timescale for the implementation of performance management system as specified within the Contract with the actual milestones for implementation achieved by the Partnership. The left hand side of the diagram shows the dates when implementation of the PMS was planned, the right hand side shows the date when it was achieved.

Taking each of the three major performance management system areas in turn, included below is a summary of implementation efforts to date:

Availability measures are ineffective In the absence of agreement to transfer lifecycle risk to LST, it was intended to assess the condition of accommodation and identify any maintenance required to enable the introduction of availability. Although estimated timescales are outlined in the above diagram, no specific timescale was identified for implementation. It was anticipated that timescales for implementation would differ between critical and non-critical spaces, reflecting the relative degree of risk associated with each.

FM performance management system has been suspended

The FM performance management system was introduced within four months of commencing the Partnership. There are issues with the system and its operation, highlighted in the following sections, but for the most part, it has continued to operate since that early stage.

Concerns over the link between performance measurement and service provider behaviours led to suspension of the FM system between April and June 2004. It was hoped that suspension would empower LST, and in particular their sub-contractor service providers, to focus on service rather than measures. The system has recently been re-introduced, with the exception of building engineering.

CM performance measurement is incomplete

The introduction of the CM performance management system was subject to a benchmarking exercise and a pilot scheme prior to implementing financial penalties, and a 12 month period was provided within the Contract to undertake this exercise.

The implementation of the full CM performance measurement process is incomplete. Initially, a 12 month delay was experienced due to there being too few projects to enable effective benchmarking. Despite the more focused approach to performance measurement in the provision of CM services, the system (within CM) is not linked to any financial penalties. We understand that due to a dispute over the interpretation of KPIs at the commencement for the Contract, LST are not liable for penalties until the detail of the system is agreed. At present, the BBC envisages that the system will be linked to financial penalties in the next 12 months. Penalties will not be applied to performance management information recorded to date.

The Mailbox


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6.4.2 LST incurred penalties equivalent to only 0.25% of the Unitary Charge during 2003/2004 Penalties are based on a sliding scale of relative performance measurement scores generated from a variety of sources including customer signed audit sheets. Penalties are incurred when performance drops below 95%. A performance score below 50% would result in the entire Unitary Charge ‘at risk’ being deducted. In essence, LST should incur penalties unless service delivery standards are maintained at a very high level.

During 2003/2004 (April 2003 - March 2004) LST incurred a penalty amounting to just 0.25% of the corresponding Unitary Charge and they continue to incur relatively modest penalties in relation to the overall Unitary Charge, based on the current performance measurement system in operation.

Penalties rarely exceed £10,000 per month which is very low relative to the overall level of Unitary Charge. The BBC considers that these do not reflect current standards and are insufficient to adequately penalise poor performance. The Partnership operates on a self-regulated basis and the BBC has the right to challenge the underlying performance data that generates penalties. In practice the BBC rarely exercises this right as it has a limited resource to do so.

It should be noted there is no independent audit or certification of the performance scores or penalties as this was not envisaged as justified in a partnership arrangement. It is commonplace and usual good practice to independently verify performance measurement when the ‘thin client’ organisation is unable to perform this role itself.

6.5 Innovation in service provision has not met BBC expectationsIn creating a partnership with a leading private sector property service organisation, the BBC anticipated that it would benefit from their deep property services skills. The following criteria which were used by the BBC in assessing initial bids clearly illustrate their expectations of the Partnership:

Bring innovation to the BBC’s property estate to achieve the 2020 Vision; and

The ability to work in partnership with businesses to deliver efficient property skills & develop the role of the property partnership

One of the benefits the BBC perceived in LST was its ability to deliver innovation and efficiencies in service delivery setting an expectation for benefit sharing which, to date, has not been met.

