Mark McVicar, partner in the development and planning group at Cushman & Wakefield, gives his view on partnerships between private capital and the public sector:

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The real challenge this decade is improving front line public services to meet disparate community needs whilst juggling burgeoning regulation, stressed revenue budgets and effective drought in Treasury capital funding.

Forced efficiencies in service delivery, widely translated as cost cutting, seems inevitable. However, while cuts may balance revenue budgets, the emerging chasm in capital funding risks long term damage.

From universities needing new campuses to stay globally competitive to local authorities desperate to secure regeneration or procure new infrastructure to deliver services, putting projects in the cupboard until 2021 is not attractive.

In common with all businesses, there are times when reassessing the cost/benefit of capital tied up in property needs revisiting. For many public organisations, that time is now.

Whilst more prudential borrowing remains an option for some, for others, like Glasgow City Council (Glasgow to sell off £120m public property; 05.02.10), leveraging capital from property assets is perhaps the solution.

Non operational assets offer a straightforward sale proposition.

Operational assets, where most capital lies, presents a far more complex “equity release” proposition.

Injecting private capital here and making effective use of it (be it debt or equity) needs structural preparation and has its price.

Unlocking asset value demands re-assessment of operational cost. Traditional top down budgeting will not capture true property costs at the service level.

For some assets, such as offices it’s a straightforward calculation, market rental value.

For other assets, such as schools there is no reliable rental market pricing and alternatives, such as annualising replacement costs or building in indexed growth may offer a solution.

For the private sector occupational covenant and rental growth will be foremost in their minds, hence Glasgow City Council “guaranteeing” any debt raised. Whether that “guarantee” breaches their prudential borrowing limits remains to be seen, but alternatives such as underlying development value may provide adequate protection.

Establishing a “fair” internal rental market, is then a critical step and this lends itself to an internal “property company” to provide economies of scale in asset and facilities management and to provide a launch platform for capital raising.

Inevitably, revenue costs at the service level will increase to capture property costs, albeit matched by increased centralised revenue, recycled back to services. A simple accounting process.

The leap of faith, is any subsequent sale (or mortgaging) of assets “leased to services” or the sale/mortgaging of the “property company” itself.

This “capital grab” for revenue proposition is where the public sector will either succeed or burden future tax payers with yet more debt, contracted services or higher taxes.

Capital, raised from assets, should be carefully used: to reduce debt held on less favourable terms; reduce operational costs (from space efficient buildings that are in the right location and are fit for purpose); reduced real estate costs and carbon footprint (i.e. energy efficient buildings, more efficient plant/machinery); increase revenue (i.e. new university courses); or unlock investment which will drive additional rate income/tax income (i.e. regeneration) that can be captured by the investing organisation (e.g. through TIFs).

In essence, an “opco/propco” model is predicted to emerge across the sector.  With public facing “Opcos” remaining publicly owned front line service providers, with operational fixed assets owned by “propcos” where ownership varies from wholly owned to fully divested, depending on strategy adopted.

However, for many, success requires cultural change. The right decisions will only be made if the base assumption is that central government will not “bail out” a distressed service provider. That’s essential if the family silver is not to be frittered away leaving nothing to sell next time.

Whichever party is returned in May, the next 18 months will see a tipping point in how we run public services. It’s time to be prepared.

• Glasgow to sell off £120m public property
• Councils to mimic Glasgow propco
• Why the change in thinking is more important than £35bn sales
• Budget 2010: £35bn public property sell-off
• Incentive given for procuring services jointly