CaRTS and CaRDCo New Financing Concepts for Transport Infrastructure Cambridge Futures 2 Conference Marriott Hotel, Hun

1. CaRTS and CaRDCo New Financing Concepts for Transport Infrastructure Cambridge Futures 2 Conference Marriott Hotel, Huntingdon 18th February 2002 Cambridge Futures 2 Conference - 18th February 2002

2. Responding to the Caborn Challenge • Private sector agitation • County Council lobbying successful • Whitehall listening • £2+bn bill of fare prepared • Has to involve private sector • How do we respond to the “Caborn Challenge”? • Consider 2 aspects - sources of finance, especially PFI - legal structures, especially ownership • Concepts at this stage - much financial and legal analysis yet to be done Cambridge Futures 2 Conference - 18th February 2002

3. Sources of infrastructure finance • 4 sources - taxation/rates eg schools - existing private sector agents eg water utilities, housing associations - Section 106 agreements - Private Finance Initiatives/Public Private Partnerships • 3 caveats to applying PFI/PPP to Cambridge Project • Most public/private partnerships concerned with privatisation of existing assets/operations • Cambridge Project basically a start up • uncertain project costs, uncertain revenues • who is going to put up the equity? • Successful local businesses not a source • share rich rather than cash rich • shareholders focused on business objectives, not altruism • lively minds, but not cash • Considerable local personal household savings - not usually involved Cambridge Futures 2 Conference - 18th February 2002

4. How does PFI work? (1) • Extension of privatisation, combined with international project financing techniques eg power stations • Private capital put up to build new public facilities against long term “offtake” contract from public sector • Started with transport, but now extended to hospitals, prisons, ?schools • Uses private sector profit motive to improve efficiency • Risk transference - project construction risk - operating risk • Profit capping mechanisms Cambridge Futures 2 Conference - 18th February 2002

5. How does PFI work? (2) • Transport project example eg Dartford Crossing • contracting consortium formed (contractor and operator) • fund feasibility study and bid • construction risk analysis • operating risk analysis: traffic forecasts and other risks • bidding process • 30 year concession granted for facility management • Payment mechanisms • tolls, actual or shadow, with tapering profile • shift to mean journey times, availability and safety related payments • 3 way funding negotiation between consortium, government and banks • 75/85% initial finance from bank senior debt • banks during construction, then bonds < 30 years • the “equity plug” needed to fund feasibility/bid and “first loss” cover for banks • consortium aims to minimise its “equity plug” Cambridge Futures 2 Conference - 18th February 2002

6. Ownership - private company model (1) • Joint venture consortium company formed by providers - usually construction contractor and facility operator • Put up the “equity plug” • Joint interest in maximising return for shareholders on smallest equity plug in shortest time • 3 potential areas of profit to share • construction contract margin • post-construction refinancing profit (lower risk, lower margin) • operating profit • Gain from managing transition from higher to lower risk • Resell equity ownership of completed project to institutions Cambridge Futures 2 Conference - 18th February 2002

7. Ownership - private company model (2) • Profits accrue to owners of “equity plug” ie consortium venturers’ shareholders • Profits of each project paid away rather than retained • Leads to fragmented, project by project approach • Private sector looks for “pregnant” opportunities, rather than continuous development • Development depends on succession of “pregnancies” to create fresh PFI awards from central government • Local role remains lobbying for PFI awards from central government • Railtrack dividend issues • Public governance operates only through concession contract Cambridge Futures 2 Conference - 18th February 2002

8. Ownership - the mutual model (1) • Can we structure commercial ownership of “equity plug”by local users? • Set up new Industrial & Provident Society - Cambridge Regional Transport Society (CaRTS) • Would bid for PFI contract and procure bank finance, construction contract and operator services • How to raise the “equity plug” to fund bid? • Most mutuals accrete equity over time, but in principle can do an IPO • Offer securities call Permanent Interest Bearing Securities (PIBS) to regular users of service • rateable and tradeable perpetual security, but callable • coupon ~ 7.50 % • subordinated to senior bank debt, but ? coupon deferable • no ownership concentration: one member one vote • legal ownership inalienable, but beneficial ownership “strippable” • can be held by corporate persons • IPO could also offer embedded membership rights eg annual season ticket discounts Cambridge Futures 2 Conference - 18th February 2002

9. Ownership - the mutual model (2) • CaRTS guided bus example • project cost ~£50/60m • lowish risk ~ £40m bank/bond debt possible • “equity plug” ~£10/20m required • PIBS issue to raise 10 - 20,000 x £1,000 • offered to public in Cambridge • ?ISA-able ~ worth 10+% gross with lifelong season ticket discount • ?coupon deferred until after construction • investors able to resell stripped coupon once project rated • offered to University, colleges and employers for season ticket concessions for employees • ?include provider interests eg Anglian Water • ?embedded board membership for County Council vs assignment of S.106 benefits “down the track” • ?50% of board and Chairman elected by users Cambridge Futures 2 Conference - 18th February 2002

10. Ownership - the mutual model (3) • Pro’s and cons • enable profits to be retained and re-used for continuous development • provide development vehicle under local control • maintain efficiency of private sector without shareholder vs user conflicts • close identity of users and investors may not apply so easily elsewhere eg roads with public access • speed of retained earnings build up vs scale of Cambridge Project (but S.106 injection possibilities) • local investor capacity • Not the only answer, but part of possible mix Cambridge Futures 2 Conference - 18th February 2002

11. Ownership - public/private partnership • Alternative model of company limited by guarantee, with dual public and private board - ?Cambridge Regional Development Company (CaRDCo); like New Railtrack • Usually used for long term or charitable purposes, beyond potential members’ horizons • ? Accountability issues - members chosen by board • ? PFI programme management role • But ability to act as procurer depends on coming up with “equity plug” • ? EEDA and other grants; • ? S.106 proceeds; • ? other asset injections • Potential to blend elements of mutual and PPP approaches • Another part of mix Cambridge Futures 2 Conference - 18th February 2002

12. Potential pattern of funding? • Gas and electricity works £45m TXU/Eastern • Water and waste £55m Anglian Water • CHUMMS £300m Private PFI • ?Transport deficit £90m ?Tax • Local roads £360-400 ?CaRDCo PFI • Public transport £50/60m CaRTS PFI • Market town allowances £25m Tax • Contingency £160/175m Tax • Health £352m ?CaRSH/ CaRDCo/ Private PFI • Education £155m ?Tax/CaRDCo/ Private PFI • Community £68m Tax • Housing £360m Housing Assocs Cambridge Futures 2 Conference - 18th February 2002

13. Conclusion • Cambridge’s economic success “home grown” • Ignored by central government when growing • Then challenged to sort out our problems too • Sense of responsibility to respond to the challenge • Must create mechanism to capture local return off our own success, rather than see it go back to central government or to remote institutional shareholders • Prize will be greater ability to steer our own futures • Mutual I&PS - CaRTS - and Private/Public Company limited by Guarantee - CaRDCo - may offer that mechanism • Owe it to ourselves to try Cambridge Futures 2 Conference - 18th February 2002