New forms of funding – The Non-Profit Distributing Model Simon McCann (Partner, Projects)

NPD – not all that new! Developed in Scotland 2008 (and before) Over 20 schemes since (further education, health, transport) Welsh Assembly Finance Committee report into alternatives to PFI/PPP 2008/9 – considered range of models - NPD was one of recommendations Model is therefore relatively tried and tested and well-understood by funders and infrastructure companies

What is NPD? Similar risk profile and structure to “traditional” PFI/PPP BUT capped return to private sector (competed) Operating surpluses returned to public sector or reinvested – no distribution to equity shareholders Enhanced control / stakeholder involvement in management of the project Similarities to PFI/PPP in whole-life costing, maintenance cycle planning, performance based service payments, single point of delivery

Structure * Company limited by shares (non-distributing)   Building Contractor Service Provider Authority Lenders Investors NPD SPV* Golden share Surpluses Annual unitary charge Loan repayments Loan Construction price Service payments Appoint directors pro rata to investments Loan and non-dividend bearing equity -shares in the SPV mainly held by the private sector investors - shares in the SPV stapled to the investment Building contract Facilities management contract Funding documents Project agreement Key: = key payments and additional information = key documents * Company limited by shares (non-distributing)

Governance Ownership and control rests with those whose lending is at risk – i.e. junior lenders “Public Interest Director” – appointed by Scottish Futures Trust (arm of Scottish Government) – not the authority Compliance with good governance and NPD principles Independent view Re-financing opportunities and efficiency savings (non-distribution reduces incentive on shareholders to do this) “Golden share”- held by authority - veto over certain key strategic areas

Welsh projects Various announcements Mar – Sept 2015 – Welsh Government committed to using NPD for three projects – Velindre Cancer Centre (£210M) A465 “Heads of Valleys” dualling 21st Century Schools

What went wrong? July 2015 - ONS classification of Aberdeen Western Peripheral Route as “on balance sheet” – i.e. public-owned asset rather than private Effects – capital spend on asset has to be taken into account against capital budget – reduces overall amount available (devolved government, NHS) capital charges against revenue budget Chilling effect on NPD

What were the reasons for ONS’ decision? Specific to AWPR - but created general issues for NPD that need to be addressed “Golden share” – degree of control over project indicated public ownership 100% of surpluses went back to public sector (early NPD projects – surpluses went to charity or reinvested) – indicated ownership of rewards of project

How can we get round this? Need to focus on reducing level of public control (whilst keeping key NPD benefit of stakeholder involvement); and Reducing public sector share of surpluses – possibly returning to passing to charity or reinvestment in project

Scottish Hub solution Scottish “Hub” model (smaller community-based NPD projects, design/build/finance/manage) accepted by ONS in November 2015 as being off balance sheet. Shared ownership of SPV – 60% private sector 20% charity 10% Scottish Futures Trust 10% procuring authority Welsh Government liaising with SFT re: solution for Velindre – business case approval currently pending

Does Brexit affect any of this? General impact on investor confidence – only time will tell. Much depends on Autumn Statement ESA10 accounting rules re: public/private sector classification – will remain in force until Brexit happens (at least 3 years). Many countries outside EU have similar standards so unlikely to change significantly Procurement – major infrastructure projects notoriously slow & expensive to procure. Rules will stay same until Brexit happens and then international obligations (WTO) require us to have some form of transparent public procurement – so again, little likely to change Though NB greater flexibility under Public Contracts Regulations 2015 – particularly competitive negotiated procedure – may speed things up / cut cost, depending on how authorities use it

Some alternatives (particularly for HE sector) “Off balance sheet” treatment not as much of a concern for Universities. Wider scope to consider other methods “Asset backed” or “pension fund” route – e.g. Aberystwyth University £40M accommodation PPP with Balfour Beatty – freehold land transferred to lender, leaseback for service period Bond issue – e.g. Cardiff University £300 million, 3%, due 2055. “General” purposes, so not limited to specific projects.

The Non-Profit Distributing Model – Questions? Simon McCann (Partner, Projects) simon.mccann@blakemorgan.co.uk DD: 029 20 686146 Mob: 07795 968750