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

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. PFI 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
Integrated approach to design, build and service delivery. Single point accountability. The specification and payment mechanisms are designed to ensure standards are maintained for the next 30 years. It is not to the advantage of any contractor to skimp on initial investment – need to sort out the problems later.
Facilities management - services to be delivered:
Building maintenance
Grounds maintenance
Cleaning
Janitorial and security services
Provision and maintenance of furniture, fixtures and fittings
Energy and waste management
Water and waste water management
Catering
ICT and telecommunications infrastructure
Example of an output specification – grass cutting
Value for money Whole life approach to design, build and services
Fixing and long term management of price
Control of performance
Non-performance = Non-payment
Initial capital
investment
Improved service provision

9. Maintenance Contractor Special Project Vehicle/Company
Typical PFI Structure
Building Contractor
Contracts
Maintenance Contractor
Special Project Vehicle/Company
The Authority
Comprises
Pays for this service delivery through the AUC
Banks
Contracts With
Building Contractor
Maintenance Contractor 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
The NPDO is an evolution of the PPP model, not a replacement for PPP. It focuses on there being no return-bearing equity in the project company – the SPV in conventional PFI.
A not for profit model is certainly applicable in mature PPP sectors – it is already used in housing, and could also work in public infrastructure projects including education.
It is likely to generate value for money improvements as surpluses can be re-invested in the project. All re-financing and residual value gains will fall to the project.
BUT, the contractor market and the financing market will need to be persuaded and encouraged to support a not for profit model,
AS it will be funded by 100% debt (mix of senior debt and subordinated debt),
AND a pilot is appropriate because the public sector needs to test the model out and develop it in the light of market responses.
In conjunction with Partnerships UK, Argyll and Bute Council has proposed its schools project to the Scottish Executive as the pilot for this model.
Problems of the school estate remained
Council Starting Position
Not supporting a PFI model

14. NPDO 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. Facilities Management
New NPDO Structure
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
Public Sector
DBFO
Concession
SPV is an NPDO
Bank Debt
Charity or
CLG
Facilities Management Co
Construction Co

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

17. NPDO - Detail Reference model - governance - finance
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.
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. SQUARING THE CIRCLE NPDO/PPP Model Council Government Funders Users
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
NPDO/PPP
Model
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
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. Artificial sports pitches at all schools – only one not floodlit.
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?