“Finance and the Business Case” Jonathan Clarke Corporate Finance Director Genesis Housing Association 11 th July 2013

Contents Purpose of business case Investment choices Finance options Governance

Purpose of business case HM Treasury’s “Five Case Model” –‘Strategic case’ – what are we seeking to achieve –‘Economic case’ – NPV-based economic appraisal –‘Commercial case’ – commercial viability –‘Financial case’ – affordable –‘Management case’ – achievable / deliverable

Purpose of business case Economic case: net present value Financial case: capacity, risk, accounting, vires Revenue subsidy? Risk reduction? Capital subsidy? Risk reduction? New funding? Off-balance sheet? NPV > £x?

Purpose of business case Challenge: environmental outcomes not commensurable with other outcomes e.g. financial return, number of homes. –DECC research on EPC ratings: up to 14% impact on value (June 2013) Policy objective: capture externalities in financial return, without undue complexity. “Investment decision” then “finance decision”. –In perfect market, finance-providers rational, meeting their needs shouldn’t affect investment decision. Government intervention – driven by policy not financial return – makes things complicated. Complex government interventions – even if essential and well thought through – make it more difficult to analyse choices, to build credibility and to instil confidence in delivery.

Investment choices Retrofit of existing homes / Environmental spec of new homes – Insulation (loft / cavity / solid-wall) – Boilers, renewable heat – Windows – Micro-generation – photo-voltaic, wind, solar heating … CHP … vs. Other repairs spend on existing homes vs. Community investment vs. New homes Other sectors will have their equivalents.

Investment choices Green Deal – market intervention rather than subsidy ECO – capital subsidy –£760m p.a. “Carbon Saving” (solid wall, hard-to- treat cavity etc) –£190m p.a. “Carbon Saving Communities” (low- income communities) –£350m p.a. “Affordable Warmth” (private tenure only) FIT – revenue subsidy

Finance options OptionComment Green Deal“Off-balance sheet”. No (immediate) risk to landlord; but may be expensive form of funding. ECOPotential to improve economic viability. Build relationships to improve delivery. ECO brokerage. FITPotential to improve economic viability. Existing fundingImpact on existing loan covenants (gearing, on-lending)? New fundingPerhaps on project basis with bespoke covenants? Partnership / joint venture Alignment of interests and incentives; potentially costly to establish.

Governance Course of action Strategy Options Stakeholder engagement  Business case  Decision  Delivery