Key decision opens door for major construction projects

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Cash-strapped local authorities across the UK have a new opportunity to take major construction projects forward after the door was opened for a new form of private finance model to be widely adopted. 

The Non-Profit Distributing (NPD) Model is an alternative to the much-maligned Private Finance Initiative (PFI) in which surplus profits are reinvested in the public sector rather than going to the private sector as unpopular “windfall” payments.

The future of NPDs was in doubt because of a ruling by the Office for National Statistics (ONS) that one such project should be classified as being owned by the public sector. This decision meant that local authorities would be liable for capital charges – effectively making future NPD projects a non-starter. 

But after a key agreement was reached over a major project in Scotland, it now appears that this hurdle has been overcome, making properly-structured NPD schemes an attractive option for local authorities to fund large-scale construction projects. 

Crucially, surplus funds generated through NPD schemes can be reinvested in local communities, so that as well as delivering high value schemes, they can also contribute to local wellbeing and regeneration. 

Simon McCann, a partner in the commercial team at law firm Blake Morgan and a specialist in NPD projects, said: “I’d expect that this development will now kick-start the adoption of NPD projects across the UK. 

NPD projects can be adopted by any public authority in the UK, subject to the normal approvals processes, and do not require any new legislation. 

As long as the projects are properly structured, there is no reason why they cannot become the “new PFI” without being associated with the perceived pitfalls of the old model. 

The Scottish government had been developing and using NPD as an alternative to PFI since 2008 and had successfully delivered around 15 major road, education and hospital projects with the model. 

A key aspect of NPDs is that the projects are delivered through a Special Purpose Vehicle (SPV) in which both the public and the private sector have a shareholding. 

It was this that led to problems when in July 2015, ONS ruled that one NPD project, the Aberdeen Western Peripheral Route, must be classified as being owned by the public sector because of the degree of public sector control. 

It now appears the Scottish Government has reached an agreement with ONS on a model that can be treated as “off balance sheet”. 

The key change is that the public sector has much less control of the SPVThe proposed structure is that the private sector would own 60%, 20% would be owned by a charity, 10% by Scottish Futures Trust, which is an arm of Scottish Government, and 10% by the procuring authority. 

Simon McCann added: ”Particularly interesting is the involvement of a charity because this could greatly expand the opportunities for using major projects to deliver social and community benefits, such as targeted employment and training for the long term unemployed and other disadvantaged groups. 

“Therefore this recent development presents a real opportunity for cash-strapped authorities across the UK to take infrastructure projects forward and deliver major local growth and regeneration.”