"To corporate PFI or not to corporate PFI" is a complex decision for individual organisations. However, it is a long way from here to the Property Week suggestion (Property Week dated [ ]) that in all cases the client should be deeply wary of treading this path.
The fundamental point is that corporate PFI creates a totally different dynamic between occupier and "landlord". An appropriately structured outsourcing contract creates alignment between occupier and supplier and enables the client to create value in its core business. It is not just about property.
The presumptions underlying Mr. Barrie's "Nine reasons to be wary of corporate PFI" seem to be that:
The same nine reasons also assist in challenging these presumptions:
Flexibility under a PFI Contract is always less costly than the traditional alternative on a portfolio-wide basis.
Property Trading: The outsourcing contract typically recognises significant development opportunities. If interests are appropriately aligned and gains shared the client benefits without having to become a property development company.
Long Range Planning: Corporate PFI is designed to create the flexibility clients need over the long term. The flexibility mechanisms will be a function largely of the client's normal planning horizon and the variables which most impact the core business.
Fixed Payment: In difficult times it is not significantly easier for occupiers to reduce property costs in the traditional environment than in the world of outsourcing. Indeed, the fixed corporate PFI payment reduces dramatically the volatility in clients' overheads and eliminates exposure to upward surges in rental obligations.
Critical Facilities: Many companies outsource IT, which is significantly more business critical than any physical facility. Mapeley's approach is to retain the corporate knowledge and expertise embodied in the existing client team to facilitate the management of critical facilities and to put in place robust Business Continuity Plans.
Additional Staff: A total outsourcing should reduce the need for client staff to oversee performance of the supplier. Typically today they are monitoring many different organisations. Mapeley provides on-line access to its systems to its clients to minimise the requirement for management. This frees client resource to focus on strategic initiatives.
Future Value: Again, contracts will typically involve gain sharing or the font end consideration recognises future value. For the client, properties disappear from the balance sheet, but are replaced by cash: illiquid assets are converted into the most liquid asset. The cash can then be deployed in the core business, where returns must be higher.
Estate Sale: The disposal of an entire estate may optically be carried out at a discount compared to aggregated individual asset sales. However, the fully burdened cost to carry the property and to conduct hundreds of individual transactions have to be taken into consideration. In all cases, an objective price can be set by third party valuers.
Corporate PFI is patently not a panacea. It is also not one dimensional: the contract must be tailored in each case to the specific need of the client. Attempting to take a template and retrofit the client requirement to it is not the way the market will develop.
Mapeley welcomes the challenge of proving the effectiveness of corporate PFI; similarly, it is not afraid to agree that in some individual cases it is not appropriate.
Yours faithfully,
ROBIN PRIEST,
Chief Executive