6.5.1 Improvements in assumed services have been disappointingLST has committed to delivering efficiencies and cost savings and these are priced into the Unitary Charge paid by the BBC irrespective of whether they are achieved. Delivering these efficiencies is an LST responsibility (and risk) and as a result, the BBC has secured ‘baseline’ efficiencies.

One area of particular focus currently are those services transferred by the BBC to LST at existing (pre-partnership) cost levels, referred to as ‘assumed services’. The BBC expected LST to deliver efficiencies against these assumed services resulting in cost savings over the in-house BBC cost. To date no savings in assumed services have been achieved.

LST recognise that efficiencies on assumed services should be possible but we understand that there have also been upward cost pressures offsetting the ability of LST to drive efficiencies from these services. Specifically, the recent introduction of new, more onerous regulations in relation to asbestos management, cost inflation within the security market, and the likely impact of the European Union Working Time Directive on security costs were highlighted.

Future efficiencies should be possible and are expected once key disagreements are resolved and key partnership staff are able to focus on innovation and generating improvements.

6.5.2 No material additional benefit sharing has taken place, other than those contracted at the outsetAs part of the Partnership approach, a mechanism for sharing upside benefit resulting from innovation is provided within the Contract. Seventeen potential benefit sharing opportunities were envisaged and mechanisms are included within the Contract. Some potential benefit sharing is dependent upon expansion of the contract but the majority relates to scope A activities currently in place. To date, there has been very little benefit sharing delivered suggesting that LST have not been able to produce efficiencies in excess of basic expectations.



Although the BBC anticipated LST would drive further efficiencies, the financial aspects of its proposal (outlined earlier) were evaluated as a base case ignoring benefit sharing.

6.6 The spirit of partnership is not fully developedTrust is a key tenet in the effective operation of an arrangement of this kind. In creating the Partnership with LST and transferring much of its existing in-house technical expertise, the BBC is largely reliant on the credibility of financial and performance information provided by LST. In order to have confidence in the information provided and to maintain the effective operation of the Partnership, it is essential that a high degree of trust exists between the partners.

6.6.1 Key individuals have departed from both organisationsDuring the procurement process the BBC was impressed by the Trillium/Land Securities team and in particular the vision of key individuals, including Manesh Chande (formerly of Trillium). This LST team articulated a vision for the future direction of the Partnership which was consistent with the philosophy of the BBC. This clearly resulted in a high degree of confidence and positive chemistry between the two organisations.

Since commencing the Partnership in 2001, key individuals involved at the time have subsequently moved on from both organisations. Leavers include Manesh Chande and Ian Robertson, Head of BBC Property. Similarly, at a contract management level, both the BBC and LST have had significant personnel changes.

The lack of continuity in the day-to-day management teams of the partners appears to have had a negative impact on many of the ongoing disputes as new people inevitably have less ownership of the original concept. In such a complex partnership agreement, there are major risks of knowledge loss without effective succession planning and, although efforts are being made by both partners, much of the original ‘chemistry’ has been lost.

6.6.2 The BBC, as a ‘thin client’ organisation, is not receiving the ‘world class’ property management expertise it expectedThe successful transfer of BBC in-house staff to LST is highlighted earlier in this report as a major benefit of the Partnership. Several advantages were highlighted, including the ability of the BBC to manage its property services function with a relatively small in-house team. This transfer passed deep knowledge of the estate and the BBC business to LST but also provided the BBC with the opportunity to perform a more strategic role.

Success of an operating model of this kind is dependent on an effective relationship with outsourced providers including mutual trust, the delivery of quality, value for money services and good management information.

An increased quality of service provision has been demonstrated following the creation of the Partnership but the BBC does not believe it is receiving the added value that a ‘world class’ property service provider was expected to bring. Innovation and the resultant benefit sharing have not materialised and the poor quality of performance management information provided is limiting the successful operation of a ‘thin client’ model within the BBC. In particular, much BBC Property time is currently spent on reconciling and auditing the financial and performance information provided by LST.

