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Non Profit Distributing Model (NPD) Seminar

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.

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Non Profit Distributing Model (NPD) Seminar

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

  2. Scottish Futures Trust Sandy Rosie Director, Financial Partnerships Unit

  3. Today’s SFT menu - - - • Background to SFT • Progress • Forward look

  4. 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

  5. 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”

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

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

  8. SFT Functionality ?

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

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

  11. Current position of delivery bodies Welsh Water TfL TfL

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

  13. Comparative (£) Interest Rates* 6.5% Bank Loan 6.1% PFI / PPP Projects  6% # 6.0% Wrapped Bond 5.8% EIB 5.6% Welsh Water 2028 5.5% 5.5% AAA Bond 5.5% Interbank Swap Rate 5.4% TfL 2035 5% 5.0% PWLB 5.0% Gilts 4.8% 4.5% * Reference 20 year term: excludes other costs of borrowing and VfM impact of loan terms and conditions # Non-EIB funds

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

  15. Public Authority Capital funding - Construction / FM Co.s SPV - NPD Market investors Charity Sub debt - lenders c. 10% Community stakeholders Senior debt lenders c. 90% Banks Facilities Management Co Lead Construction Co FM sub-contracts Design sub-contracts Trade sub-contracts Adviser sub-contracts NPD Structure

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

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

  18. Financial Partnerships Unit sandy.rosie@scotland.gsi.gov.uk 0131 244 7497

  19. Introduction to NPD14 February 2008 Mikko AJ Ramstedt Senior Project Adviser Financial Partnerships Unit

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

  21. What is NPD about? • Securing Expertise • Maximising VfM • Stakeholder Transparency

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

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

  24. 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

  25. 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

  26. 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

  27. Shareholder A Equity

  28. 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

  29. 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

  30. 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

  31. 3. Procurement Process • Evaluating surpluses • Effect on risk transfer

  32. 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

  33. Mikko AJ Ramstedt mikko.ramstedt@scotland.gsi.gov.uk 0131 244 4940

  34. Developments in PPP Guidance Vivienne Cockburn 14 February 2007

  35. 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?

  36. Part A: Why look at operational PPP guidance now?

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

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

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

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

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

  42. 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 LAISSEZ FAIRE • significant monitoring • Contract first point of contact • Enforce all deductions • reliance upon contractor monitoring • Limited verification • Not always enforce all deductions

  43. Governance and Contract Management User Guide to the Project Agreement Guide to the Payment Mechanism Risk Register Governance Structure Transitional Plan Contingency Plan Generic PPP Contract Management Documentation Operational • 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

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

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

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

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

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

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

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