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NPDO Non Profit Distributing Organisation

NPDO Non Profit Distributing Organisation. Mikko Ramstedt, Project Adviser Financial Partnerships Unit. Contents. Background Why a Non Profit Distributing Organisation? NPDO Structure and Governance Concerns / Issues Process. NPDO Model – Background.

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NPDO Non Profit Distributing Organisation

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  1. NPDO Non Profit Distributing Organisation Mikko Ramstedt, Project Adviser Financial Partnerships Unit

  2. Contents • Background • Why a Non Profit Distributing Organisation? • NPDO Structure and Governance • Concerns / Issues • Process

  3. NPDO Model – Background • Argyll & Bute Council designated pilot • Partnerships UK (PUK) cosponsor • The Council’s Advisers • Ernst & Young • Shepherd & Wedderburn • MPM Capita

  4. NPDO – Why a new PPP model? • Political concerns over profits in PPP – Desire to retain surpluses for educational purposes • More pro-active and stable partnership • Improved perceptions about PPP • Possibilities for new areas of PPP • PPP evolving alongside standardisation

  5. Objectives To deploy a wholly debt based capital structure on a schools PPP that… • Improves stakeholder acceptability and participation • Achieves at least as good value for money as traditional ‘equity’ based PPP

  6. Standard Outline Structure Education Authority Capital funding - Construction / FM Co.s Special Purpose Vehicle (SPV) Equity holders ~ 1% Market investors Sub debt - lenders ~ 9% Senior debt lenders ~ 90% Banks Lead Construction Co Facilities Management Co FM sub-contracts Design sub-contracts Trade sub-contracts Adviser sub-contracts

  7. Benefits from PPP Performance based payments Life-cycle maintenance and facilities management Single point delivery system Improved service provision Initial capital investment PPP

  8. Education Authority Capital funding - Construction / FM Co.s SPV - NPDO 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 NPDO Outline Structure

  9. Additional Benefits SPV surpluses reinvested in project ‘Normal’ profit level for sub-contractors Stakeholder involvement included as a right NPDO

  10. Principles • Minimum disturbance to traditional equity based schools estate PPP model • Follow Scottish Executive guidance on standard form schools contract • Achieve similar levels of risk transfer as under traditional PPP • Surpluses arising are applied to the benefit of authority education services • Risk profile and corporate governance acceptable to financiers • Management incentives consistent with stable and sustainable performance

  11. Structure part 1 • SPV a company limited by shares • Small board; Stakeholder, Independent + 3 other directors • Junior capital is exclusively sub-debt • Senior debt and sub contracts as per traditional model • SPV will elect to donate surpluses to the charity rather than distribute dividends • No restrictions on distributions by sub-contractors

  12. Why a Company Limited by Shares? • The traditional corporate vehicle • Flexibility / familiarity • Minimum deviance from existing PPP business model • Does not rule out bidder variants

  13. Structure part 2 • Shares in SPV stabled to sub-debt • Sub-debt can be provided by sub-contractors or senior lenders to the SPV, or third party funds and institutions • SPV is: • Private sector classified • ‘Profit’ (Surplus) maximising • Tax paying entity • Fully commercial operating basis

  14. Why ‘Profit’ (Surplus) Maximising? • Has to manage the same risks and sub-contracts, and deliver the same operating performance as traditional PPP • Management incentives tied to generation of surpluses, to maintaining credit equality of junior and senior debt and other targets • Familiar regime for efficiency and performance drivers

  15. Corporate Governance • SPV board policies: • No dividend distributions • Surpluses applied according to agreed priorities 1. Management incentives 2. Build-up reserves 3. Additional scope of services pre-defined under the contract 4. Donations to the charity • Having applied all statutory and fiduciary duties, SPV’s objective to deliver value for money to the Authority

  16. PPP - v – NPDO • Senior Debt • Sub Debt • Equity • Senior Debt • Sub Debt • Management Incentives

  17. Benefits: PPP - v – NPDO • Established • Partnership • Bidders • Unitary Charge • Novel • Partnership • Strong Bidder Interest • Financial (UC) • Non-financial

  18. Some Concerns • No equity? • Debt Service Cover Ratio • Governance arrangements? • Directors’ duties unchanged

  19. Value for Money • Financial • Application of surpluses • UC level • Tax-efficiency • Non-financial • Acceptability • Stakeholder involvement • Wider benefits

  20. Issues for Local Authorities • Bidder response • Financial Balance • Surpluses versus Low UC • Charity • Tax efficiency – • Availability of Surpluses • Balance Sheet Treatment • Preparation!

  21. Argyll & Bute Pathfinder – Process • Consultation Q4 2002 • OJEU March 2003 • ITN June 2003 • BAFO February 2004 • Provisional Preferred Bidder March 2004 • Statutory Consultation • SE final approval, and • Financial Close September 2005

  22. Summary • Background • Why a Non Profit Distributing Organisation? • NPDO Structure and Governance • Concerns / Issues • Process

  23. mikko.ramstedt@scotland.gsi.gov.uk www.scotland.gov.uk/ppp Mikko Ramstedt, Project Adviser Financial Partnerships Unit

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