Welsh Government has committed to three infrastructure projects using the Non-Profit Distributing ('NPD') Model – the redevelopment of the Velindre Cancer Centre; dualling of sections 5 and 6 of the A465; and the 21st Century Schools Project.

As previously reported, the NPD model had to be placed on hold in both Wales and Scotland (where it was originally developed) due to the decision by the Office of National Statistics that an NPD scheme (the Aberdeen Western Peripheral Route) had to be given a public 'on balance sheet' classification. This means that the project is added to government debt and deficit figures and counts against capital budget, which can make projects unviable.

It appeared for a while that that the Scottish Government had found a structure for their 'Hub' projects which would allow NPD to continue.

However, new definitive guidance from the EU's statistical office ('Eurostat') has ruled firmly against NPD in its current form, throwing into doubt whether the initiative can continue at all.  

What is NPD?

The Non-Profit Distributing ('NPD') model is simply an alternative funding structure for public-private partnership ('PPP') projects that would previously have been carried out under the Private Finance Initiative ('PFI'). It could be adopted by any public authority in the UK (subject to normal approvals processes) and does not require any new legislation.

Many of the perceived problems with PFI stemmed from the private sector receiving surplus 'windfall' profits on top of their anticipated rate of return, and also loss of public control over public sector assets.

Therefore, what NPD sought to do was to create a structure under which –

  • The private sector takes a fixed rate of return
  • The public sector has greater control and transparency over the special purpose vehicle ('SPV') delivering the project, usually through a 'golden share' giving enhanced voting rights on key issues
  • Surplus profits are not distributed to the private sector. Instead, they can be returned to the public sector, used to pay off debt, or invested in more or higher-standard services or infrastructure.

However, it was these very factors which led the UK's Office of National Statistics ('ONS') to consider whether NPD schemes were actually public-owned schemes and therefore 'on-balance sheet'.

  • 60% by the private sector partner
  • 20% by a charity
  • 10% by Scottish Futures Trust (an executive arm of Scottish Government); and
  • 10% by the procuring authority.
  • On 29th September 2016, Eurostat issued its definitive guidance on the classification of PPP schemes; to view it, please click here. The advice is written in conjunction with the European Investment Bank and the European PPP Expertise Centre, therefore it can be seen as authoritative, as it is not just a piece of statistical guidance written in isolation, but taking into account the views of PPP investors and practitioners.
  • Any share by the public sector in savings from the operating/maintenance budget will automatically mean that the PPP is on balance sheet
  • A right to require refinancing (which was part of the role of the 'Public Interest Director' in some NPD schemes) will automatically mean that the PPP is on balance sheet
  • As regards the public sector sharing in profits, the ability to do so is strictly constrained –
    • An entitlement to a share of 50% or more automatically leads to the PPP being on balance sheet;
    • An entitlement to a share of less than 50% but more than one third is of very high importance to the statistical treatment;
    • An entitlement to a share of one third or less but more than 20% is of high importance;
    • An entitlement to a share of 20% or less but more than 10% is of moderate importance; and
    • An entitlement to a share of 10% or less does not influence the statistical treatment
  • Any imposition on the private sector of a cap on revenues will automatically result in the PPP being classified as on balance sheet. This includes any indirect methods such as capping through demand-based operational payments or providing for expiry once a specific level of return is achieved
  • If the public sector retains veto or approval rights over important decisions of the SPV (other than the usual permitted areas such as change of control, changes of key personnel or subcontractors, refinancing, etc), this can mean that the PPP is deemed to be government-controlled, even where the public sector holds a minority share or no share at all in the SPV.