Funding Social Care PFI projects Christine Galeon Tel: April 2003

Agenda Optimised financing in PFIs What makes a Care PFI project bankable? Unusual economics: Mitigation strategies The regulatory challenge Conclusion

Agenda Optimised financing in PFIs What makes a Care PFI project bankable? Unusual economics: Mitigation strategies The regulatory challenge Conclusion

Optimised financing Typical PFI Structure Local Authority SPV Shareholders Design and Construction Care services and day-to-day repairs Lifecycle repairs Funder Direct Agreement Project Agreement Senior Debt Equity Sub-contracts

Optimised financing Typical features of financial structure SPV set-up to enter into contracts and raise finance Competitive long-term financing High gearing (ca 90:10 debt:equity ratio) with small equity cushion Long term debt with limited tail until concession end Repayment solely from project cash flows Security solely over SPV’s assets and step-in rights

Agenda Optimised financing in PFIs What makes a Care PFI project bankable? Unusual economics: Mitigation strategies The regulatory challenge Conclusion

What makes a Care PFI project bankable? (1) Affordability Experience and commitment of all consortium members Design & build; Maintenance, but also… Care services…New in PFI Registered Social Landlords Ethos; Not-for-profit organisations Long-term commitment through fixed price contracts RSLs and PFI are compatible Other care providers

What makes a Care PFI project bankable? (2) Clear risk allocation with realistic transfer of risks and liabilities OGC guidelines Address sector specific issues, e.g - Development of care plans - Interface with frail patients - Flexibility to cater for special needs - Payment mechanism Partnering between all parties is essential Robust financial structure Satisfactory due diligence, including care due diligence

Agenda Optimised financing in PFIs What makes a Care PFI project bankable? Unusual economics: Mitigation strategies The regulatory challenge Conclusion

Unusual economics: Mitigation strategies High proportion of care / staff operating costs Operating cost overrun risk Limited mitigants available to private operator Sharing the risk: Best value for money solution Indexation Tailor-made benchmarking regime - Frequency - Comparator group Pitfalls of market testing

Agenda Optimised financing in PFIs What makes a Care PFI project bankable? Unusual economics: Mitigation strategies The regulatory challenge Conclusion

The regulatory challenge National Care Standard Commission: omnipresent, but not contractually bound Care Standards Output specifications Payment mechanism – objective perfomance indicators? First registration and cancellation risks Lenders’ step-in No legal solution to address uncertainties, but: Monitoring providing early warning Pragmatism

Agenda Optimised financing in PFIs What makes a Care PFI project bankable? Unusual economics: Mitigation strategies The regulatory challenge Conclusion

Conclusion The recipe for success in social care PFIs Usual PFI ingredients Best value for money Efficient financial structure Optimum risk allocation Quality and long-term dedication of parties With an extra pinch of pragmatism and partnering to address sector specific challenges The path to social care PFI does exist!