What are the possibilities of Scotland’s non-profit distributing model for funding PPP projects and what do contractors need to know?
The non-profit distributing (NPD) model is an alternative funding structure for public-private projects developed in Scotland in 2008/09.
Since then, NPD has been used in about 15 projects including roads, schools and hospitals, and the Welsh Government is currently considering adopting NPD for road and hospital schemes.
No new legislation
NPD could be used by any UK public authority (subject to normal approvals) and does not require new legislation.
NPD was placed on hold in Wales and Scotland due to the Office of National Statistics’ decision that an NPD scheme (Aberdeen Western Peripheral Route) had to be classified as ‘on balance sheet’.
Treasury rules mean that capital charges are then payable by the authority, which could make NPD schemes unviable.
“NPD aims to avoid the perceived problems with “old” PFI including private sector ‘windfall’ profits and loss of public control over public sector assets”
However, it appears that the Scottish Government has agreed a structure with the ONS which would allow future NPD projects to remain ‘off balance sheet’, giving the green light to future schemes.
NPD aims to avoid the perceived problems with ‘old’ PFI, including private sector ‘windfall’ profits and loss of public control over public sector assets.
The most important points of the NPD structure include:
- Fixed rate of return for contractors and lenders (which is competitively tendered);
- Greater control and transparency for the public sector over the project vehicle, usually through a ‘golden share’;
- Surplus profits are not distributed to shareholders. Instead, they can be taken by the public sector, used to reduce debt/costs, or re-invested in the project.
Apart from this, NPD is not very different to other forms of PPP. Risk distribution between public and private sector, lenders, construction and service contractors, consultants and subcontractors, is much the same.
On or off balance sheet?
The ONS decision to classify the Aberdeen project as ‘on balance sheet’ stemmed from the high degree of public sector control and the retention of 100 per cent of the surplus by the public sector.
Accordingly, the solution apparently agreed between the Scottish Government and the ONS involves less public control, with project vehicles being owned as follows:
- 60 per cent by the private sector;
- 20 per cent by a charity;
- 10 per cent by Scottish Futures Trust (part of the Scottish Government); and
- 10 per cent by the procuring authority.
ONS has confirmed to the Scottish Government that this would enable projects to be treated as ‘off balance sheet’. Other approaches are possible and could be tailored to fit the individual authority’s requirements.
This therefore presents a workable solution to the on/off balance sheet issue and could allow NPD projects to proceed not only in Scotland and Wales, but UK-wide.
Simon McCann is a partner at Blake Morgan