non profit distributing model (npd) seminar 14 february 2008 financial partnerships unit
TRANSCRIPT
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
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2007/08 2008/09 2009/10 2010/11
Capital Expenditure Scotland (£bn's)
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
to all public bopdiesOFF
BALANCESHEET
£100 m pa £50 m pa
ONBALANCE
SHEET
Private sector
Public sector £170 m pa £430 m pa £80 m pa £200 m pa £620 m pa £1170 m pa £480 m pa
Scottish Enterprise (1) Scottish Water (1)
£140 m pa
Scottish Transport partnerships (6)
Communities Scotland (1)Local authority (32)
Urban Regeneration Cos
Registered Social Landlords
Health Boards (12)SE Transport, Transport
hub Scotland Subsiduary delivery cos
Police, Fire)
Scottish Water Solutions
Scotland (2)
PPP project companiesUniversities and FE Colleges
Justice agencies (5)(SPS, SCS, CO/PFS
Scottish Funding Council (1)
Network Rail Joint Venture Co
Current position of delivery bodies
TfL
TfL
Welsh Water
SFT main objectives
• Additional investment
• Cheaper costs than PFI
• Non-profit distributing
Comparative (£) Interest Rates*
Bank Loan 6.1%
InterbankSwap Rate 5.4%
WrappedBond 5.8%
* Reference 20 year term: excludes other costs of borrowing and VfM impact of loan terms and conditions# Non-EIB funds
WelshWater20285.5%
TfL20355%
EIB 5.6%
Gilts 4.8%
AAA Bond 5.5%
6.5%
6.0%
5.5%
5.0%
4.5%
PFI / PPPProjects 6% #
PWLB 5.0%
SFT main objectives
• Additional investment
• Cheaper costs than PFI
• Non-profit distributing
Public AuthorityCapital funding - Construction / FM Co.s
SPV - NPD Market investorsCharity Sub debt - lenders c. 10%Community stakeholders Senior debt lenders c. 90% Banks
Facilities Management Co Lead Construction Co
FM sub-contracts Design sub-contractsTrade sub-contractsAdviser 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 - ?
Introduction to NPD14 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
Developments in PPP Guidance
Vivienne Cockburn14 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 ofOperational projects
Feedback from PPPManagers
1. Payment Mechanisms
2. Managing OperationalProjects
3. Benchmarking & MarketTesting
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 chargechange 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
LAISSEZFAIRE
• 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 fromExisting 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 SchemeRetained Risk
Payment & Performance
Regimes
NPD: Financial
Workshopsto Apportion
Risk
Financial Input
Technical Input
PPPCPAMDevelop 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 CockburnFinancial Partnerships Unit, Scottish Government [email protected] [email protected] Mobile: 07766 006 028 Tel: 0131 244 7496
Guidance on FPU website:www.scotland.gov.uk/Topics/Government/Finance/18232/12271
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Non Profit Distributing Model (NPD) Seminar14 February 2008