Ten Principles for Creating Value from Local Government ...

Ten Principles forCreating Value from

Local Government Property

Urban LandInstitute$

Sponsored by

Ten Principles forCreating Value from

Local Government PropertyAndrea CarpenterMary Beth CorriganRachelle L. LevittPaul Stephen

Sponsored by

About ULI–the Urban Land Institute

ULI–the Urban Land Institute is a non-profit educa-tion and research institute that is supported by itsmembers. Its mission is to provide responsible leader-ship in the use of land in order to enhance the totalenvironment.

ULI sponsors educational programmes and forums toencourage an open, international exchange of ideasand sharing of experiences; initiates research thatanticipates emerging land use trends and issues anddocuments best practices; proposes creative solutionsbased on that research; provides advisory services; andpublishes a wide variety of materials to disseminateinformation on land use and development.

Established in 1936, ULI has more than 29,000 mem-bers in 80 countries, representing the entire spectrumof the land use and development disciplines. ULIEurope’s 1,800 members enjoy diverse, frequent, andhigh-quality programmes. ULI activities include twoannual conferences: one on development and finance,which is held in Paris and attracts over 450 leadersfrom Europe and North America, and one on the keychallenges and opportunities facing the European realestate industry. ULI Europe’s 14 District Councils offerlearning and networking opportunities at local meetingsacross Europe, and its sector-focused Product Councilmeetings provide valuable platforms for discussion.

William KistlerPresident, ULI Europe

Recommended bibliographic listing:

Carpenter, Andrea, Mary Beth Corrigan, Rachelle L. Levitt, and PaulStephen, Ten Principles for Creating Value from Local GovernmentProperty. Washington, D.C.: ULI–the Urban Land Institute, 2005.

ULI Catalog Numbers: T34, 10 Pack; T35, Single CopyISBN: 978-0-087420-959-4

Copyright 2006 by ULI–the Urban Land Institute1025 Thomas Jefferson Street, N.W.Suite 500 WestWashington, D.C. 20007-5201 U.S.A.

Printed in the United Kingdom. All rights reserved. No part of thisbook may be reproduced in any form or by any means, electronic ormechanical, including photocopying and recording, or by any infor-mation storage and retrieval system, without written permission ofthe publisher.

SPONSOR

Partner Deloitte

The Real Estate team at Deloitte comprises over 250professionals with specialist real estate knowledgeacross all of its service lines: audit, tax, consulting andcorporate finance. The breadth and depth of our prac-tice allows us to assemble specialist teams with spe-cific skills to address clients’ needs, whether the issuesare the impact of changing accounting standards or taxlegislation, identifying and managing risks in majordevelopment opportunities, creating value from anoccupiers’ estate, or reviewing and advising on financ-ing options and proposals.

The team works to the highest professional standardsand provides assured, objective support to clients, par-ticularly in complex, high-profile and fast-paced trans-actions. The core areas of focus—property companies,real estate funds, and occupier advisory (corporate andpublic sector)—reflect Deloitte’s view of the directionthe market will take over the next few years.

For further information visitwww.deloitte.co.uk/realestate.

Paul Stephen, Partner+44 (0)20 7007 [email protected]

ULI Project StaffRachelle L. LevittExecutive Vice President, Policy and Practice

Mary Beth CorriganVice President, Advisory Services and Policy Programmes

Andrea CarpenterManaging Director, ULI European Centre for Regeneration and Sustainability

Liz HughesDirector, Programmes and Operation

Nancy H. StewartDirector, Book ProgramManaging Editor

Byron HollySenior DesignerBook/Cover Design, Layout

Sandra F. ChizinskiManuscript Editor

Cover photograph: Greenwich Council’s proposed civic office and libraryin Woolwich. See page 8. (HLM Architects)

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iii

Participants

ChairRobin PriestPartner DeloitteLondon, U.K.

Public Sector SpecialistsBrendan ArnoldDirector of Corporate FinanceBirmingham City CouncilBirmingham, U.K.

Dick HogbinCorporate Property ManagerLondon Borough of GreenwichLondon, U.K.

Tommy O’ReillyProgramme DirectorWorkplace 2010Strategic Investment BoardBelfast, Northern Ireland

Alan PhelpsCorporate Asset ManagerKent County CouncilMaidstone, U.K.

Ian Smith Head of Asset ManagementRotherham Metropolitan Borough CouncilRotherham, U.K.

Rhian TaylorProject Commercial ManagerSurrey County CouncilKingston upon Thames, U.K.

Anna WodaProject ManagerLondon Borough of BrentLondon, U.K.

LawyerRobert KidbyPartner and Head of Real EstateLovellsLondon, U.K.

Investment SpecialistsPeter LillingtonInvestment DirectorScottish Widows Investment PartnershipEdinburgh, U.K.

Richard ThirkellFund ManagerPruPimLondon, U.K.

AdvisersLee MallettDirectorRegeneration and CommunicationLondon, U.K.

John MasonDirectorMonaspireBelfast, Northern Ireland

Karen SierackiDirectorKaspar AssociatesLondon, U.K.

Paul StephenPartner, Corporate FinanceDeloitteLondon, U.K.

Michael SudlowPartner, Occupier StrategyCushman & Wakefield Healey & BakerLondon, U.K.

DeveloperAndrew ReynoldsDevelopment DirectorHinesLondon, U.K.

Local authorities in the United Kingdom are under pressure to deliver morewith less. The expectations of both citizens and central government continueto rise—and yet, as in the private sector, councils are still expected toachieve major economies in managing resources, both financial and human.

