Could the non-profit distributing organisation model chosen by Aberdeen City Council be the shape of things to come for public private partnerships in Scotland?
THERE’s a widespread view that Scotland’s once buzzing public private partnership (PPP) market is becalmed, if not dead in the water. Traditional PPPs are pretty much off the agenda in Scotland, partly due to the ideological hostility of the SNP government, and also because the government has yet to come up with anything workable to replace them.
The government’s proposed alternative, the Scottish Futures Trust, is widely seen as being so woolly that it will take years before it can evolve into something that can be used to draw private capital into public-sector projects.
While Alex Salmond’s government wrestles with this embarrassment, the only form of PPP that is possible in the interim are so called non-profit distributing organisations (NPDOs). However there are many people in the world of infrastructure investment who see these structures as unattractive from a profits perspective. They say that the insistence on the use of such structures is already causing equity investors and contractors to review their commitment to the Scottish market.
However, a £129 million schools project for Aberdeen signed last December would suggest that NPDOs may not be all bad from a private sector perspective. The project for nine new and refurbished primary and secondary schools in Aberdeen turned out to be sufficiently attractive to appeal to an international consortium – even though there were still plenty of traditional PPP projects up for grabs at the time it was inaugurated.
The winning consortium comprised Icelandic property company Nysir, UK-based facilities management group Operon and Danish construction company Pihl & Sons. It has been named NYOP after the three members’ initials. The Anglo-Scandinavian grouping saw off a rival bid from the Transform Schools group, made up of Balfour Beatty, Mansell and Haden, and an earlier bid from Robertson that was withdrawn.
NYOP spokesman Sigfus Jonsson said: “We have used an innovative funding mechanism for this scheme, which has provided considerable benefit. In partnership with Aberdeen City Council, we look forward to financing, delivering and operating 21st century schools with extensive community facilities.”
Under the NPDO model, investors are not allowed to acquire equity in a project. Instead, they can buy loan stock which rather than generating an equity-type return, provides them with a fixed return. At the time Aberdeen City Council chose to go down the NPDO route, most other councils in Scotland still preferred, and were permitted to adopt, the standard equity-financed PPP model.
However now that the Scottish government has said it will only allow the NPDO model to be used, the early Scottish PPP projects that adopted the model –schools projects in Aberdeen, Argyll & Bute and Falkirk – are being closely scrutinized.
Keith Patterson, a partner in law firm Brodies, which advised Aberdeen City Council, says: “NPD has been dubbed ‘PPP-lite’ and it’s true the financing structure is based on the same principles. However, the model means that investors make a fixed return and are not able to make windfall or unexpectedly high profits.”
Even though the forecast rate of return from NPDO projects is no lower from the outset than for conventional PPP projects, the fact that windfall profits are barred makes the approach more acceptable to politicians and to the general public.
“No major party now opposes this type of funding arrangement,” says Patterson. “Another benefit of the NPDO model is that it allows for greater transparency, since the rate of return is fixed and therefore known from the start of the project. Public acceptability should make it easier for public sector organisations to deliver better projects.”
Patterson acknowledges that many investors and contractors have criticised the NPDO model. However, he points out this has not prevented three projects being financed on the NPDO basis, even though these were all signed at a time when conventional PPP projects were still available in Scotland. “Now that this is the only model available, I think contractors and investors are likely to continue to bid for NPDO projects.”
One area of real concern however is the marketability of NPD loan stock, which could limit investors’ ability to sell their investments on to secondary investors. “This is an issue which derives from the refinancing proposals in NPD projects, which is not something directly related to the nature of the project as a non-profit-distributing structure,” says Brodies’ Patterson. “This issue alone should not be allowed to derail the use of the NPD model.”
“Second, and more obviously, if there are very few projects coming to market, investors and contractors will look elsewhere for business. This would see a loss of this expertise and capability from Scotland. Not only would that mean that if the market were to revive in, say, three years there would be fewer local contractors able to bid projects, but it would lose the opportunity to export this financing expertise, something at which Scotland has been traditionally good.
The first new school to be built under Aberdeen Schools’ 3Rs (Reorganise, Renovate and Rebuild) project is due to open in spring 2009, with the final one expected in October 2010.
This article was published in Scottish Business Insider’s Deals & Dealmakers Yearbook 2008, published in August 2008.