The only way is LABV
As cash from central government has dried up – and with little prospect of generating their own spare cash as financial pressures mount – the idea of a 50-50 joint venture where all the public sector needs is some spare land looks increasingly attractive to local authorities.
As various forms of the model have emerged – particularly in the last year – it raises the possibility that LABVs could be able to match the early success of PFI.
Over the past 12 months, LABVs have gone from simply a novelty being developed by John Laing in Croydon, to a favoured regeneration vehicle by councils up and down the country, including Slough, Stockport, Liverpool and Cardiff. Developers have got in on the action, with the likes of Morgan Sindall and Sir Robert McAlpine seeking involvement, alongside Laing.
The model’s main attraction on both sides is its apparent flexibility, which certainly gives it an edge over PFI. It allows each party to negotiate much more freely what they want from the deal. “There are many models of LABV because there are different requirements from different parties,” says Steve Newcomb, at technical adviser Mott MacDonald. “It’s very, very flexible [and] about trying to get the right model to fit the objective of the various parties involved.”
In reality, LABVs can be anything you want them to be, adds Newcomb. The model suits many local authorities, especially if they have a large site for regeneration and want to enter a more formalised joint venture deal with the private sector, adds Janet Lewis, at lawyers Nabarro. She is currently working on the Watford Health Campus LABV, which shortlisted four bidders in January.
“It is a very disparate market at the moment; the LABV model is a recognised one, but it’s not being rolled out in a consistent manner and quite rightly so. One of its benefits is that it can be structured to suit individual schemes or authorities and it hasn’t been standardised.”
Where the developer is always the majority owner, like in most PFI and PPP projects, it is difficult for local authorities to get exactly what they want from the deal. The LABV, however, keeps it an equal partnership arrangement between the two.
Jamie Kerr, at developer John Laing, says the model is now “seen as a way to make things happen” – although having pioneered the model in Croydon and being a shortlisted bidder on the Watford project, he might be seen as having a vested interest.
Nonetheless, Kerr warns that it is by no means an easy market. Getting things right at an early stage is key to their success.
“Because you’re effectively running a business together, things will change and other opportunities will crop up during the concession period. So, one of the things we are saying right at the beginning is to make sure that the OJEU is wide enough in order to bring other things in.
“LABVs will not be the panacea to all local authority problems, and they also have to be realistic about what they’re going to get from their land value. Transparency is key, otherwise it’s not good for the partnership,” Kerr says.
As Kerr’s comments suggest, the complexity of implementing such a structure between two joint, but very different, partners means there are plenty of hurdles to overcome.
“It has been interesting. We had to help the council quite a lot [in Croydon], as they had to go through an education process themselves on how to be directors on a scheme like this. It was a challenge to get their governance in line with the LABV.”
Talking about the unique, yet challenging, circumstances of Watford, Lewis adds: “Generally most bidders’ hearts would sink at the mention of a LABV; they are more complicated, they have higher bid costs and are very complex deals.”
The initial vision of Watford council was to build a new hospital under PFI, and regenerate the surrounding area. But political steers affected the plans, with Health Secretary Andrew Lansley determined not to allow a PFI deal to go through, and a rethink was needed.
Watford’s masterplan was eventually divided into different zones – including residential, commercial, and green spaces – to become a “unique” mixed regeneration project and a more integrated LABV joint venture, says Lewis.
“Due to the site being so big, the decision was made to develop under a LABV model to allow both parties the flexibility to work together over a long period within a corporate vehicle and to share development risk and reward.”
But the Watford example highlights the limitations of LABVs. The original plans for the acute hospital have been put on ice – temporarily at least – demonstrating the fact that the biggest projects will probably always require some central government investment.
Another limitation at present is the perception that only a very small pool of companies are capable of implementing the maturing model correctly.
“There is a barrier to entry because of the procurement process and I think it puts off a lot of more conventional property developers,” admits Kerr. “There are a limited of number of advisers who can guide local authorities through the pitfalls of a LABV. It is important to get the right experience and the expertise for us to engage with.”
Lewis agrees that this perception has grown up around the market. “But that’s not actually true,” she says. “A lot of local authorities will want a greater choice – and there is space for other bidders to offer different approaches. Organisations are slowly starting to declare themselves either in or out of the LABV market, but some are still testing the waters.”
Watford, again, provides a good example of this. Contractors Vinci, Kier, and a consortium led by Mott MacDonald are all bidding for the scheme alongside John Laing.
Politics, too, have played a part in the slow development of LABVs to date, with only the Croydon one really delivering anything on the ground so far. Watford may have been pushed down the LABV route by political imperatives, but they can also hold things up.
“When we’re looking at the local authority we partner with,” says Kerr, “we ask ourselves, is there the political will to make things happen?”
In answer to this, one source points to the recent difficulties caused on all projects – not just LABVs – by the elections. Changes have arisen at local level, not to mention the shift of focus from the coalition government, which in some areas means interest in projects has waned.
