Thirty-First Report - Managing central government property

The Cabinet Office’s efforts to update its property database have been subject to a series of unnecessary delays and setbacks. The Cabinet Office announced its new property database in 2018, with an anticipated launch date in 2021. The Cabinet Office determined that an off-the-shelf system would not be capable of receiving data from 160 different bodies across government. It therefore commissioned the development of a bespoke system called inSite. Citing staffing problems, the contractor, Landmark Solution, did not complete the inSite project, even when granted an extension. The Cabinet Office terminated the contract in July 2022 but has not yet appointed a new contractor. The Cabinet Office could not tell us when the new system will be up and running or how much it will cost. Recommendation 2: The Cabinet Office should analyse why the inSite programme has failed to meet its goals and set out what it has done since to ensure that these mistakes are not repeated in future procurement exercises.

The land and science property portfolios do not have clear leads, which frustrates decision making and creates a lack of accountability for their management. In 2021, the Cabinet Office organised government property into twelve portfolios, such as health or defence, based on how property is used. Ten portfolios have a lead department. The science and land portfolios do not. The portfolio lead provides a single point of contact and accountability for those assets. The Cabinet Office recognises that there should be a single owner of the land and science portfolios but has not yet designated leads. Recommendation 3: In its Treasury Minute response to this report, the Cabinet Office should name lead departments for the science and land portfolios. If it is not 6 Managing central government property able to at that point, then we expect to receive separate correspondence alongside the Treasury Minute providing the reasons for this delay, including a timeline for when a decision will be made.

We are sceptical that the Government Hubs programme still represents good value for money in the current climate. The Government Hubs programme relocates civil servants from small offices into large, modern government hubs located in cities across the United Kingdom. The government plans to deliver at least 31 government hubs and, potentially, up to 50. Demand for office space has decreased since the pandemic and it is unclear what long-term impact this will have on commercial rents. Government has incomplete data on the usage of offices and, although new systems are being rolled out to gather such data, it is not yet available. From the limited data available, GPA has calculated at least a 25% reduction in office usage. It is therefore possible that fewer hubs, or smaller hubs, will now be required. Our witnesses were not able to tell us how many government hubs were on long-term, fixed leases. Without a clearer understanding of what is needed, the government risks being locked into long-term, expensive leases, the costs of which could be passed on to the departments that sublet space for years to come. Recommendation 4: In its Treasury Minute response to this report, the Cabinet Office should set out in detail the benefits and costs, including valuation drops compared to previous prices to date of the Government Hubs programme and how it will be adapted in-light of the new estimates for post pandemic office usage.

In addition to this, the Cabinet Office should update us yearly on the rollout of the hubs programme. Such updates should include the lease term and next available break point for each GPA hub, the extent to which offices are being sublet, the current levels of vacant space and what plans government has to sublet this space in the short to medium term.

It is unclear how the government will meet its target for property disposals, given the past struggles of such programmes and current market uncertainty. The new government property strategy has set a target for disposing of surplus property, to generate £1.5 billion by 2025 that can be reinvested into the estate. Detailed plans have not been published about how it will achieve this target. In our report on the last disposals programme, many departments were significantly behind their targets for land disposals. This time, the Cabinet Office needs to ensure that the departments with the largest land holdings fully participate in the disposals programme. Recent market turbulence may also negatively impact the programme. Cabinet Office officials acknowledged such risks and assured us that there will not be a fire sale of assets. Recommendation 5: The Cabinet Office should write to us by April 2023, setting out how it intends to reach its property disposal target, including: • KPIs; • milestones; • disposals targets for each portfolio; Managing central government property 7 • how it is monitoring compliance from all departments; • and how it is ensuring value for money during market fluctuations

Government’s plan to reduce the operating costs of the government estate is not sufficiently ambitious. The Cabinet Office could not tell us if the government’s current operating cost to property value ratio is a good one. In 2020–2021, the operating cost for central government property was £22 billion which on a valuation of £158 billion is 13.92%, which is higher than we expect. This includes rent for leasehold property, as well as maintenance costs and other expenses. The new government property strategy announced plans to save £500 million on its annual operating costs by 2025, roughly a 2% reduction. Cabinet Office officials told us that the target was a cautious one and more savings may be found. For example, £8 billion per year is spent on facilities management. The Cabinet Office has recently issued new requirements for facilities management contracts which it expects to lead to improved contracts and better value for money.

