Management of maintenance when a quick fix fails

March 26, 1999

Cars, unlike buildings, have a habit of spluttering to a halt unless regularly maintained. Buildings, as many universities well know, can stagger on for decades, becoming unreliable and depressing towork in.

The failure of a lift, a boiler or a roof is inconvenient, but a quick fix is often achievable. But what happens when a major failure occurs?

Many of the buildings spawned by the Robbins Report and the expansion of universities in the 1960s and 1970s were built to standards that are now regarded as unacceptable. Renewal is overdue and many institutions face huge capital outlay to prevent further deterioration.

In recent months, some architects and contractors have joined forces with property investment organisations to create financial vehicles that enable any institution capable of setting aside a reasonable maintenance budget to relax in the knowledge that the days of the unforeseen emergency are over. They can focus instead on the process of planned maintenance and, equally important, building renewal.

The Higher Education Funding Council for England has recognised the problem of backlog maintenance, and has allocated Pounds 108 million in matching funding for upgrading estates. This contribution is vital, but universities still need to find substantial capital to reduce escalating maintenance costs. For example, the backlog maintenance cost facing one university, is estimated to be about Pounds 40 million.

Until recently, universities obtained non-HEFCE finance to fund building-related projects through banks and financial institutions. Specialist investors are now providing finance for specific sectors, such as student residences, by using a mixture of property leases and loan finance. Rotch Property Group, for example, has a Pounds 130 million portfolio comprising mainly student residences.

A distinct advantage of a university leasing property is that its financial commitment as a tenant is regarded as an income and expenditure account matter rather than a long-term debt. But for core university properties and expenditure related to refurbishment of existing university properties that may be linked to a previous financing transaction, this arrangement is generally unacceptable. Must the university fund maintenance and refurbishment of existing properties by raising new debt? Fortunately, thanks to government promotion of Private Public Partnership, the answer is no.

The essence of PPP is partnership, based on the principle that the private sector will provide the university with a service at an annual service charge. There are two main benefits to this arrangement. First, the financial risk associated with providing the service is passed to the private sector. Second, the arrangement is seen as a service charge, not the creation of an asset, against which the public sector must register an equivalent debt. It is, in essence, off the balance sheet.

With the principles of PPP now accepted by institutions, it is expedient for universities to consider a partnership approach, incorporating the placing of long-term financial risk of future maintenance with a private-sector partner. The important benefit of this is that the replacement and maintenance can be carried out at the beginning of the partnership, with an inflation-linked annual service charge to cover the planned expenditure over the term. If the cost of replacing the item exceeds the estimated cost, or if it falls earlier than anticipated, the private-sector partner foots the bill.

The graph (left) shows the long-term service charge, calculated by forecasting the expenditure needed to maintain a teaching facility with a capital value of Pounds 9 million, ignoring in this instance the impact of inflation. Clearly, failure to maintain the building results in the compounding of costs.

For the service provider, the business generated by such long-term relationships is obvious. For contractors who take a long-term view and are prepared to manage long-term risks, the refurbishment and improvement of higher education estates provides an exciting opportunity.

James Boyle, a project manager for Rotch Property Group, and Frank Woods, a partner of architect Austin-Smith: Lord, are both consultants to higher education.

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