Why Invest NI HQ was built using PFI
There has been some interest of late in government’s use of private companies to complete construction of large public sector projects via Private Finance Initiative. Mel Chittock, Executive Director of Finance & Operations explains the Invest NI project.
What is PFI?
Private Finance Initiative (PFI) deals were developed in 1992 by the Conservative government, but became widespread under Labour after 1997.
Capital Value is the likely price a property would sell for at the time of the valuation.
NPV is used to assess a given project's potential return on investment (ROI), or time value of money. It is a method used in corporate budgeting to calculate the value of money at a point in time.
Time Value of Money is the idea that the value of money today is more than it will be in the future. i.e. £1 is worth more today in real terms, that it will be in 10 years’ time.
Unitary Charges are standard annual payments made over the life of a PFI. They not only cover repayment of land costs and construction, plus lease of the building, but also insurance, maintenance, soft services, upkeep and replacement of fixtures and fittings, plus a contribution to utility costs.
PFI was designed to provide a better approach to managing the various risks to the public sector in major capital projects. It has been used across a broad range of projects such as schools, hospitals, housing and prisons.
Under PFI a private company, instead of government, meets the up-front costs and then leases the building and services to the public sector. Lease arrangements for PFI projects are long term, often 25 years or longer.
There are 33 PFI projects in Northern Ireland, one of which is the Invest Northern Ireland headquarters in Belfast.
Why was a new HQ needed?
Invest NI was established in 2002 when the Executive decided to merge three agencies to create one economic development body for Northern Ireland. It was formed from the merger of the Local Economic Development Unit, Industrial Development Board and the Innovation Research & Technology Unit.
A new building was required to house the new agency and its 550 staff. None of the existing offices were large enough and there was no suitable building available in the market to rent.
Why did government not complete the build itself?
A detailed business case was completed assessing the best option for the design, build and operation of the new HQ building, comparing both PFI and public sector options.
Important Facts & Figures
When looking at the PFI costs it is easy for figures to be incorrectly compared – for example present day costs being compared with figures from over 10 years ago.
Here are some facts and figures to help:
- The net present value of the PFI project in 2004 was £55m, against £65m for government to complete the project.
- The Unitary Charges were forecast to be £120m over the 25 years of the PFI contract.
- Based on the 2004 capital value and the estimated rental element of the projected unitary charges, the rental cost per square foot was circa £13.50 which was in line with equivalent office rents at the time.
- The capital value of the project in 2004 was £27m.
The current valuation of the Invest NI headquarters building is £22.75m (March 2017).
Valuations are carried out each year by Land & Property Services. These valuations may fluctuate based on property market trends. The fact the building is in a PFI project has no bearing on the valuation.
- By purchasing the BSDL Group we will deliver at least £7m of additional savings to Executive expenditure in Northern Ireland.
The PFI option demonstrated that it would cost approximately £10m (Net Present Value (NPV)) less than if government undertook the project itself.
The contract was won by McAleer & Rushe and Dunloe Ewart (MRDE) following a tender competition. They set up a group of companies (BSDL Group) to provide land, construct the building and lease and operate the new premises via the PFI contract.
Invest NI moved into the new offices as a tenant in 2005.
Value for Money
There have been questions about whether this PFI project was value for money.
The correct way to assess if the PFI project is value for money is to compare the costs as an NPV of the project. The costs included purchasing the land, construction, and providing a fully serviced building for 25 years. At the time when the contract was signed in 2004, the NPV for the PFI costs was £55m, for government it was £65m.
It is not correct to compare, as some have done, a present day valuation of the building (£22.75m) with the total unitary costs over 25 years (£120m) as these are two very different things.
We have tried to explain these terms in our Definitions section.
In 2012 MRDE placed the BSDL Group of companies on the open market, which included the Invest NI HQ building, land and the PFI contract. As the building and PFI contract are linked together, it was not possible to buy the building on its own.
Invest NI was successful in its bid to purchase the BSDL Group for £38m. We did this because we estimated we would be able to save at least £7m on the forecasted unitary charges for the remaining years of the PFI contract.
There are two parts to the £38m: our cash payment of £17.5m, and the £20.5m of existing debt owed by BSDL. This debt is what the original developer owed through financing the build and PFI contract. The debt, originally owed to the Bank of Ireland, transferred to NAMA following the property market crash. NAMA then sold it to Cerberus in 2014.
Before we bought BSDL repaying this debt was part of our annual unitary charges. Now that we own the PFI contract we pay Cerberus directly. To date there has been no viable opportunity to acquire the debt or reduce the interest payable to Cerberus. We continue to review this on a regular basis and will take the appropriate steps when it is right to do so, and provided it represents good value for money.
These savings will reduce Executive expenditure in Northern Ireland.
It also means we now own the building.