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6. Concept Evaluation
6.1. Overview
As outlined in the previous chapter the concept of SFT is one of an initiative designed to make scarce public sector investment go further, whilst ensuring that the equally important objectives of infrastructure that is long-term, reliable, affordable, and good quality are kept to the forefront of infrastructure investment decision making.
As part of the development of this SBC a wide range of concepts were developed in order to inform the potential scope of SFT, these concepts were then refined and evaluated in order to clarify the most deliverable and beneficial activities of SFT, as well as helping to develop the most appropriate organisational form for SFT.
6.2. Methodology
The options evaluation for the Strategic Business Case has followed a four-stage process shown in the following diagram and described in more detail below:
Figure 7. Options Evaluation Process
- Concept Development - where all potential options for a Scottish Futures Trust to participate in public sector infrastructure development have been considered. The ideas captured ranged from those generated in pre-election manifesto papers, to recent SFTSBC brainstorm sessions. This was intended to be a broad ideas generation stage, where no concept was excluded.
- Stage 1 Shortlisting - in this stage, each concept was exposed to a critical flaws analysis by assessing the concept against the five key constraints outlined at section 5.3 above, namely Vires, Accounting Treatment, State Aid, EU Procurement Rules and ONS Classification. In each of these categories a 1-5 scoring mechanism was adopted, as follows:
Score | Significance |
|---|
1 | Showstopper risk, no mitigation possible |
2 | High risk, little mitigation possible |
3 | Risk evident but mitigation possible |
4 | Small risk, mitigation likely |
5 | No risk |
Any concept that scored a 1 or 2 in any of these categories was "parked" at this stage and the remaining currently viable options taken to the second stage of Shortlisting. The reason for "parking" options rather than discarding them at this stage is that, as discussed, SFT should follow a development path, and if some of the constraints that caused an option to score a 1 or 2 were to be removed in the future, then that activity could again become relevant for the future development of SFT.
- Stage 2 Shortlisting - in this stage, the remaining concepts were subjected to further analysis and scored against 2 additional factors:
a) Their potential to add value; and
b) The potential for wide sector applicability, as follows:
Potential to Add Value | Sector Applicability |
|---|
Score | Significance | Score | Significance |
|---|
1 | No added value | 1 | No application |
2 | Marginal added value | 2 | Very limited application |
3 | Added value, significant risk | 3 | Application in 1 or 2 sectors |
4 | Added value, some risk | 4 | Wide application |
5 | Significant value, low risk | 5 | Application across the board |
Any concept that scored a 1 or 2 in terms of its potential to add value was also parked. A score of 1 or 2 in sector applicability indicated a narrow potential application, but as the value in that sector could be significant, it was not used as a filter at this stage. The remaining options were collated into a final list of the preferred options for activities that the SFT could undertake.
- Structuring - The activities of the SFT are, to a large extent, linked to its structure and form as a "body". As such, elements of structuring have been considered in the earlier stages of options evaluation. However, there are a number of options available in terms of the detailed structuring and these were analysed in more depth at this stage. The final determination of structure being guided by the principle of form follows function.
The outcome of the options evaluation process is a preferred option for the scope of SFT activities and its structure.
The preferred options for activities of SFT following the short listing process are discussed further in this Section, whilst the structuring of SFT as an organisation is covered in Section 7.
6.3. Preferred Option(s)
The outcome of the options evaluation process is that the SFT should be tasked to further develop and undertake the following range of activities in support of an overall SFT initiative:
Concept |
|---|
Asset provision by alternative entities |
Provision of assets is facilitated via an entity which is an organisation with a genuine reason for alternative residual use of the assets created on its behalf and is itself a private sector classified body, e.g. provision of schools accommodation by a University or hospital accommodation by a medical faculty. This model would be congruent with policy initiatives to (for instance) create closer links between schools and universities. Significant further exploration of risks and structure is required to determine the feasibility of this structure. |
Innovation in rail infrastructure delivery |
This option focuses primarily on the role that SFT could play in supporting the delivery of rail projects through an NPD ("Non-Profit Distributing") structure, to maximise value. Procurement strategy development for rail infrastructure is being progressed independently of work on the SFT, so at this stage, this concept simply seeks to recognise potential links. |
Finance aggregator for SG funded private bodies |
The SFT could be set up in the private sector to consolidate and manage the external finance requirements of a number of bodies which are classified as private sector bodies by the ONS, and which are currently used to deliver government policy, such as universities, colleges, Registered Social Landlords (" RSLs") and Scottish Water. Currently, these bodies are part funded through capital grant from SG but it is potentially possible for the combined finance requirement to be raised from the debt markets, against the strength of the body's own covenant.. This should insulate the SFT entity from project risk, reduce the reliance on upfront capital funding from SG and release portfolio efficiencies by aggregating finance requirements across sectors into a single portfolio of bank and bond finance on a rolling programme basis. |
Finance conduit / framework funder (aggregated & competed private senior debt) |