The BBC is seeking to introduce a number of reporting structures to simplify and improve management information allowing its in-house staff to focus on more strategic issues. At the time of our fieldwork, the detail of these is yet to be fully agreed and introduced.


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Appendix 1: Scope and methodology

Objectives and ScopeThe objective of this study was to assess whether the BBC is achieving best value for Licence Fee payers from its Partnership arrangements with LST. They also considered what, if any, action could improve the arrangements of the partnership and the delivery of these benefits. We therefore designed this study to answer key questions about the LST/BBC partnership arrangement as follows:

Whether the arrangement is consistent with the overall needs of the BBC;

Whether the overall objectives of the arrangement are being delivered effectively;

How well the arrangement compares in terms of cost and quality with that achieved by external best practice;

The potential scale of the opportunity for improving VFM; and

How best any opportunities identified could be achieved.

Given the complexity of the partnership arrangements and the broad spectrum of areas covered, we adopted a findings based approach to reporting providing commentary on important issues rather than providing detail on every aspect we covered during our review.

Our scope did not cover a review of Broadcasting House or Pacific Quay as each has been subject to its own independent value for money assessment, nor did we review White City II as that is currently the subject of a separate National Audit Office value for money study.

MethodologyWe were provided with information and data from a variety of sources in order to obtain evidence to answer the above questions and substantiate any findings raised. In addition we held structured interviews with a number of key stakeholders from the BBC and LST.

1. Documentary review and analysisWe reviewed and analysed documents held by the BBC and LST. The purpose of this review and analysis was to confirm the BBC’s objectives and approach and the outcomes achieved. Documentary sources of evidence we examined included papers from the BBC, LST and third parties covering:

process and performance information;

strategy papers;

financial information and reports including the financial bid model;

documents provided surrounding the appointment of LST including bidding instructions, bid evaluations documents, commissioned reports;

the Contract for Occupational Services (CoS);

benchmarking reports;

structure, organisational data; and

customer satisfaction questionnaires.

AP P E N D I C E S


2. Fieldwork and interviewsIn addition to the review of information and data provided, we undertook interviews with key stakeholders to substantiate findings and gain further evidence. The table below shows details of the roles of individuals within the organisations we consulted:

Table 12: Organisations and roles consulted

Organisation Position/Area of Responsibility

BBC Chief Operating OfficerHead of Corporate Real Estate, BBC Property Head of Contract Management, BBC PropertyFinance and Commercial Director, BBC PropertyHead of Estates Strategy, BBC Property Programme Manager, BBC PropertyFinance Analyst, BBC Property Finance and Planning Manager, BBC PropertyHead of Major Developments, BBC PropertyCommercial Manager Major Projects, BBC PropertyProject Director Major Projects, BBC PropertyHead of Property Services, BBC PropertySenior Contract Managers, BBC PropertyContracts Manager Construction, BBC PropertyFinance Manager, BBC PropertyProject Director, West 1 Project, BBC PropertyValue for Money teamCommercial Lawyer, Corporate Legal and Intellectual Property Head of Business AssuranceProject Manager, Business AssuranceInformation Manager, Information Security and Quality AssuranceLead Human Resources PartnerHead of Finance, Rights & Business AffairsHead of Divisional Services, News ResourcesController Distribution and Technology, World ServiceHead of Resources Services, World ServiceDirector of Finance, Radio and MusicDirector of Finance, BBC Broadcast

Land Securities Trillium Chief ExecutiveBBC Contract ManagerDirector of Finance, Facilities ManagementHead of OperationsOperations ManagerFinance OfficerHead of Construction Management

Savant Consultant to the BBC

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Appendix 2: Procurement process

The BBC selected a partner following a competitive, market-tested, tender processIn order to explore the relative merits of creating a property partnership with the private sector, the BBC, assisted by NM Rothschild, commenced a comprehensive procurement process.

