'Non-profit distribution' could be shape of things to come. Here's how it works

Published on Wednesday 8 October 2008 21:19

But what will it actually mean for the sector and for all of us? As a consultee on the recent proposals, I took part in the discussions that led to the SFT being set up as a limited company.

One of the SNP's manifesto commitments was to see more funds going back to the community, by using what is termed the non-profit distributing model.

Although there have been only five such projects to date, it is clear the SNP believes this model is deliverable and bankable, with the perceived benefits of securing expertise, maximising value for money and allowing shareholder transparency.

It is also 100 per cent debt financed, so there are no uncapped equity returns, and any surpluses flow into a charitable body for community use.

Concerns exist in relation to early PFI deals, where refinancings and "secondary market transfers" were considered to be excessive.

Agreeing the incentives and penalties is inextricably linked to the transfer of risk issue, because, as you would expect, reward follows risk.

In John Swinney's covering letter to the consultation, the SFT is described as a "model that as a first step will direct the excess profits made from traditional PFI funding back into the communities and as a second will secure savings for the public purse through greater partnership, improved management and better value borrowing".

So how will the SFT operate? Two separate organisations are envisaged. First, SFT Ltd will:

• Review significant projects to ensure quality and consistency.

• Develop strategies for schools delivery and funding.

• Give guidance on the non-profit distributing model.

• Develop the local authority municipal bond.

• Create asset provision models based on innovative thinking.

The SFT Finance and Investment Organisation is the second organisation. This will be a joint-venture between public and private sectors with the objectives of investing risk capital and acting as a funding conduit.

The trust may also have an investment fund it could use to provide "junior debt", along with private sector investments in non-profit distribution projects and the recycling of surpluses.

So what would be the benefits of the SFT?

One is that the public sector may be more willing to seek and rely upon the expertise of a public body perceived to understand and represent the public sector's interests.

John Swinney stated that up to 150 million would now be invested in Scotland's public infrastructure, committing to an investment programme of 35 billion in the next ten years.

I believe if the SFT is able to borrow at a better rate than the private sector, this would mean better value for the public sector. To assist, the government proposes an aggregation of sector debt, risk and capital investment and is looking at the possibility of local authority municipal bonds. How this will work in reality remains to be seen.

Scottish infrastructure needs investment. Money has been made available in various sectors but the problem lies in the long-term commitment required under the non-profit model.

Traditional vehicles will still be available to local authorities, but whether this is enough is not yet clear. What is clear is that any future projects will revolve around the non-profit distribution model.

• Karyn Watt is a partner in construction and projects at Anderson Strathern