Does Scotland have the answer?

Scotland
01/12/2011
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The traditional PFI model is coming under greater scrutiny and public debate in the UK than ever before. One of the key issues associated with the traditional PFI model is the arguable potential for large profits to be generated by the private sector at the expense of the public sector - and anyone profiting from the public sector in the current climate is likely to become a target.

Scotland’s £2.5 billion infrastructure investment programme is primarily to be delivered using the non-profit distributing (NPD) model and the first of the OJEUs marking the beginning of this procurement are due to be issued before Christmas.

So what are the key building blocks of NPD?

Take your traditional PFI model and then modify to account for:

nominal equity only: usually investors will subscribe to loan notes with a fixed level of return (so NPD does not mean not-for-profit);
investors also being shareholders;
no distributions being payable;
an additional director being appointed to the Board of Directors of the SPV, nominated by the Scottish Futures Trust (this director being known as a “public interest director” since he or she is intended to ensure the interests of the public sector body are considered, and in some cases protected, as part of the key decisions taken by the SPV in managing the project);
the public interest director having powers to instigate a refinancing (note that all projects closed to date have allowed for senior and junior debt refinancing but going forward it will be restricted to senior debt refinancing on the same basis as the public sector has under the revised refinancing guidance issued by HM Treasury in 2008); and
if any “Surpluses” are generated, these are returned to the public sector or donated to a nominated charity.

Then add to the mix the fact that four schools projects (Argyll & Bute Schools, Falkirk Schools, Aberdeen City Schools and Moray Schools) and one hospital project (Tayside Mental Health) have closed to date using the NPD model and you have a deliverable and proven alternative solution to the traditional PFI model.



What this means for the public sector

The positive alternative to the much maligned PFI offered by the NPD model provides a platform for considerable investment to be made by the Scottish Government into public sector projects. Additionally, such investment provides a light of hope to private sector investors and developers which should attract much needed private money and expertise to Scotland. Additionally, the capping of private sector equity returns is a positive move for the Scottish public sector as any "Surpluses" generated are either returned to the public sector or donated to charity, adding further value.



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