Stephen Phillips: Now's the time for radical rethink on asset management

Published on Wednesday 20 May 2009 19:36

FACED with the current challenges arising from the economic downturn, public sector asset managers have two choices.

They can either draw in their horns and maintain existing ways of working in a reduced and semi-dormant form, or look proactively at new approaches – without necessarily any additional cash investment on the part of the authority.

The first of these approaches could result in a downwards spiral, with a significant impact on delivery of services and reducing asset values.

By simply standing still, the authority will see continuing inefficiencies in the way its portfolio is used; continuing deterioration through an unsustainable repairs and maintenance regime; continued use of buildings no longer fit-for-purpose; and continuing wastage of resources on short-term "patch" solutions and energy inefficiencies.

The alternative is a radical review of the options available, including consideration of special purpose vehicles and joint ventures to maximise value (in the widest sense) from public sector assets.

There is a need for public sector asset managers to prioritise and rethink business models; and to look at the whole system with the intention of redesigning it around what the client wants, so as to make it affordable and sustainable.

For example, forming a wholly owned offshoot vehicle to take forward major strategic property projects can often release a more entrepreneurial spirit among senior management and allow access to private sector expertise at board level within the new entity. This in turn will provide a more focused interface with private sector partners, and will often produce a clearer mission, less susceptible to changes in the political agenda.

There is a need to respect the political sensitivities associated with a proposal of this kind – particularly one involving a major part of the property portfolio. But one key aspect of this type of structure is that the authority remains ultimate owner of the offshoot – there will be mechanisms within the legal structure that enable the authority to regain control (or indeed take the properties back in-house) if it has serious concerns about the structure at some future date.

The structures that were developed for the five of the six Urban Regeneration Companies (URCs) in Scotland provide a useful example of alternative models. The URC models could be applied not just for regeneration projects but for any complex property-based projects involving joint working by two or more public authorities. They could also readily be used in England and Wales, as much as in Scotland.

There are two main approaches that can be adopted: either the use of a company limited by guarantee to reinforce the principle of recycling financial proceeds or the use of a company limited by shares or a limited liability partnership to allow the participating authorities to share in surpluses arising from the project.

It should also be noted that the Scottish URCs employ wholly owned subsidiaries and joint-venture offshoots to assist with the delivery of particular development projects within the overall regeneration initiative.

One of the interesting new trends in local authority offshoots is the emerging use of limited liability partnerships (LLPs). Their use has diversified across the UK to include local asset backed vehicles.

The recent 180m James Watt dock joint venture set up between Riverside Inverclyde and Peel is a good example of this.

There are also very promising possibilities through use of the LLP model for a surplus properties portfolio, potentially allowing an immediate cash receipt for the authority from private sector loan and/or equity capital. This also gives the prospect of sharing in future profits.

This is particularly relevant in the current economic climate – and helps to illustrate how a more creative approach to the legal framework could potentially produce an ideal fit with the overall requirements … notwithstanding current financial constraints.

&#149 Stephen Phillips is head of the public sector team at Burness LLP