Ten Principles for Creating Value from Local Government Property is intended toprompt a debate among local authority decision makers and commercial andproperty principals as to the contribution that local authority property canmake to the delivery of modern local government services. According to theInvestment Property Forum, local authorities are responsible for around £130billion of real estate. Arguably, this asset base represents the largest untappedresource in local government. Leaving aside schools and social housing, whichconstitute an estimated 80 percent of the total local government buildingstock (and for which authorities perform an essentially custodian role),authorities can make real choices about the remaining 20 percent, or £26 bil-lion of the aggregate portfolio.

This Ten Principles publication, the first of a new series on local authorityproperty, focuses on local authorities’ operational estates: the buildings fromwhich they co-ordinate and deliver public services. Rethinking the need tohold and occupy extensive property estates offers local authorities not onlythe opportunity to access capital, but also, potentially, a basis for fundamen-tally changing the way local government does business and engages with itsstaff, stakeholders, and citizens. Given the growing pressure on local govern-ment for higher-quality services at lower cost, there is merit in exploringwhether property assets can increase efficiency and productivity. While per-formance and process improvement through active management of existingestates will continue to deliver value, this publication considers whetherlarge-scale portfolio transactions—which are only just starting to emerge inlocal government—can help achieve a fundamental change in creating value.

Creating Value from Local Government Property is based on a two-day workshopand numerous case studies. The focus is on best practices for creating valuefrom local government property in the U.K., which is the source of most ofthe examples. Nevertheless, many of the messages will resonate across conti-nental Europe. The publication takes as its backdrop a number of majorthemes, such as the interaction between public and private sector partners toachieve an authority’s goals, and the use of technology to help achieve opera-tional efficiencies and greater productivity.

This is an extremely exciting time for local government to meet the goals setby the U.K. central government and by the expectations of citizens. Manylocal authorities are actively considering the contribution made by their prop-erty interests to wider organisational objectives. This is an ideal opportunityto share the experiences of others in striving towards these goals.

The authors of this publication wish to thank those public bodies that havefacilitated an open and frank discussion of the issues by offering case studiesreviewing their work to date. In addition, ULI would like to thank Karen Sierackifor initiating and supporting this process and Deloitte for its generous support.

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Introduction

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Ten Principles for Creating Valuefrom Local Government Property

Rock the Boat

Find Your Champions

Capture the Vision and Define the Need

Optimise Commercial Leverage

Listen, Engage, and Act

Make It Happen

Engage the Private Sector Early

Understand the Partner’s Culture

Design for the Future

Make a Big Splash

T he property estates of most local authorities in the U.K. are a historicalaccident—a legacy of piecemeal acquisitions, boundary changes, and

mergers. At best, this creates a serendipitous marriage of form and function:in many towns and cities, the town hall is a recognisable icon of democracy.At worst, however, portfolios are remote, inaccessible to service users, in poorcondition, unfit for their purpose, and project an image of a patrician,bureaucratic model of local government—an image many councils are strivingto change.

The way councils do business, and the services they provide, have been and willcontinue to be in a state of change. If change programmes are to deliver therequired benefits, the infrastructure to support changing models of service deliv-

ery, citizen expectations, and advances in technology also needs toadapt. Many organisations, however—both public sector and pri-vate—find that their ability to change their property commitmentslags behind their need to evolve operationally. All too often, prop-erty constrains rather than enables changing working practices.

In a move to create a property portfolio that will deliver effective,modern government for the 21st century, local authorities need tobe bold. The key questions for them to ask are: What type oforganisation do we want to be? How can we use property tocatalyse and support that goal?

The starting point must be to recognise property as an organisa-tional asset, fully integrated into the corporate strategy. The recent

requirement for U.K. local authorities to prepare annual asset managementplans (AMPs) has helped raise the profile of property. To date, these planshave generally been better at diagnosing liabilities than at identifying fundedsolutions. Nevertheless, AMPs have helped to create a climate where localauthorities can start to challenge fundamental assumptions about their busi-ness and how it impacts their property needs.

The Prudential Regime introduced by the Local Government Act 2004 allowsauthorities far greater freedom to determine an affordable level of capitalinvestment. In addition, many authorities carry a significant opportunity costin under-utilised assets, where latent value might be realised to fund changeprogrammes. With a broader range of financing options available, local authori-ties are in a stronger position to challenge the status quo and to think strate-gically about what role property will play in the achievement of service goals.

At a strategic level, every authority is likely to benefit from questioning thecontribution that property makes to the business. Such challenges need togo beyond day-to-day issues affecting specific properties: the boat needs tobe rocked.

11Rock the Boat

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n Why do we occupy the buildings we do? What purpose, and whom, does ourproperty serve?

n How connected are we with other public service agencies? How easy is itfor citizens to access services and public officers?

n If our core business is service delivery, why do we own so much property?Is control of property more important than ownership?

n What financial and community value do we get from the “family silver”?Could we get better value through different ways of leasing or owning property?

Questioning fixed assumptions can be a difficult and even emotional process.Nevertheless, the exercise has value even when the questions raised do not resultin change. For example, when Surrey County Council looked at the plans for itsnew council headquarters, it questioned whether the building needed a councilchamber. Hiring commercial space for the few times when the full council meetsoffered a cost-effective alternative. The council’s review acknowledged the viabil-ity of this alternative, but concluded that an integrated council chamber wouldboth reflect the headquarters’ democratic function and raise its status as a publicbuilding. Despite the result, all stakeholders valued the opportunity to debateand validate the function of a modern, fit-for-purpose council headquarters.