None of the witnesses were able to tell us at the hearing how many of the 12 HMRC hubs were let on 25-year unbreakable leases. They thought it was one or two, the Permanent Secretary of the Cabinet Office subsequently wrote to us saying it was six. This means that six large hubs are locked into much higher rents than the current market but the capital values for the leases have also declined. HMRC is now trying to sub-let spaces at a rent which is higher than the market. We warned HMRC about this practice. We heard that the Chief Executive of the GPA was now much more open to obtaining a range of freehold and leasehold options for the hubs and other offices. Recommendation 6: The Cabinet Office should write to us within six months splitting out operating costs of the government estate by expenditure type (including lease obligations) and also set out the current £500 million planned savings for each area and what scope there is for additional savings. 8 Managing central government property 1 How the Cabinet Office manages government property

On the basis of a Report by the Comptroller and Auditor General, we took evidence from the Cabinet Office, including the Permanent Secretary, Chief Property Officer, the Government Head of the Property Profession and the Chief Executive of the Government Property Agency on the management of central government property.1

Citing staffing problems, the contractor, Landmark Solution, did not complete the inSite project, even when granted an extension. The Cabinet Office terminated its contract with Landmark solutions in July 2022, by which point it had paid out £880,000 of the £1.3 million contract. The Cabinet Office told us that it negotiated a termination agreement with Landmark. Landmark has subsequently repaid £300,000 and the Cabinet Office has 9 Qq 10, 40–41, 50, 52 10 C&AG’s Report, 2.13 11 Q 8; C&AG’s Report, 2.13 12 C&AG’s Report, Figure 5 13 Q 13 14 Q 8 15 C&AG’s Report, 2.16. 16 Q 8 17 Q 20; C&AG’s Report, 2.14 18 2018 strategy. 19 Q 20. 20 Q 18; C&AG’s Report, Figure 7 10 Managing central government property retained the software licenses already purchased and the work Landmark has undertaken to date.21 This consists of 140 webpages that can be used to enter information about property assets.22 The Cabinet Office explained it is about to begin the process of finding a new supplier to complete the inSite system, and that the new supplier may be able to use work already completed, or it may need to start anew.23

The Cabinet Office was not able to tell us when the inSite system would be functional or how much it will cost. The Cabinet Office stated that such information could only be provided after it agreed a contract with a new supplier. The Cabinet Office said it will not “put prescriptive requirements on the timeline” for inSite.24 It does not anticipate difficulties finding a new contractor, or expect a new contractor to have the same resourcing problems as Landmark.25 However, when the Cabinet Office recently “soft-tested” the procurement, the organisation which came forward was unable to meet the Cabinet Office’s due diligence or provide confidence that it could complete the inSite project.26 21 Qq 11, 12 22 Q 22. 23 Q 15. 24 Qq 13, 14 25 Qq 48, 49 26 Q 50 Managing central government property 11 2 Efforts to reform the management of the government estate Portfolio management

In 2021, the Cabinet Office categorised government property into twelve portfolios based on how property is used.27 For some portfolios, such as defence or prisons, a single department or arm’s-length body holds all the relevant properties. In other portfolios, such as the office portfolio, the relevant properties sit in many different departments. The Government Property Agency (GPA) serves as the lead for the office portfolio.28

The government believes that this portfolio approach leads to improved data and management, as well as increased transparency and accountability.29 The new government property strategy lays out plans for each portfolio to have its own strategy by March

Currently, ten of the twelve portfolios have a lead department. The science and land portfolios do not have a lead.32 Given the importance of portfolio management to government’s plans for the estate, and in ensuring a single point of accountability, we queried why two portfolios did not have a designated lead. The Cabinet Office agreed there should be “a single owner” for those portfolios. However, it told us it would require a series of conversations with the relevant departments before agreeing which departments will take ownership of these two portfolios.33 Although numerous departments own science and land assets, the Cabinet Office believes there are logical candidates to serve as leads and these lead departments could be named by March 2023.34 The hubs programme

Another of the government’s major property initiatives is the Government Hubs programme. The government plans to relocate civil servants from hundreds of small offices into dozens of large, modern government hubs that are strategically located in cities across the United Kingdom. HM Revenue and Customs (HMRC) has already opened 12 government hubs. The GPA said that it has already completed four projects and has plans to deliver 17 hubs during this spending review period. It has since written to us with further details on the location and planned opening date for eight of those additional hubs.35 When we questioned the witnesses on the HMRC hubs, no one was able to tell us how many of the 12 hubs were let on 25-year unbreachable leases. The Permanent 27 C&AG’s Report, 1 28 C&AG’s Report, Figure 1 29 Cabinet Office, State of the Estate 2020–21, December 2021 30 Government Property Function, Government Property Strategy: 2022–2030, 9 31 Government Property Function, Government Property Strategy: 2022–2030, 19 32 C&AG’s Report, 1.9 33 Q 33 34 Qq 31, 32 35 Q 26; Letter from Cabinet Office to Committee dated 2 November 2022 12 Managing central government property Secretary of the Cabinet Office has since written to us saying the number is six.36 As a result, six large hubs are now locked into much higher rents than the current market but the capital values for the leases have also declined. HMRC is now desperately trying to sub-let spaces at highly elevated rent. In the past, we have raised concerns about HMRC’s plan to create these regional hubs, particularly about entering into long-term leases and whether the plan represented value for money.37 Moving forward, the Chief Executive of the GPA said he was open to increasing the number of government freeholds so as to secure a ‘balance of tenures’ across their portfolio.38