The proposition is that the SFT could be set up as an organisation that arranges finance for projects or programmes to deliver greater efficiencies from planned investment. This could include facilitation of Local Authorities grouping together for a Bond issue. It is envisaged that the SFT could raise private sector debt to fund an investment programme and adopt a due diligence role to mitigate risk. There would be benefits in lower cost of finance form the "bulk funding" of aggregated projects. The benefit of this would be in lower cost, more flexible senior debt funding and there may also be an opportunity to minimise the cost of risk capital. |
Efficiency measures in existing PPP deals |
This considers the potential opportunity that exists for SFT to leverage value from existing PPP projects by taking a role co-ordinating contract improvements and potentially re-financings. Such opportunities may broaden in the future as accounting rules change giving the potential, for example, for consideration of underpinning of elements of senior debt or other restructuring in future re-financings. Any such approach would need to address the private sector interests as owner of the entity delivering the PPP project as well as those of the public sector. |
Underpinned Financing of new NPD projects |
This concept would potentially see underpinning by the Scottish Government of a proportion of senior debt (to be determined on a sectoral, or project basis) applied to new NPD projects in Scotland. This could enable the initial senior debt to be secured on very attractive terms, helping to drive down the cost of such funding. Full regard would have to be given to risks retained through underpinning obligations. |
Social housing - funding change catalyst / aggregator |
Social housing has been considered as a separate sector given the specific nature of the revenue stream from tenants which supports the servicing of funding (rather than being reliant on 100% government funding). A concept has been considered whereby the SFT could enhance the level of housing investment by changing the financing assumption that the units built would remain in the social housing sector in perpetuity. This could reduce the level of public sector grant funding required and therefore, increase the number of units that could be constructed. This could be complemented by a role as a funding aggregator or conduit in this sector. It is important in this concept that tenancy arrangements are not disrupted. |
Funding vehicle for asset backed regeneration |
This concept relates to a potential role for SFT in structuring and potentially aggregating private sector funding to leverage against public sector assets and promote regeneration |
Promoting / introducing model for tax incremental financing ( TIF) |
Several public sector bodies in Scotland are exploring routes to access tax incremental funding, where increased business rates resulting from investment in a specific development zone are hypothecated to the repayment of finance raised to facilitate regeneration. This is generally focussed on business rates, but could involve a range of structures including developer levies. There is a potential role for SFT in further developing this model and potentially standardising and acting as a broker / aggregator for private funding. |
Risk capital investment in infrastructure |
This concepts sees the SFT as an investor (or potentially co-investor) of risk capital in infrastructure. A role as investor requires SFT to be capitalised, and the concept includes establishment of an SFT investment vehicle structured as a joint venture between the Scottish public sector (investing a proportion of the capital) and private sector investors (each investing a proportion). It is anticipated that the investment vehicle would be private sector classified. |
Programme / significant project development & procurement - Schools, waste, flood defence, street lighting, hub etc. |
This concept is founded on looking at investment need on a programme basis to improve costs and delivery. It envisages an SFT entity working with public sector stakeholders in instigating and leading a sector specific investment programme and driving efficiency through: a) aggregation of funding; b) standardisation of documentation; c) development of suitable commercial delivery vehicles; d) utilisation of risk capital at a portfolio level; e) management of deal flow; f) facilitation of delivery expertise across the public sector; and g) use of due diligence disciplines. It is anticipated that this concept could be applied across a number of sectors and could deliver an increase in investment by making more efficient use of existing, current or planned financial investment. |
Asset efficiency / value realisation (inc surplus assets) |
There is a potential role for SFT in promoting efficient management of assets across the Scottish public sector, including creating structures that promote joint working through sharing of assets and in simplifying the realisation of value from surplus assets for public sector bodies |
Supporting on Balance Sheet NPD |
This concept is for the SFT to play a leading role in continuing a programme of NPD projects across sectors in Scotland, adding value through standardisation, due diligence and potentially combined with the finance conduit function. |
Advice / infrastructure planning / diligence functions |
There is an opportunity for SFT to be the vehicle that offers a solid platform of skills and co-ordination to support SG's range of project, programme and financing activities. Such a body would need to be representative of all sectors and levels of government within the Public Sector. It is not envisaged that SFT would necessarily replace all existing delivery or procurement bodies, but it would at least need to consider and manage the interfaces between the various bodies. Its principle objectives would therefore be: a) to ensure consistency in advice to Ministers; b) to produce guidance and standardisation that is effective and commercially relevant; c) to develop innovative delivery models; d) to apply QA rigorously, ensuring better offerings to the market; e) to drive efficiency and remove duplication in the public sector; and f) to allow representation of all market interests. |
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