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PPP Seminar : Education Barnsley Case study

Gavin Quantock Deloitte Corporate Finance 23 July 2014



Case study Barnsley building schools for the future programme

•  PPP and Education

•  Project background

•  Project structure

•  Key challenges

–  Funding

–  Private sector bidders

–  Council challenges

–  Stakeholders

•  Project timeline

•  Lessons learnt

•  Outcomes

2 Barnsley case study



Education PPP UK Government investment programme

Overview

•  British Government investment programme designed to facilitate private sector investment in schools

•  PPPs have been the main delivery mechanism by which much UK infrastructure has been procured in the last 15 years.

•  Over 600 PPP projects with a total capital value in excess of $84 billion.

Education

•  Over 120 new or refurbished schools projects

•  Launched in early 2000s – PPP schools, then following by a new structure Building Schools for the Future (“BSF”)

•  Fourteen Local Education Authorities were asked to take part in the Government's first wave of the BSF programme for the fiscal year 2005/6

•  By 2009, over a third of Local Authorities had joined the programme;

•  Over $12billion of capital expenditure has been spent in the UK


Source : HMT



Project background

The council

•  Barnsley Metropolitan Borough Council (the “Council”) is a local authority located in the North of England approximately 180 miles from London)

•  Current population estimated at 240,000 people

•  Strong political will for the programme

The project

•  Use of PPP to replace/modernise 13 secondary schools comprising 9 Advanced Learning Centres (“ALC”) plus 2 special schools

•  Owing to scale and complexity of project a phased development required:

–  Phase I: 5 schools –  Phase II: 3 schools –  Phase III: 3 schools


Local Authority wanted to replace all 13 secondary schools

Town hall

Source : www.barnsley.gov.uk/



Project background continued

Key objectives

•  Procurement of a private sector partner for ‘new build’ projects and refurbishment of existing schools

•  The Council required full service from the private sector including Design, Build, Finance and Operate (DBFO)

•  Full Information communications and technology (“ICT”) provision

•  Central government funding used in the form of PFI credits

Contractors

•  Laing O’Rourke: Construction

•  John Laing Investments: Sponsor/Equity investor

•  Civica: ICT 5 Barnsley case study

Deloitte involvement

•  Appointed in 2007 following a competitive tender process

•  Provided financial advisory services to the Council including:

–  Affordability assessment

–  Deal structuring

–  Commercial negotiations

–  Project management support

Private sector finance and operational expertise required



Project structure New structure was used for delivery under which a long term development partner was selected to deliver multiple projects

•  Unique structure adopted by the project

•  Local Education Partnership (“LEP”)

•  Local Authority also invested at both the ‘top co’ and Special Purpose Vehicle (“SPV”) level

•  Independent central government organisation also invested equity building schools for the future investments (“BSFI”)

•  Designed to promote and facilitate a pipeline for the private sector and stimulate competitive tension

•  Long term delivery partner over multiple phases




Project structure continued Public sector equity injected at several levels


Council

Private sector partner

John Laing Investments Laing O’Rourke

Private sector partner

LEP

Hold Co.

Project Co.

BSFi 50%

4.9% 4.9%

39.2%**

10%

10%

80%

51%*

100%

50%

Senior debt lent at Project co level



Discussion topic Considerations of the structure used

–  What do you consider to be the advantages and disadvantages of public sector equity investment in infrastructure?

–  What do you consider to be the advantages and disadvantages of having a long term delivery partner from a single contractor?




