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

Argyll & Bute Council designated pilot

Partnerships UK (PUK) cosponsor The Council’s Advisers

Ernst & Young Shepherd & Wedderburn MPM Capita

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

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

Standard Outline Structure

Education AuthorityCapital funding -

Construction / FM Co.sSpecial Purpose Vehicle (SPV)

Equity holders ~ 1%Market investorsSub debt - lenders~ 9%

Senior debt lenders~ 90% Banks

Facilities Management Co

Lead Construction Co

FM sub-contracts Design sub-contractsTrade sub-contractsAdviser sub-contracts

Benefits from PPP

Single pointdelivery system

Improved service provision

Performance based payments

Life-cyclemaintenance and facilities

management

Initial capitalinvestment

PPP

Education Authority

Capital funding - Construction / FM Co.s

SPV - NPDO Market investorsCharity Sub debt - lenders c. 10%Community stakeholders Senior debt lenders c. 90% Banks

Facilities Management Co Lead Construction Co

FM sub-contracts Design sub-contractsTrade sub-contractsAdviser sub-contracts

NPDO Outline Structure

Additional Benefits

Stakeholder involvement

included as a right

SPV surpluses reinvested in

project‘Normal’ profit level for sub-contractors

NPDO

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

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

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

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

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

Corporate Governance

SPV board policies: No dividend distributions Surpluses applied according to agreed

priorities1. Management incentives2. Build-up reserves3. Additional scope of services pre-defined under

the contract4. Donations to the charity

Having applied all statutory and fiduciary duties, SPV’s objective to deliver value for money to the Authority

PPP - v – NPDO

Senior Debt Sub Debt Equity

Senior Debt Sub Debt Management

Incentives

Benefits: PPP - v – NPDO

Established Partnership Bidders Unitary

Charge

Novel Partnership Strong Bidder

Interest Financial (UC) Non-financial

Some Concerns

No equity? Debt Service Cover Ratio

Governance arrangements?

Directors’ duties unchanged

Value for Money

Financial Application of surpluses UC level Tax-efficiency

Non-financial Acceptability Stakeholder involvement Wider benefits

Issues for Local Authorities

Bidder response Financial Balance

Surpluses versus Low UC

Charity Tax efficiency – Availability of Surpluses Balance Sheet Treatment

Preparation!

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

Summary

Background Why a Non Profit

Distributing Organisation? NPDO Structure and

Governance Concerns / Issues Process

mikko.ramstedt@scotland.gsi.gov.uk

www.scotland.gov.uk/ppp

Mikko Ramstedt, Project Adviser

Financial Partnerships Unit