To be consistent with good market practice and provide a contingency, the BBC continued to consider a self-financing solution to ensure a like-for-like comparison with the creation of a partnership.

The BBC sought partnership proposals from the market and received substantial interestIn early 2000, an OJEC notice and preliminary Information Memorandum seeking outline proposals from private sector organisations, was issued on behalf of the BBC by NM Rothschild. The information provided to the market, setting out the basis of partnership, was based on the BBC’s overall objectives and basic information on the business and its estate.

The envisaged role of the partner and the criteria on which the BBC would evaluate proposals contained in the preliminary Information Memorandum are summarised below:

The immediate role of the partnership:

At White City

Take on ownership of the existing White City building.

Be responsible for the development of two further buildings.

Invest in excess of £200 million in acquiring, upgrading and developing the White City properties.

Be responsible for their ongoing development, management and operation over a 20 to 30-year term.

Be prepared to absorb appropriate risks.

UK Estate

Take on construction services for the BBC’s UK estate.

TUPE of BBC staff.

The role of the Property Vehicle is intended to expand through the BBC’s London estate and possibly also expand through the regional estate. The intention is that the role of the Property Vehicle will expand, on a property-by-

property basis, to take over responsibility for maintaining and providing facilities management and other services to the BBC. It is unlikely to involve the transfer of the freeholds of Television Centre or Broadcasting House.

In order to assess the merits of each bid, the BBC outlined the following criteria to judge prospective partners within the preliminary Information Memorandum:

Key BBC Assessment Criteria

Deliver the efficient management of complex development opportunities.

Bring innovation to the BBC’s property estate to achieve the 2020 Vision.

Provide long term facilities management to service critical businesses comparable to the BBC for its buildings at White City.

Manage and absorb appropriate risks.

Own and maintain plant and equipment.

Ability to work in partnership with businesses to deliver efficient property skills and develop the role of the property partnership.

Ensure a co-operative rather than adversarial partnering structure.

Provide optimum value for money and deliver the BBC’s requirements at no additional cost to the Licence Fee payer.

An understanding of the BBC’s requirements and sensitivity to the need to maintain continuity of broadcasting activities.

Willingness and ability to maintain confidentiality of sensitive matters.

NM Rothschild received responses from 11 consortia by the 25 May 2000 deadline. The consortia consisted of a variety of organisations including many recognised as market leaders in the fields of finance, facilities management, development and construction.

The BBC and NM Rothschild evaluated the submissions from the 11 consortia against the above criteria. Five consortia were long-listed in July 2000 and each party was issued with a detailed Information Memorandum.

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BBC PR O P E RT Y – VA L U E FO R MO N E Y RE P O RT

Within the detailed Information Memorandum, the role envisaged by the BBC of a Partner was clarified in further detail. The creation of a Property Vehicle was proposed to form the partner organisation and manage partnership activities. The scope of activities for which the Property Vehicle was initially intended to be responsible for was as follows:

Purchase the existing White City building and surrounding land from the BBC. Operate the building and all related facilities management services, construct two new buildings on the surrounding land and operate those in the same way. The BBC will take on a long-term occupational obligation, paying a unitary charge to the Property Vehicle.

Take responsibility for the BBC’s construction management related functions throughout the UK, including the people currently employed in the business.

Take responsibility for procuring the finance necessary to provide the above services.

Absorb appropriate risks.

It was intended that the Property Vehicle will subsequently expand through the London estate, and may also expand through the regional estate. Its role will be to:

Provide property development (including design, construction, planning and decanting) facilities management and support services for the BBC’s accommodation.

Design, achieve planning consent for, develop, equip and service new and refurbished accommodation where necessary.

Procure the finance necessary to upgrade and develop the BBC’s accommodation to meet its ongoing needs.

The objectives of the Property Vehicle will be to:

Implement a programme to achieve the 2020 Vision in the BBC’s buildings at minimum cash cost to the BBC.

