A huge school build and refurb PPP project, which elicited several superlatives, is currently on time and within budget
THERE were no half-measures when South Lanarkshire Council decided to modernise its secondary school estate eight years ago. Having chosen to go down the public-private-partnership (PPP) route in 2000, the Hamilton-based local authority opted to take the bull by the horns and rebuild or refurbish all 19 of its secondary schools.
“We didn’t want to have a two-tier system in place — as happened in North Lanarkshire — once the construction phase was completed,” says Bill Martin, project manager for the council.
John Watt, a partner in the accountants Grant Thornton in Glasgow, who advised the council throughout the project, says: “South Lanarkshire council was brave to take on the totality of their secondary schools in one hit. The only other council to have done this is Glasgow.”
Other advisers working alongside Watt included Michael McAuley, a partner in law firm Dundas & Wilson and Evelyn McDowell of consultants Turner & Townsend. Martin calls them his “dream team.”
The council’s decision gave rise to several superlatives. With a capital value of £319 million, the project is the UK’s largest-ever educational PPP scheme to date. It is also being financed by the largest-ever bond issue in Scotland, and was only the third ever education PPP project to be financed in this way. The £352m financing structure took advantage of a fixed-rate guaranteed income contracts and an RPI swap to keep annual unitary charges down to around £29m per year.
“The council set an affordability target and stuck to that,” says Watt. “The actual project came in underneath that.”
A further £40 million was shaved off the cost of the project, in which the consortium partners are Amec, Innisfree and John Laing, following the council’s decision to dispose of some surplus acres to Amec.
The project was also unusual in that ‘soft’ facilities maintenance services, cleaning and catering were excluded, largely because the council believed it could provide these cheaper itself, but also to appease the unions.
One early hurdle South Lanarkshire had to jump across was persuading the Scottish Executive to commit sufficient resources to the scheme. In the end the Executive came back with an offer of £10.8m. Although this was 50% lower than the council had been hoping for, its enthusiasm for the project remained undimmed.
Another key milestone came in June 2003, when the council placed an advertisement in the Official Journal of the European Community to solicit bids for the 33-year concession. By October 2003 it had short-listed InspirED (the consortium led by Amec) and the South Lanarkshire Schools Partnership (a consortium led by Amey) and asked both to proceed to the next stage – the “invitation to negotiate” (ITN). Tender offers were received from both parties by October 2003.
The council had originally wanted to build eight new secondary schools and refurbish 11 others. However, InspirED came back with a “non-mandatory variant bid” which included a much greater proportion of new-build schools than SLPS’s and it was named as preferred bidder. Financial close was reached with InspirED on June 28 2006.
South Lanarkshire Council will end up getting more than it bargained for, with 17 new-build and two refurbished schools due to be completed over a 38 month period. The first four new schools — Holy Cross in Hamilton, St Andrews & St Brides in East Kilbride, Duncanrigg in East Kilbride, and Lesmahagow in rural Lanarkshire — are all being handed over this August (with two of these being three months ahead of schedule). The last schools will be ready in August 2009.
Other schools being rebuilt under the programme include Biggar, Carluke, Larkhall, Strathaven and Uddingston while Hamilton Grammar and Stonelaw High are to be refurbished.
Shepherd & Wedderburn advised Amec, which in addition to its 33.3% equity stake in InsprirED, is also builder and long-term facilities manager on the project. S&W partner Chris Arnold says advising the sub-contractors is “no less onerous than advising the council or the special purpose company.”
Amec’s other advisers included CIBC Capital Markets and Pinsent Masons, while bond issuers XL Capital was advised by Linklaters. “This project represented the largest bond financed transaction ever undertaken in the UK education sector and underlines our strength in the market,” says Pinsents partner Ian Laing.
In a press release issued at the financial close, Amec claimed to have invested £8.4m of equity in the project, stressing it will “benefit from multiple income streams together worth more than £400m.” In reality, however, the London-based group will not enjoy these revenues. The company has embarked on a major restructuring that will see its PPP investment arm, construction and facilities-management businesses sold off.
“That was initially of real concern to the elected members,” says Martin.
However the councillors have, apparently, been reassured that whoever buys these Amec divisions will be contractually obliged to honour agreements made with South Lanarkshire.
“It will make absolutely no difference whatsoever,” says Martin. “The contract will stand us in good stead.”
This article was published in Scottish Business Insider’s Deals & Dealmakers Yearbook 07, published August 2007.