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7. The Preferred Option for SFT
7.1. Overview
Based on the outcome of the evaluation process outlined in the previous chapter, this chapter sets out an outline proposal for the SFT initiative, and covers the initial activities, structure and governance of a proposed SFT organisation.
This chapter also reviews the likely costs and potential value added of SFT. At this early stage any quantification of costs and benefits must be regarded as indicative, further detailed development and business planning is anticipated as part of an implementation stage.
It is also recognised that SFT, once established, will be able to develop its activities over time. Ensuring the governance of SFT is established correctly is therefore essential in order to ensure SFT remains focused on its primary objective of supporting an initiative of efficient infrastructure investment and delivery.
7.2. The SFT Toolkit
The scope of SFT's activities rest in the shortlist generated by the evaluation process outlined in chapter 6. This shortlist in effect provides a toolkit from which various scenarios can be constructed. The SBC Delivery Team has scenario tested a number of options, utilising the toolkit in a variety of combinations. For Instance:
- SFT as a developer/deliverer of programmes, using conduit finance and SFT risk capital;
- SFT as the facilitator of efficiency measures in existing projects;
- SFT supporting the delivery and financing of a significant NPD project.
7.3. Organisational Structure
The proposed organisational structure for SFT has been largely driven by its functions.
Based on the original strategic objective of more efficient infrastructure investment, and the detailed analysis of potential SFT activities, SFT has developed as having 4 main areas of business activity:
i) SFT as a provider of policy support, quality assurance, guidance and standardisation;
ii) SFT as a developer and co-deliverer of projects and programmes;
iii) SFT as an investor of risk capital;
iv) SFT as an aggregator or conduit for funding.
The first two business activities (infrastructure planning, policy support and quality assurance, and project and programme development) sit best within a public sector classified body. It is not intended that this function would be in competition with private sector advisors in any way. The second two activities (investment and finance) sit better in the private sector, not least as risk capital is to be raised from private investors.
Therefore the structure of SFT is likely to look as the diagram below (although it is recognised that this structure may still develop over time):
Figure 8. SFT Organisational Structure
7.4. Governance
SFT has always been conceived as being representative of the whole public sector, and, if it is to deliver its efficiency potential, it has long been recognised that this original ambition must be crystallised in SFT's governance. There is however always a balance to be struck between appropriate representation and governance, and effective management.
For the immediate next phase SFT will be moved forward more efficiently under direct oversight of Scottish Ministers. However, once its more detailed business case is confirmed, it could be overseen by an Infrastructure Board for Scotland, possibly made up of senior representatives from across the public sector and chaired by the Cabinet Secretary. The purpose of the IBfS would be to oversee SFT delivering its strategic objectives, and to input to the future strategic direction of SFT.
SFT Finance and Investment will be a separate private sector classified entity in which SFT D&D has a minority share. Careful structuring of the constitutional documents will be required for this entity to ensure the public sector can exert appropriate influence whilst not undermining its private sector classification. Its potential organisational form has not been assessed in detail, although the flexibility and transparency of a Limited Liability Partnership ( LLP) structure is initially attractive. It is anticipated that it is likely to fall to be regulated by the FSA. It will have its own management team who will report to the LLP members committee.
The details of how investment will be raised from the private sector has not been explored in any detail as part of this SBC, rather that work will fall to SFT Delivery as part of the business planning for SFT Finance and Investment. However, it has been noted through the SFT consultation that the private sector has raised concerns over the downturn in infrastructure dealflow. This concern should be addressed in the case for SFT F&I.
The working assumption is that State Aid clearance will require to be sought for SFT's activities. This will likely take somewhere between 3-6 months. Initial discussions have been held with the State Aid unit in the Scottish Government, and they will continue to be kept informed of developments.
The proposed twin organisational structure has precedents in the public sector 12, however more detailed work is required on the corporate structuring and form of SFT, which it is anticipated will be carried out as part of a more detailed business planning exercise, post this SBC.
7.5. Resources
SFT has not been conceived as a large organisation, rather it is envisaged as a small focused team, resourced by senior and experienced infrastructure delivery professionals. To be successful SFT must be able to attract, employ and retain experienced staff who have delivery experience from working across various sectors, on publicly and privately financed remits.
Neither is the aim of SFT to displace an effective advisory community. In taking an overview and helping the public sector capture bulk buying power, SFT is undertaking innovative and new activity close to government, and when SFT is supporting the public sector as it conceives, develops or engages in complex infrastructure procurements, it is strengthening the client capability, the governance and management of the project or programme.
SFT also has a role to play as a catalyst, conceiving and developing innovative ways of delivering infrastructure investment, opening new markets as a result.
Where SFT is required to undertake large specific assignments it is envisaged it will resource specifically to deliver those particular projects or programmes; either by secondment, recruitment or advisory support.
7.6. The Cost of SFT
The implementation of SFT has always been regarded as a development path (as explained in Chapter 9). In the short term a series of steps require to be gone through to establish SFT (as envisaged above), in the longer term SFT may have wider opportunities as a result of legislative or constitutional changes that lead to a change in shape or direction.
As the activities of SFT will ramp-up over time it is envisaged at the outset it will have a small headcount and that its staffing will increase over time. Initially it is assumed it has 6/7 staff, including support staff, by 2011 it is assumed it has around 20 employees, including support staff. These estimates provide a range of possible costs.
The working assumption is that SFT Development and Delivery will be established as quickly as possible and that SFT Finance will be established and operational by 2010-11, therefore the bulk of start-up costs land in 2009-10, these being primarily advisory and recruitment costs.