Assist the BBC by providing accommodation and service flexibility to meet its changing needs, managing the risks inherent in a property estate of this nature, and maintaining continuity of broadcasting activities during all redevelopment, restructuring and decanting.

Although the BBC’s exact requirements for the creation of a partnership differed from those outlined within the preliminary Information Memorandum, the majority of key activities remained similar.

A structured evaluation of the bids process took placeDetailed bids were received by the deadline of 31 August 2000.

The creation of a partnership of this kind is complex and in order to properly assess the legal, technical and financial aspects of each bid, an evaluation panel of specialists was assembled. The panel consisted of the BBC in house specialists and external advisors.

The panel evaluated all detailed offers in accordance with the criteria for assessment detailed within the Information Memorandum. These are summarised under two groups as follows:

Quality and non-financial aspects

Technical capability to provide accommodation and services in accordance with the Memorandum and the Output Specification.

Approach to be a co-operative, transparent partnership.

Ability to demonstrate how the structure proposed will keep the BBC’s cost of property occupation to a minimum, generate fair returns for investors and align the interests of the parties should the activities of the partnership be extended.

Demonstration of technical merit, transparency, flexibility and value for money of the bid (including operating proposals, method statements and Operating and Financial Model) at the outset and through the possible extension of the partnership at a later stage.

Understanding of the BBC’s operational and commercial needs, including any proposals in relation to the management, operation and decision making procedures in the partnership.

Proposals for maintaining innovation, continuous improvement and using technology.

Ability of the partner to demonstrate its long-term commitment to the BBC and to the Partnership and to obtain finance throughout the Partnership period.

Ability to meet the demands of the BBC for the management of its property business, including the candidate’s ability to manage the effective transfer of staff to the Partnership.

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Price, Risk Transfer and Financial Aspects

The detailed price and risk transfer proposals in respect of:

Provision of accommodation and facilities management services at White City; and,

Provision of Construction Management services nationwide

The robustness of the Operating and Financial Model and figures to support the pricing structure proposed.

The pricing mechanism for determining the future Unitary Charges and Variable Charges that might apply following the extension of scope of the Property Vehicle.

The approach taken to the cost of property occupation for the BBC and the suitability of any key performance indicators.

The robustness generally of the financing structure and the availability of finance, both in the short and longer term.

A series of assessments were undertaken to assess each bid including the following:

Question and answer sessions.

Presentations by the consortia.

Meetings with individual team members on specialist areas.

Following these, an initial scoring exercise was performed by the panel and clarification sought on any areas on uncertainty.

It was clear from the evaluation process that all but one bidder was keen to secure early progress towards taking responsibility for the whole BBC estate. In order to encourage bidders to be creative and seek to deliver the maximum benefit within the partnership, the BBC communicated that it was prepared to consider variations from the exact scope provided above.

Proposals were subsequently sought for the extension of scope from White City to the whole of the London Estate and BBC Scotland including the development and operation of the proposed Pacific Quay scheme. Following the period of evaluation, a summary assessment of the five bidders was made to BBC Governors in October 2000.

A recommendation was also made in October 2000 to carry out a more detailed evaluation and financial assessment of the two preferred bidders. Following this assessment the BBC aimed to select a preferred bidder to be granted exclusivity status before commencing detailed negotiations.

Alongside the short-listed bidders, the BBC continued to refine and evaluate a BBC self-procurement option. Continuing with this option provided the BBC with a baseline comparator and also a contingency, should the creation of a partnership ultimately prove unsuccessful.

The detailed financial assessment involved the further testing of proposals against the evaluation criteria. In undertaking its detailed assessment, the evaluation panel undertook the following activities:

A plenary negotiating team addressing each of the proposals as a package.

Working groups to test and challenge proposals in specific areas including finance, operations, HR, property, technology and legal.

A programme of site visits and interviews with bidders and service partners.

A programme of bidder tours and tri-partite meetings with trade unions.