“It’s been a frustrating time over the past two years: the election; then the Comprehensive Spending Review; then the council cuts,” adds Kerr. “Now, fortunately, the projects we expected to see last year are finally happening.”
And what of the areas chosen for LABVs? One source believes that the places where
people are promoting the model are actually the most difficult places to make it work.
“There’s a bit of ‘Emperor’s new clothes’ about LABVs – no-one wants to admit it, but it is very difficult to make these things work in a lot of these areas. The whole regeneration thing is tricky to do on a big scale. Frankly, if regeneration was happening in Knightsbridge, it would have happened without any public sector involvement.”
Giles Frost, of Amber Infrastructure, says that although his company would consider investing in a LABV scheme, the financials would have to stack up. He warns that such large-scale regeneration schemes will be, and have been, undone by property prices.
“I think if they are going to prosper, they will need to be more tailored and be less generic, retail-led regeneration of town centre schemes. Ultimately, all these things rely on stimulating land value. So if you don’t believe that demand can be stimulated, then it’s unlikely to be successful.”
But with ‘localism’ placed at the top of the government’s agenda in 2012 and beyond, local authorities are under pressure to procure major regeneration projects by utilising property more so than ever.
Croydon’s scheme was won by John Laing in 2009, and closed its first building project the following year. It showed how it was possible for public sector bodies to use assets to attract long-term investment from the private sector, to pool resources and better the area’s economic hub.
Since then, the model has been stretched to include multi-site regeneration schemes, such as Bournemouth, and multiple stakeholder plans such as the Stockport regeneration scheme that involves Network Rail and developer Morgan Sindall. These are building on the foundations of the earlier projects, and taking the model into new
“It’s the same model in terms of corporate vehicle and the principle of risk/reward sharing and 50:50 deadlock,” says Lewis. “But it’s a completely different commercial proposition.
“In a usual LABV, the public sector puts in its land and the private sector will cash-match the value of the land. Whereas, in a scheme like Watford, where the value of the land is depressed, someone has to put in more money for, say, a new road or infrastructure.”
Adding to the mix is a backdrop of improving service effectiveness, efficiency and delivering savings as part of the previous government’s Gershon Efficiency Review, all with reduced central government funding.
The public sector needs to make sure it’s a win-win for the community, says partnerships academic John Tizard.
“The council has to be confident that it is getting value for money. It’s a challenge because you’ve got very different objectives between private and public sectors, different skill sets. And like any partnership, you’ve got to align objectives. Building relationships and having very effective governance is key.”
If not properly established and managed, there could be unintended consequences, he warns. “The contract could become all absorbing of the council’s resources, time and money and could well distort the initial aim by allowing the property provision to lead the deal, rather than the services.
“LABVs are not just about physical regeneration and economic regeneration; they’re ensuring that local people can benefit from that regeneration.”
With the local authority playing a bigger contractual role than in traditional PFI deals, the money has to come from somewhere. A lot more work is needed and, in some cases, LABVs take just as long to implement.
Nonetheless, LABVs will be used where there is no external funding available and where the local authority has to leverage land value rather than rely on government funding.
“I’ve heard from the market, and my view is, that the LABV is seen as a much more viable and stronger financing model than PFI, with a more affordable outcome,” says Newcomb.
Some have suggested tax increment financing (TIF) could play a role in the funding of future LABVs. “There’s no reason why TIF as a funding stream couldn’t come in,” says Kerr. “You’ve got to allow every different funding stream to help, especially on the bigger projects.”
As initiatives become increasingly complex, it is important each separate project within a regeneration scheme has its own funding stream.
“Each of the developments on Watford will be individually ring-fenced, so if one falls down, it won’t contaminate the others,” explains Lewis. Watford is particularly complex because as well as a variety of health projects for the local council and health authority, it also involves the football club.
“At the same time you can agree mechanisms within the contracts that allow for some of the more profitable developments to be fed back in to whatever public sector authority it is, and actually use it to cross-subsidise other, less profitable, developments.”
And with the focus slanting towards LABV more than ever, new approaches to funding are being investigated. Mott Macdonald’s Newcomb points to work at his company seeking to progress a funder-led model, rather than the developer-led approach of previous LABVs.
“Instead of taking a developer to the local government organisation, all you do is take the funder and create a LABV between those two,” he explains. “What you’re effectively doing is almost allowing them a business-as-usual situation but with access to the capital they need to do the estate remodelling required, without necessarily sacrificing the family silver.”
LABVs are clearly a fertile ground for new ideas, as councils look to make the most of their estate. Cuts in public sector spending and the stagnation of PFI have combined to fire the starting gun on a new programme of locally led regeneration schemes, and the private sector is ready to respond, says Kerr.
“It’s good to be bidding again; we’ve been raring to go for a while.”