Rocking the boat can lead to real change. The Northern Ireland Civil Service,for example, is using a strategic review of its property portfolio to catalyseand support an organisational transformation programme (see case study).

It is not just the role of the public sector to rock the boat. When private sectorpartners are involved from the begining of the projects, they can help test andvalidate their clients’ aspirations. It can often be helpful when an outsidepartner, coming in with a fresh set of eyes, explains how the market can helpdeliver property solutions that meet public authorities’ operational requirements.

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Case Study: Northern Ire-land Civil ServiceNorthern Island Civil Service (NICS),which is responsible for delivering awide range of public services, employs astaff of 29,000 across 11 departments.The Workplace 2010 project aims toincrease efficiency and to redirectresources to priority frontline publicservices through a major reform of theNICS estate.

The project involves the transfer of titleof some 80 buildings with a total areaof approximately 280,000 square

metres. A number of these buildings willbe refurbished and reconfigured, withthe aim of enhancing the workspace andsignificantly rationalising the NICSoffice estate into a smaller and moreefficient portfolio.

NICS plans to use the transformation ofits estate to catalyse and support widerorganisational change. Workplace 2010 isdesigned to be an enabling project thatwill change how people work andincrease their productivity. The expectedbenefits include the following:

• The creation of flexible, open workingspace that can deal with churn;

• Recognition of the importance of theworkplace in attracting and retaining theright people;

• Ensuring that the estate will be ade-quately maintained, so that the workplaceremains an attractive and operationallyeffective environment;

• Dealing with changing patterns of serv-ice delivery: finding as flexible a solutionas is affordable;

• Achieving an organisational understand-ing of the real cost of property occupa-tion—including the introduction of hardcharging, so that those who use, pay.

Any complex change programme needs strong leadership to align andreconcile competing interests. A champion is vital to navigate a proj-

ect through these challenges, provide direction and leadership, maintainfocus, and allow the project team to concentrate on delivery. Property invest-ment decisions, particularly those based on portfolio transformation, do notfit easily within the timescale of electoral cycles. Effective sponsorship andgovernance can provide the focus needed to bring an initiative to the top ofa council’s priorities—and keep it there.

The champion needs the authority to reach out to the full spectrum of stake-holders, including politicians, staff, and the community. The role of the cham-pion is to communicate the vision, conveying to all parties a clear sense ofthe project’s benefits. In a political environment, it is important for thechampion to build consensus, or at least to articulate the benefits of change,so as to foster cross-party support and appropriately deal with political chal-lenges. A significant property transformation has the potential to deliver bothfinancial and operational benefits. The champion needs to convey this posi-tive message to all stakeholders.

Without a champion who can drive the programme and make tough decisions,the chances of success are remote. The ambitious Project PRIME scheme (seepage 9) gained cross-party support by promoting the long-term benefits ofcost savings and occupational flexibility. A 1999 National Audit Office reporthighlighted the importance of the deal’s champions when it noted that thedepartment had “pursued PRIME as a major corporate project, providing theproject team with effective support from top management and ensuring that acomprehensive deal involving all properties and 13 services was pursued.” Achampion will not only align internal interests around a shared vision, but willalso help assure the market that a project has sufficient maturity and politicalbuy-in to justify investing time and money in the procurement process.

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22Find Your Champions

There are good examples of political drive resulting in innovative and ambi-tious regeneration schemes. Pasqual Maragall, former mayor of Barcelona, iswell known for the vision and leadership that led to the successful regenera-tion of the city following its hosting of the 1992 Olympics. Similar leadershipwas displayed by Birmingham City Council in promoting an £800 millionredevelopment in the heart of the city (see case study).

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Case Study:Birmingham City CentreIf you need a good example of making asplash, look no further than Birming-ham’s celebrated retail renaissance. Thephased redevelopment of 40 acres ofBirmingham’s city centre has revived itsjaded retail sector and released the heartof the city from the grip of 1960s con-crete monstrosities.

The Birmingham Alliance—a partnershipbetween Hammerson, Henderson GlobalInvestors, and Land Securities—has com-pleted two major phases of the develop-ment. The 17,186-square-metre MartineauPlace opened in 2001, and the £500 mil-lion Bullring opened in 2003, providingmore than 110,000 square metres ofretail space in 140 shops. Martineau Gal-leries, the final phase, is now seekingplanning consent for a 266,000-square-metre mixed-use development in the eastof the city centre.

The big splash from this project has beeneconomic: the £800 million investment inthe economy created 8,000 jobs. In itsfirst year, the Bullring received 36.5 mil-lion visitors, 6.5 million more thanexpected. The impact has extendedbeyond retail: office developers are nowlooking at sites in Birmingham, in orderto be close to the Bullring.

The development has also raised the barfor cities embarking on bold and contem-porary design initiatives; the curvaceoussilver Selfridges building, designed byFuture Systems, quickly became an inter-nationally recognisable icon.

Birmingham Council’s desire for a dra-matic solution helped provide the visionfor this major redevelopment. Formercouncil leader Sir Albert Bore is alsocredited with playing a role in bringingtogether the three developers to worktogether. Initially, Hammerson and apartnership between Land Securities

and Henderson were working on twocompeting schemes for the city centre.

Plaudits for the scheme include the 2004Urban Land Institute Award for Excel-lence. It was the first time the awardwas given to an entire city.

