Mike Geraghty Project Director Argyll and Bute Council NPDO/PPP Project

1. Mike Geraghty Project Director Argyll and Bute Council NPDO/PPP Project mikegis@hotmail.co.uk

2. NPDO – An Alternative to PFI?

3. Population Projections – Argyll and Bute(base year 2001)

4. Age Band Projections – Argyll and Bute(base year 2001)

5. The Context • Education – above average results – poor and deteriorating schools. • Widespread dissatisfaction with condition of schools. • Technical – poor almost non-existent management information re condition of buildings. • Financial – inadequate budget – borrowing power restricted. • Conclusion – the Council could not undertake the works necessary within the existing resources at the scale and pace required.

6. The Problem • Commissioned property condition surveys. • Informed estimates suggested that it would take all of the budget for the next 20 years just to overtake the backlog of repair and maintenance. • Significant improvement to layout, design, accessibility etc was estimated to double/treble the cost/time. • The Council’s ability to borrow money was restricted by legislation (Section 94). • The Council could not undertake the works necessary within the existing financial resources at the scale and pace required.

7. PFI Model - Features • The private sector contracts to design, build, finance and operate an asset-based service. • The public sector client pays a fee over the life of the contract. • The payment of the fee is dependent upon the asset/services meetings specified standards – failure to deliver results in payment deductions. • The specification includes for a managed service, facilities management and on-going life-cycle maintenance.

8. What can PFI deliver? Performance based payments Off balance sheet accounting Single point delivery system Life-cycle maintenance and facilities management Revenue funding support available PFI Initial capital investment Improved service provision

9. Building Contractor Maintenance Contractor Typical PFI Structure Building Contractor Maintenance Contractor Contracts Special Project Vehicle/Company Comprises The Authority Pays for this service delivery through the AUC Banks Contracts With To Deliver Services

10. Why Not Use PFI? • Criticisms of some early PFI from influential bodies. • Lack of democratic input into what had previously been provided by the public services. • Accusations of excessive ‘profit taking’ • Only game in town – perception of no choice and imposition. • The Council’s ruling administration has said no more PFIs.

11. Context:- Timing is Everything • PFI was re-badged as PPP and adopted as a major policy plank by the incoming Government. • Uptake of PPP schemes was patchy. • Locally – budgets were under pressure and schools were deteriorating. • Options/alternatives/solutions required to be developed.

12. The Alternative to PFI in the Making Four Imperatives • The model had to be classed as a PPP in order to gain ongoing revenue support. • It had to be acceptable to:- - Politicians - The market - The community. • It had to evolve from the PFI model but be sufficiently distinct from it. • It had to be attractive to the private sector – so changes to the familiar PFI model had to be minimised.

13. Achieved unanimous Council support for PPP/NPDO model Drivers for Council Support Secured community support Secured private sector agreement to a cap on profits, stakeholder representation on Board and recycling operating profits Secured private sector agreement that the model was bankable Secured Scottish Executive endorsement for Pathfinder status Differentiated PPP/NPDO from PFI Problems of the school estate remained Not supporting a PFI model Council Starting Position

14. What can NPDO deliver? Stakeholder involvement included as a right Greater value for money At least as cost effective as a PFI All surpluses re-cycled back into Education Attracted cross-party support NPDO No profit taken beyond sub-contractor payments Improved service provision

15. Characteristics • The Special Purpose Vehicle (“SPV”) is established by the private sector consortium bidding for the design, build, finance and operate (“DBFO”) concession • The public sector lets the DBFO contract in open competition to the private sector to deliver the required service over a period of 25 to 30 years.. • Contracts are increasingly standardised by sector and build upon best practice ie, whole life costing; competition and external due diligence. • The NPDO is funded 90% senior and 10% junior debt. Senior debt supplied by Royal Bank of Scotland (RBS) and the European Investment Bank (EIB) the Junior debt by RBS and Quayle Munro. • Trading surpluses will be re-cycled back into education via charity or CLG • Stakeholder and Independent director appointed to SPV Board – ‘golden share’ • Board majority lies with private sector New NPDO Structure Public Sector DBFO Concession SPV is an NPDO Bank Debt Charity or CLG Facilities Management Co Construction Co

16. Royal Bank of Scotland Quayle Munro Royal Bank of Scotland European Investment Bank Argyll and Bute Council Equity (nominal) Junior Debt (c. 10%) Senior Debt (c. 90%) ProjectAgreement ABC Schools (Holdings) Ltd ABC Schools Ltd. Cash Flow Surpluses Facilities Management Construction Contract Management Contract Barr Mansell hbg Charity Navigant Consulting Mitie Argyll and Bute Schools NPDO Project

17. NPDO - Detail • Reference model - governance • - finance • No shareholders - junior debt 10% - senior debt 90% • Private sector classified • - Assessable for corporate income tax • Adopts contract debtor accounting and composite trader tax treatment. • Much the same as any other PPP Company

18. Board • Junior debt entitled to provide up to five directors. • Independent Director. • Stakeholder Director. • No Council representation on Board. • Articles of Association stipulate no distribution to shareholders – surpluses must flow to charity.

19. NPDO/PPP Model SQUARING THE CIRCLE • Council • Meets Council objectives • Secure the Revenue grant Value for money • Achieve risk transfer and off balance sheet status • Affordable and Sustainable • Government • Synergy with Government policy and objectives • Balance sheet treatment • Value for money • Risk transfer • Affordability • Funders • Commercial deal – first and foremost – therefore had to be commercially attractive • Robust Business Case – due diligence • Profitable • Minimise risk exposure • Users • Responsive to their needs • Step change to the condition of school buildings • Alignment of user objectives and provider objectives.

20. Being Delivered • Oban Pre-five including Gaelic pre-five • St Columba’s RC and Rockfield Primaries • Drummore Learning Centre – mainstream • Lochgilphead Pre-five • Lochgilphead Primary • Lochgilphead High • Whitegates Learning Centre – mainstream • Mid-Argyll Sports Centre • Bute Pre-five • Rothesay Primary • Rothesay Academy • Argyll College • Dunoon Dunoon Grammar School • Helensburgh Hermitage Academy (tbc)

21. Features • Brand new schools. • Artificial sports pitches at all schools – only one • not floodlit. • Facilities management, life-cycle and maintenance included in contract. • 33% of all Argyll and Bute pupils (60% of all secondary and 16% of all primary) will occupy the new schools. • Community use included in the contract.

22. Any Questions?