We questioned whether the GPA used long-term leases for its government hubs, which might commit the government to paying above-market rents in the years to come.39 The GPA told us that the hubs programme relies on a mix of freeholds, short-term leases and long-term leases. The GPA made the case that long-term leases often achieve significantly lower rents, which can be passed on to departments who sub-let from the GPA, while allowing the government to make long-term plans. However, it is possible that the GPA will be stuck with long-term leases at above-market rates, passing on those higher rates to departments that sub-let space in the hubs. We were interested to hear the Cabinet Office discuss opportunities that might exist in the current market to generate better value by buying the freehold of some properties that are currently on long-term leases.40

The government does not yet fully understand how offices are being used post- pandemic. From the data available, GPA has calculated the usage of offices is down at least 25%.41 It explained that it is rolling out new methods of measuring usage based on Wi-Fi and swipe card data, but it will take time to implement these methods across the whole estate.42 If hybrid-working continues as it has, it is possible that fewer hubs will be required. The GPA told us that it will ensure that existing space is used before additional hubs are built. The GPA also said that future hubs can be smaller than originally planned, or cancelled altogether, if the space is no longer required.43 36 Letter from Cabinet Office to Committee dated 2 November 2022 37 Committee of Public Accounts, HMRC’s Performance in 2016–17, Twelfth Report of Session 2017–19, HC 456, 10 January 2017. 38 Qq 63 39 Qq 63, 64, 65 40 Qq 65, 66 41 Q 74, 113 42 Q 105 43 Q 113 Managing central government property 13 3 Government plans to generate savings through its property estate Disposing of property

As part of the plan to ensure a “smaller, better, greener” estate, the new government property strategy has set a target for disposing of surplus property. The Cabinet Office intends to generate £1.5 billion in property disposals by 2025, £500 million a year, which will be reinvested in the remaining estate.44 The Cabinet Office told us that it has been negotiating with departments since the summer and has seen some preliminary disposal numbers.45

We questioned the Cabinet Office about how current turbulence in the property market may affect this target.46 The Cabinet Office acknowledged these risks, particularly surrounding valuation. It assured us it would seek appropriate professional advice and there would be no fire sale of assets.47 The Cabinet Office also explained its approach to disposals, asserting that it can protect itself from some market turbulence. It argued there was relative security in selling off lots of small parcels of lands, as opposed to a few big, expensive properties that might fluctuate more widely in value.48

We have reported several times before about problems with land disposals programmes. For example, in 2021, we commented on the slow progress that the Ministry of Defence was making reducing its estate and in 2019 we noted that almost all departments were significantly behind their targets for land disposals.49 With that in mind, we challenged the Cabinet Office about how it intended to ensure that all departments participated in this disposals programme and what levers it could use if departments resisted. The Cabinet Office assured us that it had been in communication with departments and will maintain “constant pressure”.50 Reducing operating costs

The new strategy’s emphasis on efficiency is also reflected in the plan to cut the estate’s annual running costs by £500 million.51 In 2020–2021, the operating cost for central government property was £22 billion.52 We asked the Cabinet Office if it considered government’s current operating cost to property value ratio was at the right level.53 The 44 Qq 98, 101; Government Property Function, Government Property Strategy: 2022–2030, 13. 45 Q 124 46 Q 122 47 Qq 71, 123 48 Q 98. 49 Committee of Public Accounts, Optimising the defence estate, Twentieth Report of Session 2021–22, HC 179, 12 October 2021; Committee of Public Accounts, Sale of public land, One Hundred and Tenth Report of Session 2017–19, HC 2040, 24 July 2019 50 Qq 125, 101. 51 Q 95 52 Qq 1, 95; Cabinet Office, State of the Estate 2020–21, December 2021 53 Q 95 14 Managing central government property Cabinet Officed explained that the operating costs include rent on the 11% of government property that is leasehold. It also includes other significant costs, such as £8 billion spent on facilities management.54

We questioned whether the government’s plan to save £500 million on operating costs by 2025 was ambitious enough, noting that it only represents approximately a 2% reduction.55 Cabinet Office officials told us the target was a cautious one and that it might be able to save more. It explained that department officials had spoken to government organisations and were confident that £500 million could be saved from specific initiatives, including efforts by the GPA and the Department for Work and Pensions.56 It was possible that other government bodies, such as the NHS, might also be able to generate additional savings. The Cabinet Office also pointed out that it had recently revised the government’s facilities management requirements. The Cabinet Office expects the new requirement to lead to improved contracts and, given that facilities management accounts for £8 billion per year, some significant additional savings.57 54 Q 97 55 Q 96; Government Property Function, Government Property Strategy: 2022–2030, 13 56 Q 95 57 Qq 96 - 97 Managing central government property 15