L ocal priorities, national trends, and evolving policy direction all impactthe way in which authorities organise themselves to optimise service

delivery. The speed and extent of change in the public sector require astrategic response—a vision based on seizing opportunities and meetingdefined needs. The vision will be shaped by changes in the way local authori-ties and other public agencies deliver services. The Children’s Act, for exampleis predicated on a co-operative model of social care and health care deliveryfor children.

All projects, plans, and management strategies need to start with a visionthat captures and reflects how an authority can best respond to the needs ofits citizens. Involving key stakeholders, citizens, and business partners is anessential part of the process. Property should be a relevant factor in shapingthe vision and defining the need. Its value and cost to most authorities, andits impact on the way in which services are provided, are simply too signifi-cant to ignore.

No two authorities are alike in terms of their political priorities, preferredoperational models, or the relative fit of their portfolio to their needs. Thus,the vision of how property can best support the business will naturally varyaccording to local circumstances. Authorities should test their vision througha business case to demonstrate that it is deliverable, affordable, and likely tocreate value.

Some of the factors to consider in capturing the vision include the following:

n Do emerging working practices require a different space configuration? Forexample, can the existing portfolio support separate front- and back-officeoperations? Do all staff need desks, or is there potential for hot desking orshared space?

n What is the most appropriate balance of technology and property, or “kitversus brick”? Do buildings support the use of technology? Can the applica-tion of technology reduce the demand for space?

n Is there cross-boundary support for co-operation across public service agen-cies? What impact does legislation (such as the Children’s Act, and closerintegration of social care and health) have on the co-location of staff?

n What are the core outcomes that the vision must deliver? Other public sec-tor portfolio deals have delivered capital receipts, revenue savings, increasedflexibility, and better-quality facilities. What are our priorities?

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33Capture the Vision andDefine the Need

These factors need to be built into a business case that is realistic, affordable,and deliverable. Any solution will need to be attractive both to stakeholdersand to the market, and designed in such a way that a council can be confi-dent of its ability to build and sustain competitive tension. Throughout thebusiness planning process, tough decisions should be taken upfront to definethe project scope and set attainable goals using available resources. Managingexpectations will be critical to ensuring that additional work outside a realis-tic business case is not created for its own sake, and that scope drift—devia-tion from the agreed specification—is actively resisted by all parties.

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Case Study:Surrey County CouncilSurrey County Council knew that inorder to live up to its mission to trans-form itself into a “flexible, modern coun-cil for the 21st century,” its propertyportfolio would have to change. In keep-ing with its goal, the council wanted tooptimise operational efficiency and cus-tomer service. It also wanted its buildingto demonstrate democratic engagementby providing better public access tohigher quality facilities.

The council began implementingchanges to its portfolio in 1997. At thattime, it had around 90 mainly freeholdoffices, which were of poor quality andfailed to match location and need. By2001, the council had halved the numberof offices and was using new facilities,procured mostly on short leases; it hadalso improved workspace efficiency. By2006, the administrative portfolio hadbeen reduced to 14 offices, and plans tooutsource the council’s entire accommo-dation requirements were well underway.

All buildings in the new portfolio havehot desking and touchdown areas forstaff with laptops, increasing efficiency.Focused environmental design andenergy efficiency have reduced costs

and improved sustainability. Thecouncil has reduced the person-to-desk ratio from 5:5 to 3.5:5. This shifthas been supported by changes in theuse of information technology,including the provision of more lap-tops and the distribution of handheldcomputers to both social workersand senior staff. The transition man-agement team is supporting staffmembers throughout these changes,encouraging them to take ownershipof their new offices and to adapt toflexible working practices.

The council says that its early ground-work and attention to its businessplan have paid off:

• It defined its requirements based onthe optimal service delivery model,then developed the property solutionaround it.

• During the early stages of rethink-ing its property requirements, thecouncil challenged the assumptionsof its operating model.

• The council designed a procurementprocess that attracted considerablemarket interest.

A decision-making champion helpedsteer the project through the initial deci-sion making phase and the subsequent

procurement process, and also helped to ensure the availability of sufficientresources to deliver the project. The cham-pion will continue in this role throughoutthe transition management phase.

T he covenant strength of local government creates real commercial lever-age. In many local economies, a council would be viewed as an anchor

tenant, and many authorities have successfully negotiated competitive rentson individual buildings to reflect this. For a variety of reasons, however, it hasbeen less common for councils to assert their buying power at a portfoliolevel. Those public bodies that have taken portfolio deals to market have beenable to use their credit strength—in addition to the value of their underlyingassets—to raise and structure efficient financing.

The advent of the Prudential Code means that authorities can design capitalinvestment programmes that meet the needs of their communities while beingaffordable, prudent, and sustainable. The result has been additional flexibility:

authorities can now engage with their capital investment agenda and balancetheir capital and revenue commitments more freely. This comes at a timewhen there is significant pent-up demand from the private property market forlocal authority portfolio assets. For example, Surrey County Council attracted

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44Optimise Commercial Leverage

HLM

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ITEC

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over 30 expressions of interest when it launched the procurement of its officeproject. The value of the local government estate—assessed by the Invest-ment Property Forum at some £130 billion (out of £600 billion total in theU.K. property market)—makes the sector very significant.

Local authorities should recognise their true potential as owners, cus-tomers, and partners. An authority is often one of biggest landowners intown, and often holds key sites and properties. In all transactions with theprivate sector—be they regeneration projects or property deals to improveservice delivery—it should follow that councils will naturally attract thebest private sector partners. Principles 7 and 8 consider how local authori-ties can get the most from their engagement with the private sector.

