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New models of delivery

Saturday August 22nd, 2009

By Tiffany Cloynes and Vincent King, Commercial Partners, Cobbetts LLP

New approaches to delivering privately financed projects have been developed in recent years.

Local Improvement Finance Trust (LIFT) and Building Schools for the Future (BSF) programmes, as well as various PPP/PFI models such as joint venture companies and part privatisations, have all been implemented over recent years.

Public Private Partnership (PPP) is an umbrella term for government schemes involving the private sector in public sector projects. The Private Finance Initiative (PFI) is a form of PPP in which the private sector funds the new build or upgrade of public infrastructure – including hospitals, schools, prisons and roads – according to specifications provided by public sector departments. Usually the private sector also assumes responsibility for the operation and servicing of the assets.

Under PFI, the risks of cost overrun or delay are transferred to the private sector and improvements to public services can be made without upfront public sector funds. The private sector provider is paid an agreed monthly (or unitary) fee by the public body for the use of the asset over the contract term. This, and other income, enables the repayment of the project costs. Debt is the major source of funding – typically 90 per cent of the capital, with the remainder being provided by the project sponsors in the form of an equity investment. Asset ownership usually transfers or returns to the public body at the end of the project.

The typical PFI model involves three legal entities: a special purpose vehicle (SPV), created specifically for the project; a company to build the new facilities; and a company to provide facilities management (FM) services. The main contract is between the public sector authority and the SPV; the requirements are then ‘flowed down’ via subcontracts. Often the main subcontractors are companies with the same shareholders as the SPV.

The SPV will enter into various funding arrangements. In the case of bank debt this will be obtained by a loan facility agreement. The SPV will grant security over its interest in the project. There will typically be a direct agreement between the bank and the public sector authority which allows the bank to ‘step in’ and replace the SPV to preserve the project (and repayment of the debt) in the event of the SPV failing to deliver the works and/or services.”

Recently, new delivery models have emerged in certain sectors, including Building Schools for the Future and NHS LIFT.

Building Schools for the Future

BSF was launched in 2003 by the former Department for Education and Skills, and aimed to rebuild and renew virtually all of England’s 3500 state secondary schools. Approximately half of the schools will be funded through PFI. The model being used for BSF PFI is a joint venture company known as a Local Education Partnership (LEP), a new concept developed for BSF.

The LEP brings together three organisations; the local authority, a private sector partner (PSP) – usually a consortium of private companies including the building contractor – and Partnerships for Schools (PfS). The LEP will provide long-term partnering services for the local authority in order to deliver the aims of BSF, with the parties working together to meet these aims and in the process sharing certain risks and rewards.

The local authority has a contract with the LEP called a Strategic Partnering Arrangement which grants exclusive rights to the LEP to deliver the project for a fixed term (usually ten years). As client and commissioner, the local authority will formally consult stakeholders (including the school) through the Strategic Partnering Board (SPB). The SPB ensures important stakeholders have influence over the operation of the LEP, with one representative each from the local authority and the board of directors of the LEP, and one non-executive member to be the independent non-voting chairman of the SPB (appointed by consensus). Additionally, other representatives from the local secondary education community may be included along with any other co-opted persons the local authority may nominate, in a non-voting capacity. Under this category schools can be represented by governors and head teachers.

NHS LIFT

LIFT has been developed as a tool to redevelop primary care facilities (rather than PFI, which is generally used for larger schemes).

LIFT is delivered through the establishment of a local LIFTCo (a limited company) with the local NHS, Partnerships for Health (PfH) and the PSP as shareholders. The PSP has a majority 60 per cent shareholding, the local NHS 20 per cent, and the PfH 20 per cent. The local stakeholders in the health community establish an SPB to agree needs and requirements, and agree an annual Strategic Service Delivery Plan (SSDP). The SSDP is used to take forward new proposals to the LIFTco.

The LIFTco will buy land and build or redevelop the PCT. However, while LIFT has features of PFI, in that it is a long-term partnership for serviced accommodation supplied on a ‘no service, no fee basis’, there are key differences between LIFT and PFI. Rather than being established for a one-off project, LIFT is based on an incremental strategic partnership engaging a partner to provide a stream of services through an established supply chain. As such, LIFT is adaptable and can meet evolving local needs over a period of time (20-25 years). The LIFTco will, in most cases, deliver services in stages via its own wholly owned subsidiaries.

The operation of the LIFTco is supported by standard documents. A Strategic Partnering Agreement underpins this by setting out how the parties will act together in a partnering, non-adversarial manner to achieve the objectives of the LIFTco. The LIFTco has exclusive right of refusal to provide new facilities and/or services (subject to satisfaction of set criteria). Lease Plus Agreement (LPA) – a hybrid conventional lease and PFI-style agreement – is entered into with the occupants of the accommodation.

Joint ventures

Some Public Private Partnership models are not strictly PFI, ranging from a conventional long-term service agreement, or outsourcing, at one end of the spectrum, through to the creation of a joint venture vehicle, involving public and private sector partners. In this model the local authority will typically contract with the joint venture vehicle for the delivery of services; the private sector will provide its expertise and possibly working capital, and the risks and rewards in the project are shared.

Local authority regeneration projects

Local authorities are also now participating in regeneration projects through joint ventures with the private sector; the public sector contributes an asset (typically land) of an agreed value, and the private sector matches this by contributing an equivalent amount of funding or working capital in the form of an equity investment.

Part privatisations

The proposed part privatisation of the Royal Mail is another example of a PPP model. This measure has now been postponed, but in essence the Government was proposing to sell a minority stake in the Royal Mail. This would have raised capital to repay a pension fund deficit, although the primary objective was to bring about a modernisation of the service.

It will be apparent from the Royal Mail proposals that Public Private Partnerships can be contentious, and the trade unions in particular have questioned the merits of engaging with the private sector in this way. However, with the current state of public borrowing and the major parties’ stated positions on public services reform, PPPs in one shape or another look set to continue.

Further information

For further information, please visit: www.cobbetts.com

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