A weighted scoring evaluation.

Appraisal and testing of the operating models proposed.

Provision of Construction Management services nationwide.

The robustness of the Operating and Financial Model and figures to support the pricing structure proposed.

The pricing mechanism for determining the future Unitary Charges and Variable Charges that might apply following the extension of scope of the Property Vehicle.

The approach taken to the cost of property occupation for the BBC and the suitability of any key performance indicators.

The robustness generally of the financing structure and the availability of finance, both in the short and longer term.

A series of assessments were undertaken to assess each bid including the following:

Question and answer sessions.

Presentations by the consortia.

Meetings with individual team members on specialist areas.

Following these, an initial scoring exercise was performed by the panel and clarification sought on any areas on uncertainty.

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It was clear from the evaluation process that all but one bidder was keen to secure early progress towards taking responsibility for the whole BBC estate. In order to encourage bidders to be creative and seek to deliver the maximum benefit within the partnership, the BBC communicated that it was prepared to consider variations from the exact scope provided above.

Proposals were subsequently sought for the extension of scope from White City to the whole of the London Estate and BBC Scotland including the development and operation of the proposed Pacific Quay scheme. Following the period of evaluation, a summary assessment of the five bidders was made to BBC Governors in October 2000:

A recommendation was also made in October 2000 to carry out a more detailed evaluation and financial assessment of the two preferred bidders. Following this assessment, the BBC aimed to select a preferred bidder to be granted exclusivity status before commencing detailed negotiations.

Alongside the short-listed bidders, the BBC continued to refine and evaluate a BBC self-procurement option. Continuing with this option provided the BBC with a baseline comparator and also a contingency, should the creation of a partnership ultimately prove unsuccessful.

The detailed financial assessment involved the further testing of proposals against the evaluation criteria. In undertaking its detailed assessment, the evaluation panel undertook the following activities:

A plenary negotiating team addressing each of the proposals as a package.

Working groups to test and challenge proposals in specific areas including finance, operations, HR, property, technology and legal.

A programme of site visits and interviews with bidders and service partners.

A programme of bidder tours and tri-partite meetings with trade unions.

A weighted scoring evaluation.

Appraisal and testing of the operating models proposed.

The specific work streams mentioned above were broadly aligned to the various specialisms of the evaluation panel, summarised in this table.

Workstream Evaluation Focus

Overall Consortium Strength and alignment with BBC

Human Resources Relationships with Unions TUPE compliance HR management practices and staff transfer

Performance Measurement

Payment mechanisms Performance management and monitoring Operational methodology

Decision Making & BBC Process Management

To ensure both parties have appropriate procedures

To ensure the partnership is an effective means of liaison and communication

To ensure there are clear lines of authority on decisions

Operating & Financial Model

Operational model including, resourcing, change management etc.

Financial terms of continuous improvement, benefit sharing, scope extensions etc.

Financial model including base inputs, margins, structure etc.

Legal Contractual Issues

Managing the drafting of legal documentation

Financial Structure Details of financing (debt, equity etc.) Financial structure Ability to access finance

Technology IT system and platform Interface with other suppliers for technology

fit-out and maintenance

White City II Development capability and approach

Property Development

Strategic input, delivery methods etc.

Health & Safety Systems, policy, roles and responsibilities etc.

BBC Scotland FM Methodology and pricing

Pacific Quay Scheme work up and proposals

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British Broadcasting CorporationBroadcasting HouseLondon W1A 1AA

BBC Property:LST partnership arrangements Ernst & Young review presented to the BBC Governors’ Audit Committee,May 2005, and a response to the review from the BBC

This report is available online atbbcgovernors.co.uk

Documents

BBC Property: LST partnership arrangementsdownloads.bbc.co.uk/bbctrust/assets/files/pdf/our_work/govs/VFM_L... · BBC Property: LST partnership arrangements BBC response to the Ernst