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Case Study:Project PRIMEProject PRIME, the Private SectorResource Initiative for the Managementof the Estate, was the first total propertyoutsourcing deal in the United Kingdom.In the spring of 1998, the Department ofSocial Security (now the Department forWorks and Pensions) transferred theownership and management of themajority of its estate to a consortium ledby Trillium and U.S. investment bankGoldman Sachs. Trillium is now a fullyowned subsidiary of the U.K. propertycompany Land Securities Trillium. Thedepartment retained the rights to occupythe 1.6-million-square-metre estate for 20years, with Land Securities Trillium pro-viding full property and facilities man-agement services.

At the time, it was the largest PrivateFinance Initiative deal and the largestproperty transaction to close in the U.K.,and it has spawned similar outsourcingdeals in both the public and corporate

sectors. It delivered an upfront capitalreceipt of £250 million, produced whole-life revenue savings of 22 percent, deliv-ered contractually committed property-cost savings, and enabled the departmentto vacate up to one-third of the estatewith no penalty.

These benefits were delivered against ahighly challenging background. TheDepartment of Social Security had tradi-tionally struggled to align its propertycommitments to its needs, its negotiat-ing leverage with individual landlordswas weak, it was unable to generate thecapital to invest in spend-to-save refur-bishment, and its service provision wasboth expensive and of poor quality.

The project succeeded in stimulating themarket to offer a more flexible response.The department was able to optimise itscommercial leverage by consolidating allits buying power into a single contract.The successful contractor was able tocreate—and share—value from its abilityto (1) exploit the joining of land interestsand development opportunities; (2)

implement spend-to-save and invest-to-divest schemes; and (3) captureeconomies of scale. The contractor wasalso given the incentive to generateadditional efficiencies that would beshared by the two parties.

Citizen expectations of public services are changing fast. In thinkingabout the role of property in supporting service delivery, local authori-

ties should carefully consider better ways to promote civic engagement.Consultation should start early, to create an informed understanding of cus-tomer expectations and to balance service delivery imperatives with userperspectives.

Many authorities are adopting new models of customer interaction based ontechnology such as the telephone and Internet. Where customers require physi-cal access to public offices, the community can help shape the propertyrequirement by communicating to local authorities what form of access—localor centralised—works best. For example, user kiosks and satellite offices havenot proved popular with the public, since they tend to require citizens to visitmultiple offices. However, where a neighbourhood office can incorporate realdecision-making authority, public support will grow.

This process of community engagement is another key rolefor the project champion. However, any consultation processmust have a clear timeline, and the champion must have theleadership skills to make bold decisions if necessary. Inmany cases, proposals may be unpopular with local stake-holders, so consultation with citizens may be as much aneducational process as a listening process. From a practicalviewpoint, community involvement, managed effectively, willhelp offset opposition to change. Managed badly or withouteffective leadership, it can cause delays, compromise solu-tions, or threaten the viability of the project.

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55Listen, Engage, and Act

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Case Study:The Use of KiosksFinding ways for citizens to access pub-lic services at a time and in a way thatsuits the individual, rather than the insti-tution, has vexed the public sector forsome time. As citizens become more dis-cerning consumers, with higher stan-dards, they expect greater responsive-ness and more focus on the needs of theindividual.

The efforts of institutions to respond tothese changes led to a number of falsestarts. One underlying reason was thelack of an enabling mechanism: it wasnot until e-government began to takehold, in the early 2000s, that efforts to

break down the barriers between institu-tion and citizen began to show progress.Arguably, however, e-government cre-ated as many problems as it solved:while it allowed for more responsivepublic services, concern arose aboutaccess and the possibility of exclusion.

In the late 1980s and early 1990s, ascustomer care came to the forefront ofpublic sector service delivery, kiosks andone-stop shops became familiar places incouncils, but failed because the technol-ogy platforms did not exist to supportthem properly. Recently, however, onecouncil in Northern England attemptedto resurrect the approach (though it wasnot alone in doing so). But the kiosks re-introduced by this predominantly rural

council, whilst adopting new technolo-gies and multi-access channels, mistookthe extent of shifts in society. Thekiosks, which were open for set hours(though not a normal 9-to-5 day), werestaffed by council officers who wereable to provide some assistance, but notanswer or manage all public enquiries.Although they were initially successful,the kiosks quickly lost public favourwhen it became apparent that the staffrarely had the ability to fully resolveproblems, and frequently just added anextra step to the process of obtainingservice. The kiosks were soon closed.Multi-access customer channels are bothimportant and demanded, but councilsneed to practice greater flexibility in theway that they introduce this resource.

U ltimately, the keys to delivery are adequate staffing and funding for theproject, a coherent procurement strategy, effective programme manage-

ment, and adherence to the project scope and specifications. Making a prop-erty plan happen requires discipline, resourcefulness, and commitment.

A sound business plan is essential. The business case needs to define notonly the what but the how. Factors that influence delivery decisions includethe quality of the property data, an accurate understanding of the real costsof property occupation and latent value in the existing estate, the relativewillingness to divest property ownership and/or management, general mar-ket appetite and the state of the local property market, the availability offinancing, and a realistic assessment of any liabilities in the estate.

There is no one-size-fits-all procurement model. Over the past decade, manyexamples have demonstrated how a well-founded business case, supported by awell-managed procurement process, can deliver organisational transformationthrough a significant property transaction.

Robust project management should guide theproject through unplanned events that couldotherwise jeopardise the outcome. A well-runprocess that achieves its milestones is key toretaining market confidence throughout theprocurement process, which can often provelong and expensive. In addition, there shouldbe enough flexibility to respond to unforeseenchallenges through value engineering oradjustments in scope.