As for many other organisations , payroll will be the main recurring cost for SFT. This has been estimated over a 5 year horizon in order to provide some quantum for this SBC, but this must be regarded as indicative pending more detailed business planning. The staffing levels suggested would support core SFT activities, however should SFT undertake significant assignments, such as becoming a programme developer in a particular sector, then additional dedicated staff (or advisory support) would likely be required. SFT resourcing beyond core levels would be justified through normal business planning and approvals.
Based on these early estimates the potential funding requirement for core SFT activities over 5 years is summarised below:
Table 3. The Estimated Costs of SFT
£000 | 2008-9 | 2009-10 | 2010-11 | 2011-12 | 2012-13 |
|---|
Payroll (incl pension& NI) | 1,000 | 1,300 | 3,700 | 4,200 | 4,300 |
|---|
Premises | 50 | 50 | 100 | 100 | 100 |
|---|
Marketing/ PR | 50 | 50 | 50 | 50 | 50 |
|---|
Advisory | 100 | 250 | 250 | 250 | 250 |
|---|
Contingency | 250 | 350 | 500 | 550 | 600 |
|---|
Start-up costs | 1,050 | 1,100 | 1,300 | 750 | 250 |
|---|
Total | £2,500 | £3,100 | £5,900 | £5,900 | £5,550 |
|---|
These figures must be regarded as indicative estimates only. To sense test these estimates some comparisons can be drawn:
- The Strategic Investment Board in Northern Ireland had an initial annual payroll budget (updated to 2008-9 prices) for a staff of 11 of approximately £1.75m;
- Partnerships UK(around 70 staff) has a current annual budget of approximately £14m;
- The 4Ps has an annual budget of around £6m.
7.7. The Potential Added Value of SFT
As the supporter of an initiative, SFT's activities will be wide and varied, therefore trying to predict added value quantitatively is not an easy task, however qualitatively there are perhaps three main areas where we can assess SFT's added value:
i) Project level efficiency
ii) Programme level efficiency
iii) Finance costs
Project Level Drivers of VfM
- QA processes improving project preparation and execution
- Procurement team strengthening
- Use of standardised contracts and other project documentation
- Strong bidder competition arising from the above
There is substantial evidence that regardless of procurement route, procurement delay, and associated re-scoping leads to additional cost both in terms of construction inflation and bid-costs that contractors seek to recover over programmes of work 13. Benefits in this area cannot be accrued evenly across all sectors as there are varying diligence processes and degrees of standardisation already in place. It has however been assessed that in some sectors improved due diligence for major projects (often subject to more substantial delays) could lead to benefits in the 2-3% range, with a range of 1.5-2% for more standard projects. Again in some sectors, improved standardisation could lead to savings in the 1-2% range.
Programme Level Drivers of VfM
- Effective policy communication to market
- Improved stakeholder participation
- Building market confidence and so supply side capacity
- Market shaping to create a new/deeper supply capability
- Project pipeline management to better match supply and demand
- Supporting joint working amongst Authorities
- Economies of scale through shared facilities
- Reduced transaction costs through replicability
- Exercising public sector bulk purchasing power in relation to risk transfer negotiation
As an initial estimate, again across only a proportion of the overall infrastructure spend, market co-ordination could bring savings at least in the order of 1%. The potential savings from better coordination and sharing between public sector bodies are higher, as they could influence the quantum of infrastructure required, not just the cost of delivery. These have been assessed as in the 3-5% range, but are available over a lower proportion of the overall spend where there is genuine potential for sharing.
Cost of Finance
Financing costs can only be reduced where forms of project finance are implemented as described elsewhere. For future projects, use of bulk purchasing power to achieve finer terms of finance than a single Authority transaction, and techniques such as underpinned financings, should lead to savings of at least 1.5 - 2% for applicable projects. The concepts applicable to the housing sector demonstrate a potential there to improve on this level of saving, potentially at least in the 2.5 - 7.5% range.
These assessments take no account of any potential value released through organisational efficiencies.
Aggregating these areas of potential saving across applicable sectors gives an overall efficiency, or added value target, for SFT in the range of 3-5% of total infrastructure programme spend. This figure has been adopted as a reasonable working assumption for the Strategic Business Case.
Combining the estimates for SFT Costs and potential benefits demonstrates a potential for a benefit:cost ratio in excess of 20:1 - a significant contribution to Value for Money ( VfM) in infrastructure investment across Scotland.
7.8. Capitalising SFT
Part of the proposal for SFT (Finance and Investment) is that potentially it has an investment fund which, for instance, it could use to co-invest in NPD projects, alongside private sector investors.
As SFT itself is to be run on NPD principles then any returns from those investments, above a pre-determined level, could either be reinvested in the fund and therefore cycled back into infrastructure investment, or they could be used to offset operating costs, or it may be possible in some way to cross subsidise SFT (Development and Delivery) activities.
The creation of the fund would likely be a one-off cost, the quantum of investment for public and private investors would reflect the desired size of fund apportioned between public and private sectors by the relative percentage holding in the proposed SFTLLP (in effect a joint venture). The public sector could invest assets, rather than funds, as its stake in the joint venture, but this approach raises some challenging policy issues.
A great deal of detailed work requires to be undertaken to scope and structure correctly this aspect of SFT. This level of detail is outwith the scope of this SBC, and so this analysis and development it is anticipated as being carried out as part of the detailed business planning stage for SFT F&I.
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