Key challenges With numerous challenges to overcome, it became clear that a successful transaction was going to depend on factors in and out of our control


Stakeholders

Objective: Provision

of new schools

Funding Bidder

Local Authority



Funding Several funders involved with different pricing, credit committees and due diligence processes

•  Significant capital expenditure required over three phases ($450m+)

•  Consistent use of two commercial funders throughout the project

•  European Investment Bank (“EIB”) involvement (only at senior debt level)

•  Council lent into the project

–  Phase I: innovative due to payment during works phase and cheaper

–  Phase II and III : New structure due to risk transfer


Senior debt Phase 1 $m

Phase 2 $m

Phase 3 $m

EIB 62.00 0 78.62 Nord bank 32.25 34.27 40.11 Nationwide bank 32.25 34.27 40.11 Total 126.5 68.54 158.84

Other facilities included equity bridge, change in law and debt service reserve accounts Source : www.ijonline.com



Private sector bidder challenges Spent a significant amount of time bidding for the programme

•  Bidder development/bid costs increased significantly due to project delays

•  Significant communication required – constant dialogue needed to maintain spirit of partnership

•  Deal fatigue – negative press articles regarding project delays

•  Project developments led to changes in bidder commercial positions

•  Time commitment – losing bidder spent over $7.5m (non-recoverable)

11 Barnsley case study Source : www.ijonline.com



Council challenges First time the Council had done a project of this nature

•  Timing of going out to the market

•  Understanding the contracting structure and the procurement process

•  Keeping various people (residents, press, bidders) informed

•  Timetable: equal exposure and ‘face time’ with all bidders

•  Raising issues with bidders and resolving them quickly

•  Deal fatigue

•  Capital contribution decision and budgetary implications

•  Staff moving on (lead director and also the head of finance moved to a different local authority)




Stakeholders : Transaction team The “core deal team” comprised over 20 organisations


Deloitte

PWC EIB Nord Nabarros

Nationwide Civica Bevan Brittan

Members Operis Gleeds Allen and Overy

John Laing Plc Barnsley MBC Socertim consulting CMS

Laing O’Rourke Public Appleyards BSFI



Other stakeholders In addition to the “core deal team” there were lots of other stakeholders to consider…


Pupils

Teachers

Politicians

Board members

Planning authorities

Parents Non executives

Central Government

Other contractors

Shareholders of private sector Press



Discussion topic Considerations of the stakeholders

–  What do you consider to be the critical success factors needed to manage such a wide range of stakeholders and stakeholder needs?

–  How can you work with stakeholders to ensure stakeholder interests are aligned in both a financial and non-financial context:




Project timeline From start to finish the transaction took over six years


08

Preferred Bidder 01/12/08 News: Barnsley BSF picks Preferred bidder

09

General Announcement 30/03/09 News: Barnsley BSF “two to three weeks” from close

09

General Announcement 03/07/09 News: Signing imminent for Barnsley BSF

Request for Proposals from contractors 02/05/07

07 Shortlist announced (8 to 3) 07/11/08 News: Preferred bidder deadline overdue for Barnsley BSF

08 General Announcement 30/01/09 News: Barnsley BSF to close before end of first quarter

09 Bank Mandate Won 07/05/09 News: Banks on board for Barnsley BSF

09

Barnsley begin preparing for the procurement Summer ‘05

05

Financial close 09/04/10 News: Barnsley Phase II

10

First school opens April 2011

11

Tender launched to the market 17/05/07

07

Financial Close 06/07/09 News: Barnsley BSF – financial close details

09 Financial close 01/11/10 News: Barnsley Phase III financial close

10

Source : www.ijonline.com



Lessons learnt Many lessons learned from the project – here are just a few…

•  Timetable, timetable, timetable…

•  Communication is key

•  Timing of going to market

•  Knowing what you want to get out of each meeting

•  Stakeholder management

•  Having the “A team” from both sides (importance of intelligent client)

•  “Know your limits” – financial and non-financial

•  Understand affordability

•  Capital contribution by the public sector

•  Relationship with contractor – strained and complex but a 25 year commitment!

•  Recognising a long term partnership – the hard work starts when you close the deal…




Outcome

•  Successful financial close of all three phases of the programme

•  £1.15bn investment programme

•  Provision of nine ALC and two special schools

•  All schools now open and operational

•  Biggest educational building project in Europe


A fantastic outcome for all concerned

Source : BBC 8 July 2009



Discussion and Questions?



Contact details

Gavin Quantock

Deloitte LLP

Tel : +(44) 11 3292 1458

Mob : +(44) 78 2573 5188

[email protected]




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