Beyond the deal itself, it is essential to insti-tutionalise change and ensure that it deliversthe anticipated benefits. Local authoritiesneed to recognise that change managementand post-contractual implementation are

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66Make It Happen

intensive processes that need to be planned and executed with the samedegree of effort as the original procurement.

Sticking to the vision means translating it into a deliverable plan. The develop-ment of the Scottish Parliament is one project where the method of constructionbecame a priority over other considerations, including costs—and where, with-

out a clear project scope, deliverybecame protracted (see case study).

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Case Study: Scottish Parliament BuildingThe Scottish Parliament building mayhave won the Stirling Prize—Britain’smost prestigious architecture award—in2005, but beyond its status as a“remarkable architectural statement,”the building’s lessons to public sectorproject development have been anythingbut laudable.

The 33,000-square-metre Holyrood com-plex, designed by EMBT/RMJM, cost £431million: more than eight times the £50million that was originally estimated forthe parliament building, and more thantwice the £200 million that was later seen

as a realistic starting budget for such alandmark building. The overrun resulted inthe project being subject to an inquiry,which was conducted by Lord Fraser ofCarmyllie. The inquiry report, released in2004, concluded that more than £150 mil-lion had been wasted in design delays andover-optimistic programming.

The report criticised the project for tak-ing a “construction management”approach, which allowed work to startbefore the design was complete and leftany extra costs with the client. With aU.K. and a Spanish architect with cul-tural differences working from two dif-ferent locations, this ambitious schemecreated inevitable extra costs.

This case study highlights many issuesthat can arise with public sector devel-opment projects. While projects needpolitical buy-in, political pressure in thiscase hampered the government’s abilityto create a deliverable vision. The parlia-ment building project also shows howproblems can arise if occupationalrequirements are not understood fromthe outset. The new parliament’s accom-modation requests added approximately47 percent to the area of the complex.

Nevertheless, it has to be noted that thedesign has certainly achieved the visionfor a successful public building; the par-liament has, on average, 1,000 visitorseach day, 361 days a year.

T he private sector is already a major property supplier to local authoritiesthrough property leases, construction, and refurbishment work. Neverthe-

less, there is scope for much more interaction between the two sectors.

Traditionally, the market has responded only when the public articulates arequirement. However, there are benefits to engaging the private sector muchearlier in a property transformation process. For example, early involvement ofthe private sector can help identify problems—and their solutions—even inthe initial phases of the process. In addition, each side can test new ideas,and have the benefit of lessons learned by both sides. Such lessons mightconcern value creation, buildability, optimising planning, and exploiting com-

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77Engage the Private Sector Early

Case Study:Woolwich Town CentreGreenwich Council engaged early with aprivate sector partner to help realise itsambitious plans for Woolwich town cen-tre. In the summer of 2005, with thesupport of Sherlock Consultancy, itsigned an exclusivity agreement withTesco/St James’s Investments to allowthe comprehensive regeneration of a3.47-hectare site at Woolwich New Road.

Greenwich Council’s operations arespread across many buildings in the heartof town—an inefficient business model.The council saw that by restructuring itsoperations, it could provide a major cata-lyst for the area, confirming the locationas a key part of the wider Thames Gate-way regeneration initiative. Futhermore,by involving the private sector, the coun-cil could expand its plans beyond simplyproviding new public facilities, and couldbring in commercial uses such as retail.

Plans are now in place for a new, £45million council headquarters buildingthat will also include civic functionssuch as a library and local service cen-tre. The headquarters building is part ofa much larger mixed-use scheme underwhich Tesco has signed up to build a8,000-square-metre store on the site, as

well as apporximately 850 new homes ofmixed style and tenure—including afford-able homes and key worker housing.

(Greenwich Council’s office-consolida-tion project—part of a wider £750 mil-lion transformation project—is describedin a separate case study on page 20.)

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mercial potential through third party revenues. Early involvement can alsoallow the private sector to contribute to the design of the solution as well asto the delivery of the project.

Finally, engaging the private sector early can help an authority determinewhere the private sector can deliver value, and how to structure a deal to bestcapture this value. There is a well-developed market for outsourced estates: atthe lower end of the value chain are standard property management services,and at the higher end are firms that will act as principals, providing full prop-erty services and shielding occupiers from key property risks.

Building effective relationships with the property market enables all partiesto focus on their core business and allows commercially sensible judgementsbased on differing tolerance for risk. Understanding and appropriately allocat-ing risk is crucial to the success of any partnership, and an early dialogue canidentify key risks and determine how the property solution might addressthem. Recent portfolio deals have shown that the public sector can achievereal savings by transferring risks that have often proved difficult for the pub-lic sector to manage, such as demand, residual value, and availability.

Marrying the differences in core business focus and risk appetite can increasethe potential for mutual gain. The accompanying case study illustrates howthe London Borough of Greenwich is drawing upon private sector expertise todeliver a complex project to help the council both catalyse and support anorganisational change programme.

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T o get the best out of a public/private partnership, each party needs tounderstand the other party’s drivers and constraints. This can take real effort.

The private sector needs to really understand how the public sector makesdecisions, the nature of the public sector’s governance and accountabilityregime, and the fact that projects are not driven solely by financial considera-tions, but must also satisfy wider political and social priorities. The publicsector has to understand and address the private sector’s previous frustrations,such as poorly defined or commercially unviable projects, ambiguous organisa-tional commitments, changes in project scope, and procurement delays. Thepublic sector also needs to recognise the cost to the market of bidding forprojects, particularly where a significant upfront investment is required butthe basis for subsequent engagement is not clear.

