Take Two

1 May 2017 After the false start of the Welsh government’s NPD programme, it has returned with MIM. But what is the new model and can it attract bidders, asks Paul Jarvis

In March 2015, then-Welsh finance minister Jane Hutt told a packed Partnerships Bulletin conference in Newport that her government had focused on delivering “an ambitious infrastructure pipeline”, of which a version of Scotland’s non-profit distributing (NPD) model would form a crucial part.

Five months later, and the country’s plans were thrown into doubt when the Office of National Statistics (ONS) ruled that Scotland’s Aberdeen bypass NPD scheme must be classified as on the government’s books. Given Wales’ lack of funds, the off-balance sheet treatment of NPD to that point had been a major attraction of the model.

With no resolution on NPD schemes’ balance sheet treatment forthcoming, Wales eventually determined to go its own way. The result, two years after Hutt’s pronouncements, is the Mutual Investment Model (MIM).

Initially unveiled in March this year by Hutt’s successor, Mark Drakeford, details on the new plans were fleshed out at an industry day near the end of that month, with project agreement documents published a week later.

And while the initiative may have been a long time coming, it certainly now has plenty of support from within the Welsh government. At the industry day, three ministers turned up to speak, pitching their plans for investment to the market.

Encouragingly for those politicians and the officials underneath them, there also appeared to be plenty of interest from the market, with over 250 attendees at the event. The question on everyone’s lips, of course, was ‘what is MIM?’

Steve Davies, head of innovation finance in the Welsh government’s finance department, was quick to put people’s minds at ease, insisting that anyone who had dealt with initiatives such as PF2 and the NPD model would find plenty that they recognised.

Under the MIM, Davies explained that the Welsh government will invest equity in each project. It currently anticipates investing 20% each time, but decisions will be made on a project-by-project basis. The government will also have a director on the board of each project – but Davies was at pains to point out that this appointee will not have any controlling influence over a project.

“The director is not going to have a ‘golden share’ or veto power,” he explained. “We are looking to make sure that the public sector has access to the same information that any other contracting partner has.”

Davies’ colleague at the innovative finance unit, Janie Chesterton, added that MIM contracts would not include any soft services, or any internal equipment (such as computers in schools), with some low value maintenance work that does not affect the lifecycle risk able to be carried out by the public sector, such as the traditional school caretaker.

“That is a positive step,” says Richard Laing, chief executive at health property firm Prime. “It will make buildings more flexible for the clients. If they adopt that approach from day one, it will be much better value for money for the government.”

At the heart of this new model is a desire from the Welsh government to focus on outcomes rather than simply the construction of the new buildings.

“MIM will look to its private partners to deliver significant Welsh government policies,” said Drakeford. “For example, they will need to secure community benefits.

“The model has been carefully designed to match the way we go about our business in Wales.”

The big question for everyone in the room, of course, was how confident the Welsh government is that this new model will see projects classified as off balance sheet, given that its previous plans to follow the NPD model collapsed when the ONS ruled the Scottish model to be on the government’s books.

“We have worked on the classification issue for extended periods with the ONS and Eurostat to be confident that the model is one that will be classified [off balance sheet],” said Drakeford.

Davies underlined this point. “We think we are well on the right side of that line,” he said. Indeed, it is one of the prime reasons that the Welsh government is clear that it will not permit many derogations from the standard contracts it has published, because it is determined not to allow the statisticians any room to reclassify schemes.

“We will have to remain incredibly vigilant,” added Davies.

Laing says he is encouraged by the direction of travel from the Welsh government on the balance sheet issue. And while some are concerned that the government is building into the procurement timetable time for the ONS to review each project individually – perhaps suggesting officials are not as confident about the model as they suggest – Laing says this is a sensible move.

“The reality is they have a new structure and they want to make sure it is 100% watertight,” he explains. “I would hope once they have done one or two projects that they wouldn’t need to do that.”

So that’s what the model looks like, now what about the projects?

As has always been the plan, there are three schemes in the initial pipeline: the Velindre Cancer Care Centre, Sections 5 and 6 of the A465 road upgrade, and around £600m of schools projects, to be batched into groups of about four or five.

Those batches are likely to be identified this autumn, with the first scheduled to come to market next year.

Meanwhile, the reference design for the Velindre scheme is due to be passed to the government for approval this summer.

An outline design for the A465 is expected to be published this July, with market testing following in the autumn and a pre-qualification questionnaire to be issued in the first half of 2018.

Progress is certainly being made, and the Welsh government seems confident in its plans. As Andy Falleyne, deputy director in the transport department put it: “We know what we want to buy and we will be clear about that.”

That may be the case, but the next question is whether the industry is willing to provide the product that the Welsh government is looking for.

A big sticking point here is not so much the structure of the deals on the table, but the number of projects on offer.

“I don’t think they will struggle to get a competition going, but I am unsure whether the opportunity will be of sufficient scale to attract the largest contractors,” suggests Jonathan Turton, director at KPMG.

“The problem is that those contractors will struggle to hit the requirements that are needed by the Welsh government,” warns one top tier contractor.

“We will look at it and we might be a bidder,” says Laing. “Our preferred opportunities are partnerships, where at least there is the potential for being involved in a pipeline, rather than a one-off project. A one-off project has a high bidding risk profile.”

Turton also suggests that this small pipeline will struggle for attention if and when the Westminster government finally launches its long-promised programme of PF2 projects.

The top tier contractor disagrees, however. He suggests that, for the one-off projects like Velindre or the A465, a pipeline of similar projects in England (or Scotland, for that matter) would make them more attractive.

“I would consider, for example, Velindre, if there is a PF2 pipeline of health projects. Then there is a basket of projects that are of a similar nature, all of which I can pitch to my board as a potential pipeline of opportunities.”

One other concern raised by the contractor may be more difficult to overcome. “I was surprised to hear talk of fully-funded bids,” he says. “I get the logic of that, but I worry about the appetite within the financing community to do that.”

He points out that for this to work, it would require a funder to hold its price for at least six months, which few if any would be willing to do. “It will put people off,” he warns.

More fundamentally, though, as the Welsh government looks to convince the market of its commitment to the model, some in the industry are worried about how long the process is taking. “I am disappointed it has taken them 18 months to come up with this alternative model,” says the contractor.

Meanwhile, Turton is surprised it will be almost another year before any of the projects are tendered – despite all three projects having been trailed for at least two years previously.

The pressure is therefore very much on the Welsh government to start delivering.

This page was last updated on:
3 July 2017.

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