In the third of a series of real asset investment case studies from Gravis Capital Management, Michael Horton, Associate Director, looks at the case for investment in schools.
Public Private Partnerships (PPPs) are long-term project agreements where the public and private sectors collaborate to deliver social infrastructure assets for the provision of services to the local community.
The public sector partner is most often a local authority or, in the case of healthcare assets, an NHS Trust. They will retain an equity interest in the project. The private sector partners will design, build and maintain the asset on behalf of the local authority and the local authority will provide regular payments via a unitary charge throughout the project life, over the term of the contract.
These arrangements allow for effective risk transfer, greater cost certainty, and improved service delivery. They also attract private investment and expertise and create value through various funding routes, enabling projects that might otherwise face delays or not happen at all, while allowing public sector resources to deliver reliable and high quality public services.
Since 2005, non-profit distributing (NPD) and hub private financing have supported £3.3 billion of additional investment in public assets in Scotland*. Another £5.7 billion of investment is also being supported under earlier Private Finance Initiative (PFI) contracts*.
The Aberdeen Schools Project is a portfolio of schools financed as part of the Scottish government’s NPD PFI scheme.
The investment case
Implemented through a PPP, using the Scottish Government’s NPD PFI scheme, the Aberdeen Schools PFI project was a major part of Aberdeen City Council’s 2007 regeneration plan of their school estate.
With a capital value of c.£120 million, the project comprised the design, construction and facilities management services of two new build secondary schools, seven new build primary schools and the refurbishment and extension of one primary school.
Reaching financial close in December 2007, with the first schools opening in 2009 and the last in 2011, the project provides educational facilities for over 5,100 pupils on behalf of Aberdeen City Council.
How revenue is derived
The project was contracted under the Scottish Non-Profit Distributing Organisation (“NPDO”) model which deploys a wholly debt capital structure (senior debt and fixed coupon subordinated debt).
All profits beyond the amounts payable to the debt providers are distributed to a nominated charity chosen by the Council, with Sport Aberdeen and Voluntary Service Aberdeen having benefitted most recently.
Aberdeen Schools PFI was the third project to reach financial close under the NPDO model. However, due to initial difficulties that the project faced which lead to a refinance, the first charitable donations were distributed in 2019, with £5.6 million distributed to date and a further £58.0 million forecast to be distributed by the end of the project in 2039.
How the investment evolved
Following the global financial crisis in 2008, the project experienced a number of initial difficulties with all key counterparties going into liquidation during the first four years of operation. The project was refinanced in 2009 via a consortium of three senior lenders, together with Robertson FM who stepped into the facilities management contract, agreeing to take on the latent defect liabilities as part of its contract.
Since 2009, the project has operated extremely well, recording historically low deductions under the contract, whilst maintaining the schools to a high standard and deferring lifecycle spend. Most recently, during the Covid-19 pandemic, the project remained fully operational and in compliance with Scottish Government guidance.
One of the larger schools in the project is undergoing expansion to accommodate an additional 300 pupils. The increase in the school roll will require additional sports accommodation, music facilities, break-out areas, dining spaces and changes to the space allocation for buses transporting pupils to and from the school. Discussions with the Council began in 2019 with the first phase completed in 2023, with temporary modular accommodation units installed. The second phase will see a permanent additional wing added to the school. The the feasibility study and technical design is complete, with the contract expected to be put to tender in 2025.
*Source: Audit Scotland, January 2020
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