Non Profit Distributing Model (NPD) Seminar 14 February 2008 Financial Partnerships Unit

Scottish Futures Trust Sandy Rosie Director, Financial Partnerships Unit

Today’s SFT menu Background to SFT Progress Forward look

Infrastructure background Scottish Government Economic Strategy published – investment focus on transport Scottish SR07 – tight settlement, but growth in infrastructure investment Backlog of assets in poor condition concerns about costs of ‘standard PFI’, but good to have additional private investment

SFT commitment “Over the first term of an SNP Government we will introduce a not-for-profit Scottish Futures Trust, which will provide lower cost borrowing opportunities. We expect the SFT to emerge as a more attractive source of funding for both national and local projects”

SFT main objectives Additional investment Cheaper costs than PFI Non-profit distributing

Other SFT objectives To hold assets Contributions from individuals Tax allowances Oil revenues

SFT Functionality ? Guidance & Advice Funding Delivery/ Assets

SFT main objectives Additional investment Cheaper costs than PFI Non-profit distributing

Additional investment Public/private placement International Financial Reporting Standards/ Office of National Statistics rules increasing efficiency in project delivery, eg aggregation, strategic planning

12 Current position of delivery bodies TfL Welsh Water

SFT main objectives Additional investment Cheaper costs than PFI Non-profit distributing

Comparative (£) Interest Rates* Bank Loan 6.1% Interbank Swap Rate 5.4% Wrapped Bond 5.8% * Reference 20 year term: excludes other costs of borrowing and VfM impact of loan terms and conditions # Non-EIB funds Welsh Water % TfL % EIB 5.6% Gilts 4.8% AAA Bond 5.5% 6.5% 6.0% 5.5% 5.0% 4.5% PFI / PPP Projects  6% # PWLB 5.0%

SFT main objectives Additional investment Cheaper costs than PFI Non-profit distributing

Public Authority Capital funding - Construction / FM Co.s SPV - NPDMarket investors CharitySub debt - lendersc. 10% Community stakeholdersSenior debt lendersc. 90%Banks Facilities Management CoLead Construction Co FM sub-contractsDesign sub-contracts Trade sub-contracts Adviser sub-contracts NPD Structure

Progress SFT Steering Group Delivery Team (PUK + PWC +FPU + other SG) Market and public input through consultation – ends 14 March Compile outline business case

Forward Look Cabinet decision on SFT – Spring Infrastructure Investment Conference – May Establish SFT - ?

Financial Partnerships Unit

Introduction to NPD 14 February 2008 Mikko AJ Ramstedt Senior Project Adviser Financial Partnerships Unit

Introduction to NPD Definition Concept NPD v PPP Impact on bidders Procurement process

What is NPD about? Securing Expertise Maximising VfM Stakeholder Transparency

What is NPD? Non-Profit Distributing organisation 100% debt funded No equity dividends → capped rate of return for investors Enhanced corporate governance

Private sector control over day to day operations Shareholder Director Independent Director –Instigator of refinancing –Control where other directors conflicted Corporate Governance

1. NPD v PPP Common “building blocks”: Project company (SPV) Project Agreement with the Authority Risk allocation Construction and FM sub-contractors Limited-recourse finance

2. NPD v PPP NPD characteristics: NPD wholly debt-funded: 90% senior debt and 10% junior debt Surplus cash flow available for public benefit NPD Project Company controlled by junior lenders Greater transparency through Independent and Stakeholder Directors

3. NPD v PPP Refinancing Both senior & junior debt can be refinanced 50:50 sharing between junior lenders and Authority Independent Director instigates refinancing Other surpluses flow through to charity

Equity Shareholder A

NPD consortium structure No change at sub-contractor level No change for senior lenders Project Co owned and controlled by junior debt providers –Conflict of interest

1. Procurement Process No major change… but not just about making a few tweaks in the PA…. Explanation of NPD to bidders needed at all stages of the procurement, including pre-OJEU Full set of documents needed for ITPD

2. Procurement Process Two likely models of junior debt: Subordinated debt = “Equity-like” structure –No TDCR (i.e. cover 1:1) –Priced akin to equity—but return is capped, unlike equity investment –Higher WACC, but no cover ratio may mean Unitary Charge is lower –No surplus paid to charity in Base Case until “tail” period Mezzanine debt = “Debt-like” structure –Total Debt Cover Ratio (e.g. 1.05x) –Lower WACC, but cover ratio requirement may make Unitary Charge higher –Payment of surplus revenues to Charity more important

