The new Greenwich village

April 19, 1996

John McWilliam and Paul Watson describe how PFI is helping to build student bedrooms to order.

In seven months time around 650 students from the University of Greenwich will occupy new purpose-built study bedrooms, each centred around a courtyard to create a village campus environment. Greenwich has raised no finance to build this development, and will not be responsible for the day-to-day operation of the facility or the maintenance of the buildings for the next 30 years. The university runs no risk of a project overspend, and will be provided with alternative accommodation in the unlikely event that the study bedrooms are not delivered on time.

Too good to be true? No, but what appears a most simple and elegant solution has required both new thinking and hard graft. To understand how the above solution came about we must start with the problems faced by the university. As a consequence of its ageing stock of 1,500 institutional dormitory-style residential student bedrooms, students were leaving after the first term. In addition, rising maintenance costs were causing budget deficits. The case for student residential accommodation could only enhance the university's appeal and save on maintenance.

Planning consent was obtained for a 2,000-bedroom student village at the Avery Hill campus in leafy southeast London. Designs were commissioned based around a five-bedroomed flat with communal facilities.

From this was developed a bold new strategy based on the conviction that priority be given to new teaching facilities. Traditional financing of student accommodation would leave little for teaching projects.

The university needed to identify an organisation to take complete charge of the provision and management of student accomodation - a "service provider" to use the jargon of Private Finance Initiative. While at the outset we were convinced that a service provider could be found, we had no idea from where. Would hoteliers be interested or would facilities managers come to the fore?

In the event, most interest came from contractor-led organisations seeking building contracts. It will be interesting to see whether this trend continues with PFI procurement becoming a more commonly accepted form of procurement, or whether other specialists will come to the fore as in the health sector.

The university specified its requirements and how to achieve them. This clarity of vision at concept stage and the subsequent ability to focus on the final objective, proved critical.

The university effectively required a Build Operate Own Transfer (BOOT) scheme. At this stage, although the BOOT concept was well understood, it had only been applied to major infrastructure projects where volume risk was generally easier to forecast than the vagaries of student accommodation needs over 30 years.

None the less, we felt that by working with a committed promoter, we could develop a scheme beneficial to both parties. Lessons learnt from these early stages have effectively been endorsed by recent PFI guidance.

A key requirement in negotiations for the new student housing was risk transfer. The various risks were identified and apportioned as follows: Risk with the promoter

* The construction cost, timescale and all subsequent defects * The management of the facility to agreed performance levels * Long-term maintenance of the building fabric and replacement of equipment * Contribution to the cost of the development from out-of term use.

Risk with the university

* The occupancy guarantee, providing an agreed schedule of payments funded by the rental income from students.

The vehicle by which these elements could be brought together required a consortium of developer, financier, building contractor and facilities manager, led by a developer known as the promoter. Finding one willing to design, fund and operate a 650-bedroom hotel for 30 years with all the attendant risks was a challenge.

The scale of the project required compliance with EC procurement directives. The required notice was placed in the European Journal, the official journal of the European Community, in July 1993 and proposals invited.

At the end of 30 years ownership of the facility transfers to the university. The university commits itself to an agreed payment schedule that meets the promoters' cost of construction and finance over the 30 years and also meets the cost of facilities management, (linked to a suitable index). Rent collected from students by the university provides the income stream to service payments.

We prepared documentation to obtain bids from prospective promoters. The key areas to be addressed were as follows: * The nature of the transaction: a broad description of what was required and what was expected of each of the parties and the timescales involved.

* Functional user requirements: working closely with the university to define the spatial and the environmental requirements that would best meet the needs of students, drawing on both the experiences of the university and knowledge of similar projects.

* Construction performance specification: irrespective of the responsibility to operate and maintain the facility, the university has ensured, by exercising control over the physical construction of the buildings, that they will meet appropriate thresholds of materials and workmanship. After all, the buildings will one day become the property of the university.

* Facilities' performance specification and monitoring: of critical importance to the success of the development will be continued student satisfaction. Controls linking performance with payment have been developed to ensure this happens. The initial response of 44 proposals was extremely encouraging. Many were from those who relished the prospect of taking on the construction works but paid scant attention to the facilities management and risk transference aspects of the tender. Perhaps we were expecting more innovation than the market place was then prepared to deliver.

One such area was tax treatment. The peculiar status of higher education institutions generally means that VAT is a very real cost. The university's advisers, Coopers & Lybrand, devised a structure which not only satisfied the requirements of the project as well as those of Customs and Excise.

The proposal from Wimpey Construction Investments was considered the closest match and formed the basis of subsequent negotiations. It was appreciated from the outset that since the application of this type of procurement method to student housing was new, flexibility would be key to successful negotiations.

Many issues arose which were without precedent - the consequences of late completion; ownership of the sinking fund; facilities management indexation; vacation letting income; academic year changes; insurance responsibilities; security and dispute resolution, to name but a few.

It was during a battle to find an acceptable resolution of a particular issue that vision and commitment became crucial.

New situations require innovative solutions and all too often the baggage of experience of past transactions clutters up the ability to see what is best for now. The fact that these were overcome speaks volumes for the willingness of both Wimpey and the university to adopt a conciliatory approach.

The construction phase has been an equally refreshing experience in dealing with a promoter who, in addition to being responsible for construction, will also have to consider the implications both for day- to-day operations and long-term maintenance.

This is not a contractor who will be walking away at the end of the construction phase, contractual obligations fulfilled, to the next job. At all stages in the design and construction process, the promoter has taken a very keen interest in how the facility will be ultimately used, taking on board the comments of the university estates and residency staff to ensure that the end product will remain attractive to students and provide lowest possible costs in use.

This pathfinding project has taken some time and money to procure. It is important because PFI principles have relevance beyond student housing procurement, most noticeably because, from the outset, the PFI process focuses on getting a 30- year project off the ground.

If procured correctly, there is commonality of objectives bet-ween those using and occupying a building and those responsible for procurement.

The process requires committed single-minded approval from institutions to ensure that the diverse components associated with a whole life concept are managed to best advantage at all times.

It would be foolish to pretend that this type of procurement process is the "easy option" to ensure accomodation for all hard- pressed colleges and universities. But, if the right ingredients are there, it is going to have to be examined positively.

John McWilliam is deputy vice chancellor at the University of Greenwich. Paul Watson is project services partner for Grimley international property advisers.

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