NPDO Non Profit Distributing Organisation Mikko Ramstedt, Project Adviser Financial Partnerships Unit

Contents  Background  Why a Non Profit Distributing Organisation?  NPDO Structure and Governance  Concerns / Issues  Process

NPDO Model – Background  Argyll & Bute Council designated pilot  Partnerships UK (PUK) cosponsor  The Council’s Advisers  Ernst & Young  Shepherd & Wedderburn  MPM Capita

NPDO – Why a new PPP model?  Political concerns over profits in PPP – Desire to retain surpluses for educational purposes  More pro-active and stable partnership  Improved perceptions about PPP  Possibilities for new areas of PPP  PPP evolving alongside standardisation

Objectives To deploy a wholly debt based capital structure on a schools PPP that…  Improves stakeholder acceptability and participation  Achieves at least as good value for money as traditional ‘equity’ based PPP

Standard Outline Structure Education Authority Capital funding - Construction / FM Co.s Special Purpose Vehicle (SPV) Equity holders~ 1% Market investors Sub debt - lenders~ 9% Senior debt lenders~ 90%Banks Facilities Management Co Lead Construction Co FM sub-contractsDesign sub-contracts Trade sub-contracts Adviser sub-contracts

Benefits from PPP Single point delivery system Improved service provision Performance based payments Life-cycle maintenance and facilities management Initial capital investment PPP

Education Authority Capital funding - Construction / FM Co.s SPV - NPDOMarket 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 NPDO Outline Structure

Additional Benefits Stakeholder involvement included as a right SPV surpluses reinvested in project ‘Normal’ profit level for sub-contractors NPDO

Principles  Minimum disturbance to traditional equity based schools estate PPP model  Follow Scottish Executive guidance on standard form schools contract  Achieve similar levels of risk transfer as under traditional PPP  Surpluses arising are applied to the benefit of authority education services  Risk profile and corporate governance acceptable to financiers  Management incentives consistent with stable and sustainable performance

Structure part 1  SPV a company limited by shares  Small board; Stakeholder, Independent + 3 other directors  Junior capital is exclusively sub-debt  Senior debt and sub contracts as per traditional model  SPV will elect to donate surpluses to the charity rather than distribute dividends  No restrictions on distributions by sub- contractors

Why a Company Limited by Shares?  The traditional corporate vehicle  Flexibility / familiarity  Minimum deviance from existing PPP business model  Does not rule out bidder variants

Structure part 2  Shares in SPV stabled to sub-debt  Sub-debt can be provided by sub-contractors or senior lenders to the SPV, or third party funds and institutions  SPV is:  Private sector classified  ‘Profit’ (Surplus) maximising  Tax paying entity  Fully commercial operating basis

Why ‘Profit’ (Surplus) Maximising?  Has to manage the same risks and sub- contracts, and deliver the same operating performance as traditional PPP  Management incentives tied to generation of surpluses, to maintaining credit equality of junior and senior debt and other targets  Familiar regime for efficiency and performance drivers

Corporate Governance  SPV board policies:  No dividend distributions  Surpluses applied according to agreed priorities 1. Management incentives 2. Build-up reserves 3. Additional scope of services pre-defined under the contract 4. Donations to the charity  Having applied all statutory and fiduciary duties, SPV’s objective to deliver value for money to the Authority

PPP - v – NPDO  Senior Debt  Sub Debt  Equity  Senior Debt  Sub Debt  Management Incentives

Benefits: PPP - v – NPDO  Established  Partnership  Bidders  Unitary Charge  Novel  Partnership  Strong Bidder Interest  Financial (UC)  Non-financial

Some Concerns  No equity?  Debt Service Cover Ratio  Governance arrangements?  Directors’ duties unchanged

Value for Money  Financial  Application of surpluses  UC level  Tax-efficiency  Non-financial  Acceptability  Stakeholder involvement  Wider benefits

Issues for Local Authorities  Bidder response  Financial Balance  Surpluses versus Low UC  Charity  Tax efficiency –  Availability of Surpluses  Balance Sheet Treatment  Preparation!

Argyll & Bute Pathfinder – Process  Consultation Q  OJEU March 2003  ITN June 2003  BAFO February 2004  Provisional Preferred Bidder March 2004  Statutory Consultation  SE final approval, and  Financial Close September 2005

Summary  Background  Why a Non Profit Distributing Organisation?  NPDO Structure and Governance  Concerns / Issues  Process

Mikko Ramstedt, Project Adviser Financial Partnerships Unit