3. Procurement Process Evaluating surpluses Effect on risk transfer

Summary NPD – PPP without dividend bearing equity Enhanced transparency through ID & SD Main impact on junior lenders Procurement process needs to be carefully managed NPD elements part of bid evaluation criteria

Mikko AJ Ramstedt

Developments in PPP Guidance Vivienne Cockburn 14 February 2007

Agenda Part A: Why look at operational guidance now? What issues have been arising and what are the learning points? What are the conclusions and what support is there for operational PPP projects? Part B: What guidance is emerging for projects entering procurement?

Part A: Why look at operational PPP guidance now?

Experience of Operational projects Feedback from PPP Managers 1. Payment Mechanisms 2. Managing Operational Projects 3. Benchmarking & Market Testing 4. Variations Why look at operational PPP guidance now?

Part A: What issues have been arising, what are the learning points and how has this been captured in the guidance?

3.How have the unitary charge change mechanisms worked in practice? 4. What have been the learning points? 2. Has it incentivised the contractor? 1.How easy to use? PM: Lessons Learnt 1. Payment Mechanism: How has it worked to date?

Understand impact of changes Update for changes Grace Periods Availability/Health & Safety/SPV Management – no Performance Deductions - ? Commissioning/Procedures Joint training User guides Lessons Learnt How should we manage the Payment Mechanism? Active Management shadow running update prior to services availability procedures enforcing deductions?

Tricky Issues: Disputes Variations Benchmarking Refinancing User issues: Service performance Malicious damage Flexibility Project documents: Different ‘language’ Different people How sections interact 2. The Quagmire of Contract Management: Experience to date

2:Spectrum of Approaches sufficient monitoring to confidence in reporting Enforce deductions unless specific reasons Active sign off & monitoring by Project Board BY THE CONTRACT significant monitoring Contract first point of contact Enforce all deductions LAISSEZ FAIRE reliance upon contractor monitoring Limited verification Not always enforce all deductions

Generic PPP Contract Management Documentation Contract Administration Manual processes and procedures to mange the operation of the contract allocation of roles and responsibilities within Council and between Council and PPP Contractor User Guides Communications Strategy Staff Transfer Management Procedures Post Contract Evaluation Procedures Operational User Guide to the Project Agreement Guide to the Payment Mechanism Risk Register Governance Structure Transitional Plan Contingency Plan Governance and Contract Management

3. Benchmarking & Market Testing: Experience To Date Comparable Projects Negotiations distracted to other issues Demonstrating VfM Know market Aware conflict issues Clear governance structure Allow time and resources

4. Variations Difficult to implement Number of parties Funding Payment mechanism Impact on procurement law Developments: SOPC 4, Scottish Guidance re: process

Part B: What guidance is emerging for projects entering procurement?

Emerging Policy & Legislation Feedback from Existing projects 1. VfM Update 2. Payment Mechanisms 3. Competitive Dialogue? 4. Sector specific eg SCIM What guidance is emerging for projects in development?

Delivering an Approvable Scheme Retained Risk Payment & Performance Regimes NPD: Financial Workshops to Apportion Risk Financial Input Technical Input PPPCPAM Develop CPAM Value Risks NPD: Governance PPP Contract Value for Money Analysis

NPD: VfM Developments Financial Analysis Move towards NPD vs CPAM Not use Treasury HMT model Use a shadow bid model inc donation assumptions

NPD: VfM Developments VfM Assessment Timing of donations Recognise deliverability risk  Apply a risk factor to forecast donations  Discount at [7%] real Risk transfer impact Qualitative benefits

1.Roles & Responsibilities in development 2. Level of development 3. Indexation 4. Linkages to termination and performance Payment Mechanism: Procurement Guidance Payment Mechanism The Heart of your contract

Conclusions: Where are we now?

Conclusions Operational Guidance:  Payment Mechanism and Benchmarking/Market Testing Guidance – published  Managing a PPP Contract – due shortly  Variations – in development NPD VfM Guidance  In development

Contact Details Vivienne Cockburn Financial Partnerships Unit, Scottish Government    Mobile:  Tel: Guidance on FPU website:

Close Non Profit Distributing Model (NPD) Seminar 14 February 2008