Funding Social Care PFI projects Christine Galeon Tel: 020 7470 7339

1. Funding Social Care PFI projects Christine Galeon Tel: 020 7470 7339 29 April 2003

2. Agenda • Optimised financing in PFIs • What makes a Care PFI project bankable? • Unusual economics: Mitigation strategies • The regulatory challenge • Conclusion

3. Agenda • Optimised financing in PFIs • What makes a Care PFI project bankable? • Unusual economics: Mitigation strategies • The regulatory challenge • Conclusion

4. Optimised financing Typical PFI Structure Local Authority Direct Agreement Project Agreement Shareholders Equity Senior Debt SPV Funder Sub-contracts Design and Construction Care services and day-to-day repairs Lifecycle repairs

5. Optimised financing Typical features of financial structure • SPV set-up to enter into contracts and raise finance • Competitive long-term financing • High gearing (ca 90:10 debt:equity ratio) with small equity cushion • Long term debt with limited tail until concession end • Repayment solely from project cash flows • Security solely over SPV’s assets and step-in rights

6. Agenda • Optimised financing in PFIs • What makes a Care PFI project bankable? • Unusual economics: Mitigation strategies • The regulatory challenge • Conclusion

7. What makes a Care PFI project bankable? (1) • Affordability • Experience and commitment of all consortium members • Design & build; Maintenance, but also… • Care services…New in PFI • Registered Social Landlords • Ethos; Not-for-profit organisations • Long-term commitment through fixed price contracts • RSLs and PFI are compatible • Other care providers

8. What makes a Care PFI project bankable? (2) • Clear risk allocation with realistic transfer of risks and liabilities • OGC guidelines • Address sector specific issues, e.g - Development of care plans - Interface with frail patients - Flexibility to cater for special needs - Payment mechanism • Partnering between all parties is essential • Robust financial structure • Satisfactory due diligence, including care due diligence

9. Agenda • Optimised financing in PFIs • What makes a Care PFI project bankable? • Unusual economics: Mitigation strategies • The regulatory challenge • Conclusion

10. Unusual economics: Mitigation strategies • High proportion of care / staff operating costs • Operating cost overrun risk • Limited mitigants available to private operator • Sharing the risk: Best value for money solution • Indexation • Tailor-made benchmarking regime - Frequency - Comparator group • Pitfalls of market testing

11. Agenda • Optimised financing in PFIs • What makes a Care PFI project bankable? • Unusual economics: Mitigation strategies • The regulatory challenge • Conclusion

12. The regulatory challenge • National Care Standard Commission: omnipresent, butnot contractually bound • Care Standards • Output specifications • Payment mechanism – objective perfomance indicators? • First registration and cancellation risks • Lenders’ step-in • No legal solution to address uncertainties, but: • Monitoring providing early warning • Pragmatism

13. Agenda • Optimised financing in PFIs • What makes a Care PFI project bankable? • Unusual economics: Mitigation strategies • The regulatory challenge • Conclusion

14. Conclusion The recipe for success in social care PFIs • Usual PFI ingredients • Best value for money • Efficient financial structure • Optimum risk allocation • Quality and long-term dedication of parties • With an extra pinch of pragmatism and partnering to address sector specific challenges • The path to social care PFI does exist!