Non-profit distributing – has Scotland found a model that works for infrastructure projects across the whole of the UK?

3rd March 2016

In a previous blog (Non-profit distributing model – the future for Welsh infrastructure projects?) we reported in November 2015 that the Welsh Government had committed to three infrastructure projects using the Non-Profit Distributing (“NPD”) Model – the redevelopment of the Velindre Cancer Centre; “dualling” of sections 5 and 6 of the A465; and the 21st Century Schools Project.

However, the NPD model had to be placed on hold in both Wales and Scotland (where it was originally developed) due to the decision by the Office of National Statistics (ONS) that an NPD scheme (the Aberdeen Western Peripheral Route) had to be given a public “on balance sheet” classification. Under HM Treasury budgeting rules, this does not increase the overall cost of the project but means that capital charges are payable by the purchasing body. This threatened to make NPD schemes unviable.

However, it now appears that the Scottish Government may have agreed a structure with ONS which would allow future NPD projects to remain “off balance sheet”, thus giving the green light to potential schemes.

What is NPD?

The Non-Profit Distributing (“NPD”) model is simply an alternative funding structure for public-private partnership (“PPP”) projects that would previously have been carried out under the Private Finance Initiative (“PFI”). It could be adopted by any public authority in the UK (subject to normal approvals processes) and does not require any new legislation.

Many of the perceived problems with PFI stemmed from the private sector receiving surplus “windfall” profits on top of their anticipated rate of return, and also loss of public control over public sector assets.

Therefore, what NPD seeks to do is to create a structure under which:

  • The private sector takes a fixed rate of return
  • The public sector has greater control and transparency over the project company delivering the project, usually through a “golden share” giving enhanced voting rights on key issues, although other methods are possible
  • Surplus profits are not distributed to the private sector. Instead, they can be returned to the public sector, used to pay off debt, or invested in more or higher-standard services or infrastructure.

It is therefore not a “not for profit” model. Contractors and lenders are expected to earn a normal market rate of return, as in any other form of privately-financed PPP deal.

The NPD model is defined by the principles of enhanced stakeholder involvement in project management; no dividend-bearing equity; and private sector return capped at a reasonable rate set in competition through a procurement process compliant with EU rules. Investors bid a rate of return in competition.

It is important to realise that apart from this, NPD is not very different to traditional forms of PPP including PFI. In particular, the distribution of risk between public and private sector, including to construction and service contractors and their sub-contractors, is much the same.

How are NPD projects structured?

There is no specific corporate structure requirement but so far NPD projects have adopted a structure that involves the creation of a special purpose vehicle (“SPV”) company limited by non-dividend bearing shares. Apart from one golden share, which is held by the authority, shares in the SPV are held by private sector investors. This follows the principle that the SPV should be managed by the parties whose lending is at risk. The golden share gives the authority controls over the corporate, governance and management structures of the SPV.

Investors appoint the majority of the SPV’s directors pro rata to their investments, which gives them control over the SPV. Ownership and control of the SPV transfer with investment, as shares are “stapled” to investment. To ensure visibility for the public sector over the governance and management of the SPV, a Public Interest Director is usually appointed to the SPV’s board. This individual is tasked with monitoring compliance with good governance and the NPD principles; bringing opportunities for refinancing to the board’s attention; and acting as an independent voice. In Scotland, this individual has been appointed by the Scottish Futures Trust (an independent company wholly owned by Scottish Ministers that processes NPD projects in Scotland) rather than the purchasing authority, which has rights of observation only.

What did the ONS decide?

In July 2015, a review by the Office for National Statistics of an NPD project (the Aberdeen Western Peripheral Route), resulted in the project being given a public “on balance sheet” classification. Under HM Treasury budgeting rules, this does not increase the overall cost of the project but means that capital charges are payable by the purchasing body, thus decreasing the amount of money available to fund other activities. It may also have tax implications (depending on the nature and structure of the project).

ONS’ decision was largely founded on the degree of control exerted by the Scottish Government in the Aberdeen case. The “golden share” appears to have been a key factor in ONS’ decision as to whether an SPV is classified as being subject to public or private sector control. ONS was also of the view that the public sector’s share of the rewards of NPD SPVs was too great for the assets to be classified as belonging to the SPV. ONS specifically commented on the fact that in the Aberdeen case, all of the surpluses were to revert to the Scottish Government.

What is Scottish Government’s solution?

The model which Scottish Government has discussed with ONS would change the structure of the SPV to address ONS’ concerns, with SPV companies for future schemes being owned as follows:

  • 60% by the private sector partner
  • 20% by a charity
  • 10% by Scottish Futures Trust (an executive arm of Scottish Government); and
  • 10% by the procuring authority.

ONS has confirmed to the Scottish Government that this would enable the project to be treated as “private sector” – i.e. off balance sheet.

This therefore presents a possible solution to the classification issue and could allow NPD projects to proceed not only in Scotland and Wales, but also across the UK.

How can Blake Morgan help?

We are on the Crown Commercial Service (England and Wales) and the National Procurement Service (Wales) frameworks for major projects and therefore we can be instructed by any English or Welsh public sector body (including local authorities, NHS bodies and further/higher education bodies).

Our framework rates have been competitively tested, therefore provide demonstrable value for money. We have offices across Southern England and Wales, so we are readily accessible and can save you time and resources.

Our experience

We have been advising on PPP infrastructure projects since the start of PFI (including Bute Avenue Cardiff, one of the first PFI road projects). PPP and other major infrastructure projects we have worked on include –

  • Aberystwyth University student accommodation PPP – £40M
  • Neath Port Talbot CBC care homes PPP – £165M
  • Department of Health Independent Sector Treatment Centres PPP programme – £2BN+ with individual schemes to £230M+
  • Royal Hospitals Belfast Imaging PFI – £110M
  • Designed for Life strategic health infrastructure framework (all 3 phases since 2006- £1BN+)
  • SEWSCAP framework (both phases) delivering 21st Century Schools programme in South Wales
  • Velindre cancer centre NPD – preliminary advice on forthcoming NPD scheme

We are also able to call on specialist advice on the NPD model via our links with Shepherd and Wedderburn, who are experts on the Scottish NPD model.

Clients we have worked for include Welsh Government, UK Department of Health, Welsh and English local authorities and NHS bodies, education, police, fire and rescue authorities and other public bodies, as well as private contractors (including Balfour Beatty and Philips Medical) and funding institutions.

This range of knowledge and experience led to our appointment as Special Adviser to the Welsh Assembly’s Finance Committee when they undertook a report into alternatives to PFI. This included a detailed review of all the alternative models (including NPD).

We also have close links with major Scottish law firm Shepherd and Wedderburn who have advised on all the major NPD schemes in Scotland, and so we are able to deliver specialist advice on the Scottish experience of the NPD model.

Therefore we are able to provide the full range of services necessary to implement NPD, at value for money rates and from bases close to you.

We would be very happy to come and speak to you about any matter arising from NPD, or any future proposed infrastructure projects so please do get in touch.

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