An introduction to the Hub initiative in Scotland

Euan PirieOctober 2015

hub territories and participants

• Scotland divided into 5 hub Territories each with approximately 1 million people and a dedicated "hubco"

• Territories based on boundaries of pre-existing (local) municipalities and (regional) health authorities

• National ambulance, fire and police authorities join municipalities and health authorities as “participants” in each Territory

• Urban regeneration companies and housing associations also participants in later Territories – significant overall public sector participation and representation

What is “hubco”?

• Institutional public (to public and) private partnership– Public Sector Bodies (PSBs) along with Private Sector

Development Parter (PSDP) and Scottish Futures Trust Investments (SFTI) are shareholders in corporate joint venture company (hubco)

• Delivers services to PSBs (through PSDP) • Long term partnership not one off project procurement

– 10 year exclusivity period for primary care projects; 20 year overall framework; and 5 year extension option

• Costs benchmarked to ensure value for money (enhanced by tendering at supply chain level)

• Secure supply chain but not fixed for duration of framework• Offers PSBs capital or revenue funded (PPP) project

development options

Corporate structure for hubco and new projects

Key objectives for the hub initiative

• Achieving faster and more cost effective procurement

• Offer more flexible procurement solutions• Improving community buildings and the

“user experience”• Delivering the “ultimate” PPP• Creating employment opportunities and

community benefits

Faster and more cost effective procurement

• At outset PSBs in each hub Territory advertised PSDP role in OJEU and tendered hubco establishment documents and PSDP services under detailed competitive dialogue process

• hubco appointed on framework contract basis and faster procurement achieved through– removal of requirement to advertise individual projects

– replacing competitive dialogue procedure with streamlined new project development process under TPA allowing PSB and community involvement at early stage and throughout project development

– project planning improved and project progression facilitated through partnership approach and “adversarial” environment present in some PPPs removed

• Pricing protection ensured through– capping cost of key elements in new projects by reference to tendered sample projects included in

original bids (adjusted for inflation)

– requiring hubco to tender key supply chain roles to minimum pool of 3 potential providers

– supply chain bidding for more than single project and hubco subject to loss of exclusivity and TPA termination if it does not perform, strengthening PSB negotiating position

• Repetition of new project development process across all new projects and involving a consistent supply chain facilitates efficiency and continuous improvement in quality and speed of responses and significantly reduces tender costs

• PSBs supported by centrally appointed “Territory advisers” addressing “experience gap”• Speed of procurement and cost reduction further aided by mandatory use of standard form

contracts

Offering more flexible procurement solutions

• hub provides PSBs with flexible contract options– appoint hubco to design and build works under “design and build development

agreement” (and pay for works from capital budgets or via PSB borrowing)– appoint DBFM Co to design, build, fund and maintain (DBFM) facilities under DBFM

Project Agreement (DBFM Co borrowing to finance works and PSB paying service payment over 20 years+)

• 10 year exclusivity for primary health care projects applies but PSBs option to procure other projects through hubco

• hubco’s services also include services relevant to preparation for future projects, including feasibility studies, option appraisals and concept designs

• Smaller projects may be “bundled” to form single larger project – justifying costs associated with DBFM structure and supporting project finance funding

solution – option to group PSBs own projects or “bundle” with smaller projects of another PSB– significant reduction in construction and operational costs compared to progressing

projects on an individual basis

Improving the user experience

• hubco delivers “state of the art” modern facilities to replace old and poorly maintained buildings

• Collaboration between PSBs promotes sharing of facilities or co-location on single site– users benefit from improvements in community services, delivered from

better community buildings– users also enjoy convenience of multi agency solution/integrated service

provision from single location– scope to align with transport policy– better public services at lower overall cost to public sector

• Continuous improvement targets (underpinned by KPIs) drive innovation and learning from previous projects– KPIs include “user benefit” tests at both Territory and individual project

levels– Knowledge transfer between projects procured under hub

Delivering the “ultimate” PPP

• hub encourages “public to public” partnerships– PSBs (within same Territory) encouraged to undertake joint procurements and share

accommodation, delivering lower construction and operational costs • Each hubco is a corporate joint venture (limited company) with 60:30:10 ownership model

– PSBs invest for shares in and provide working capital to hubco alongside PSDP

– PSBs appoint 1 director to hubco board and participate in management of company• Relationships between hubco shareholders regulated by contract (Territory Shareholders’

Agreement)• Relationships between hubco and individual PSBs regulated by Territory Partnering

Agreement• TPA and TSA secure right (but not obligation) for PSBs to invest in DBFM projects• PSB also appoints director on project company board• hubco incentivised to successfully deliver projects

– payment of hubco’s return deferred until financial close

– hubco’s performance measured on ongoing basis by KPIs at individual project level and also across whole of Territory

– no annual service payments due on DBFM facilities until construction complete and buildings comply with service requirements

• hubco develops relationships with PSBs and may propose projects to them

Contracts structure for new projects

Creation of employment opportunities and community benefits

• Method statements for performance of new project development services include commitments to tender minimum percentage of works and services to local supply chain and SMEs – Compliance with method statements measured by KPIs

• KPIs also incentivise creation of employment and training opportunities and community engagement by hubco

• Achievement of hubco against these requirements key aspect of reports to TPB– TPB made up of representatives from all Territory

PSBs/encouraging spread of opportunities across the Territory

Successes achieved in hub and should Lithuania consider adopting the initiative?

• Use of hub to deliver projects is increasing in Scotland - HM advised on 13 completed projects with combined value of £275m+ since April 2012

• Clear evidence of reduced transaction costs – legal fees in hub DBFM c25% of those in other similar PPP projects– other fees also lower and payment deferred until financial close– advisers accept lower fees due to repeat business opportunities and greater

efficiency in processes• FWT health bundle project delivered c£100k annual operational cost

savings for PSBs compared to costs if procured individually– PSBs could achieve further savings by reviewing staffing in shared

accommodation• Kittybrewster project evidences faster procurement times• hub is flexible delivering projects in sectors other than primary health• Early involvement of community and PSBs and “open dialogue” approach

allows PSB to properly scope the accommodation and services that are needed and refine requirements pre-close in non adversarial environment

Contact details

Euan PiriePartner and Head of Infrastructure & Projectst: +44131 247 2505m: +447795100183 e: euan.pirie@harpermacleod.co.uk