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88Understand the Partner’s Culture

Case Study: Project MoDELIn common with many other major occu-piers, the Ministry of Defence is seekingto replace unsuitable portfolios with fit-for-purpose estates. Project MoDEL aimsto fund a major consolidation projectthrough disposal receipts from sites thatcan be vacated once the new accommo-dation is in place.

Often, enough value is locked in a sur-plus estate to fund the cost of consoli-dation, but experience in the public/privatepartnership market suggests that boththe gap in time between consolidationpayments and disposal receipts, and theattrition in value that occurs when con-struction and disposal programmes aremerged, can adversely impact value formoney and even the financial viability of projects.

Project MoDEL represents an approachto integrating construction, churn, and

disposal into a single contract, in a waythat really plays to the property market’score strengths, whilst protecting thepublic sector’s commercial interests. Thecontract is based on the following:

• Recognition of the value that the pri-vate sector can create through its skillsin planning, design, and property devel-opment;

• The cost-effective transfer of risk tothe private sector—including time, cost,value, bridge financing, and pullingtogether all the relevant strands of theproject;

• The alignment of interests so that eachparty has incentives to minimise costsand maximise disposal receipts.

The contractor is paid according tovalue created, instead of being paid amargin on costs incurred, and eachparty’s commercial interests are alignedthrough (1) active management of costs

and the continuous testing of value formoney through open competition, foreach phase of the programme; and (2)the provision of effective incentives forthe contractor to maximise disposalreceipts (net of the cost of constructionand churn).

Once achieved, the best way to sustain an open and effective culture isthrough hard work and clarity throughout the deal. This is best achieved byaligning interests and ensuring that responsibilities are clearly defined. Typi-cally, public/private partnerships will be defined contractually, such asthrough a lease, project agreement, or other type of partnership agreement.The accompanying case study provides an example of a contract designed bythe Ministry of Defence to align public and commercial interests in a long-term property relationship.

It may be helpful to create a road map to schedule a plan of action and aiddecision making throughout the process. Defined roles and expectations pro-vide a strong framework for successful partnerships.

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T echnologies and work practices change quickly. To accommodate suchchanges, a council needs to consider occupational trends and maintain

sufficient flexibility to anticipate future needs, thereby minimising the risk ofcreating an obsolete estate.

Workspace should be designed to be as flexible as possible, consistent withmeeting service requirements. Physical flexibility should be at the forefront ofnew construction and refurbishment schemes. Ideally, common space, such asworking areas and conference rooms, can be used by more than one departmentand for more than one purpose. One way to achieve flexibility is to design con-ference rooms that can be used for large-scale meetings and then divided intosmaller rooms for work sessions, allowing for more efficient use of space. Possi-

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99Design for the Future

Case Study: The BBC In 2000, the BBC entered into a contract to modernise its estate. Previously, ithad operated an estates model in which virtually all broadcasting was deliveredthrough highly specialised, purpose-built, single-function facilities. This signifi-cantly constrained the alternative uses that the BBC itself could use the facili-ties for, and limited the commercial value in the event that the BBC wished tosell the site (since so few commercial operators could use the facilities withoutsignificant refurbishment).

With advances in technology, and the opportunity to catalyse change through aportfolio deal, the BBC remodelled its estate so that much of its broadcastingactivity could be delivered from regular office accommodations. This changedelivered savings in construction costs, increased operational flexibility, andenhanced residual value.

ble expansion should also be planned for, so that what is used as a commonroom today can be changed into an office if demand increases. The BBC casestudy is a great example of designing flexible space.

Flexible work practices can also deliver significant savings. The average annualcost of running a single workspace in the U.K. is £6,000–£10,000 (£15,000 inLondon). A number of practices can reduce workspace requirements, includinghome working, hot desking, and providing staff—social workers, for example—with portable technology.

The future form and functions of local government remain uncertain, andthere is the possibility of both structural reform and the transfer of service-delivery functions to third parties. Given the potential volatility of demand, it

may be sensible to design portfolio solutions that allow for reductions inaggregate space requirements, in case of a major change in operations. TheProject STEPS case study provides an example.

Designing for the future also requires planning for business continuity in theevent of a natural or manmade disaster. At least some aspect of local author-ity functions needs to be operational immediately after a disaster occurs.Building design should allow for strategic functions to be up and operationalas soon after an emergency as possible.

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Case Study: Project STEPS Like Project PRIME, Project STEPS involved a 20-year serviced accommodationdeal whereby the rights and responsibilities of the 700-property estate of InlandRevenue and Customs & Excise was transferred to a private sector company,Mapeley. Unlike PRIME, where flexibility was pre-paid (i.e., the cost of vacatingspace up to the aggregate cap was built into the overall charge), in STEPS thecontract was structured so that for each year of the contract, Inland Revenue isinformed of the financial cost of exercising its right to vacate space. Thus,through a single annual cost, government is relieved of the uncertainty associ-ated with the costs (such as dilapidations and other landlord costs) from surren-dering traditional lease break.

In the competition, tenderers were required to bid the cost of flexibility at vary-ing levels of aggregate demand. The tenders demonstrated that the marginalcost of flexibility between 40 percent and 50 percent was very low, demonstrat-ing very modest cost to government.

Great buildings and good design can catalyse community regenerationand foster civic pride. Bad design can destroy them. Local authorities

should be bold in their property transformations, using them as an opportu-nity to create something of value for the community.

Part of the value of redesigning property commitments to catalyse and sup-port service-delivery improvements will come from an authority’s ability toadopt a holistic approach. Taking a portfolio perspective enables a council toleverage its buying power, achieve real change in the way its does business,and positively shape the physical environment.

The regenerative effect of property decisions should not be underestimated.Local authorities should act as role models, investing in—and insisting on—good design and high-quality buildings. This approach helps create “a bigsplash” by attracting other high-quality development to the area.

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1100Make a Big Splash

Case Study: London Borough of Greenwich The story of Greenwich is typical of theproperty challenges local authoritiesface today. After major expansions inhousing, social care, and highwaysbetween 1950 and 1980, cutbacks inlocal government spending led to over20 years of stagnation in the council’sproperty investment. This left the major-ity of council buildings unfit for pur-pose, with the council’s housing estateneeding renovation and a £100 million

backlog in maintenance and repairs forits non-housing estate. Greenwich Coun-cil was compelled to take a hard look athow its property strategy could supportthis expenditure.

In response to the catalogue of under-investment and a wider modernisationagenda, Greenwich has created a vision:to reinvent itself as a modern and effi-cient service provider to its fast-growingpopulation of 225,000. The vision—an 11-year, £750 million modernisation pro-gramme—is a big-bang solution driven bythe council’s regeneration ambitions for

the area. Private sector expertise, in the form of Sherlock Consultancy, wasengaged as strategic partner to pro-gramme and manage asset disposal andnew capital investment as the councilconsolidates its operational estate frommore than 30 properties to three. This willallow a £115 million investment in servicecentres, improved leisure facilities, andmodern office accommodation. Key to thestrategy is that both disposal sites andconsolidated council facilities—such asEltham Centre and Woolwich Centre—must be tailored to support the regenera-tion of the borough’s town centres.

For example, the £20 million Eltham Cen-tre will include not only a local servicecentre but three pools, leisure facilities, arefurbished library, and Greenwich Com-munity College. In Woolwich, the schemewill be key to the area’s regeneration,and will include a major mixed-use devel-opment with a new headquarters build-ing, new library, local service centre, anda contact centre. Further major invest-ments will be made in schools and hous-ing, supported by new information tech-nology to allow the integrated andstandardised delivery of services.

The placement of public buildings impacts surrounding property, transport,and commercial services. Local authorities must consider the full context of aproject rather than just single buildings, and ask themselves what the effectof investments will be on the public realm.

It is place, not space, that matters. The regenerative benefits of place-basedinvestment should be used to create an identity and a sense of place, andshould be a driving force in the process. Development should also adhere tosustainability principles, such as ensuring that a project is located close toexisting infrastructure. Where adequate infrastructure is not available, long-range plans must consider how the necessary infrastructure will be developed.

Making a big splash drives home to the whole community the importance ofthe public investment. When planning new developments or refurbishments,local authorities must consider social and economic spillover effects. In themodernisation programme being undertaken by the London Borough of Green-wich (see case study), a streamlined estate will improve operational perform-ance. In addition, both the new portfolio and any redevelopment taking placeat sites that are sold to fund the transformation programme will be used todrive the regeneration of the borough.

In summary, local authorities should consider the following basic design princi-ples to insure that significant public investments in real estate are maximised:

n Promote a diversity of uses;

n Encourage compactness;

n Foster intensity of development;

n Ensure a balance of activities;

n Provide for accessibility;

n Create functional linkages;

n Build a positive identity.1

Note1. Cy Paumier, Creating a Vibrant City Center (Washington, D.C: Urban Land Institute, 2004), 17.

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$ULI–the Urban Land Institute1025 Thomas Jefferson Street, N.W.Suite 500 WestWashington, D.C. 20007-5201www.uli.org

ULI Order Numbers: T34, 10 Pack; T35, Single Copy

ISBN: 978-0-087420-959-4

Topics include:

n Evaluating the contribution thatproperty makes to the business of alocal authority;

n Building consensus for change;

n Developing a realistic, affordable,and deliverable solution;

n Using commercial leverage to opti-mise financial flexibility and securethe best partners;

n Promoting civic engagement so thatproperty access and service deliverysupport the democratic process;

n Delivering a vision through robustproject management and transitionmanagement;

n Building effective relationships withthe private sector to maximise value;

n Understanding the culture of theother party in a public/private part-nership and clearly defining rolesand expectations;

n Building in flexibility for efficiencyand improved performance;

n Catalysing community regenerationand fostering civic pride by acting asa model developer.

Ten Principles for Creating Value fromLocal GovernmentPropertyAndrea CarpenterMary Beth CorriganRachelle L. LevittPaul Stephen

After two decades of underinvestmentin property, local authorities are nowentering a new era in which they havethe flexibility to respond to the goals setby the central government and theexpectations of their citizens. Many localauthorities are gearing up to transformtheir civic and administrative portfoliosto match the challenges of modern serv-ice delivery, including the impact of newtechnology and opportunities to engagewith the private sector. Based on contri-butions from experts in the propertyindustry and supported by case studies,this booklet details the principles thatlocal authorities and the private sectorneed to consider as they embark on anyproperty transformation.

More Ten PrinciplesTitles fromthe Urban Land Institute

Ten Principles forSmart Growth onthe SuburbanFringe

Ten Principles forSuccessful Develop-ment Around Transit

Ten Principles forRebuilding Neigh-borhood Retail

Ten Principles forReinventing Amer-ica’s SuburbanBusiness Districts

Ten Principles forReinventing Amer-ica’s SuburbanStrips