The likelihood of surpluses being realised (for distribution back to the public sector) depends on the financing structure and the junior debt return. It may be that the base case financial model for the project does not forecast the generation of any surpluses other than towards the end of the project once the senior funders are repaid and they release the project from their cash reserving requirements. In this case surpluses will only arise naturally during the life of the project if the Project Company performs more efficiently than expected. Another possibility is for the base case financial model for the project to generate an annual distribution of surplus cash for distribution to the public sector, as the cashflows required to satisfy lender covenants are greater than required to meet junior debt service.
Authorities will expect bidders to submit their best priced bids (i.e. lowest unitary charge) which fall within the affordability envelope for the project and which satisfy financiers' return requirements and covenants. Hence surpluses should be viewed as a consequence of the structure rather than an up-front requirement. A bid with a low unitary charge and a low level of surpluses will score better in evaluation than one with a high unitary charge and equivalent higher level of surpluses, as the ultimate distribution of surpluses remains uncertain. However, where a certain level of unitary charge is required to meet lender covenants, and the resultant cashflows are more than sufficient to meet the servicing of junior debt, this should result in annual surpluses becoming available to the authority. Such surplus distributions during the term of the contract will be evaluated positively.
Early NPD projects provided for the surpluses to be paid to a charity rather than back into the public sector. Changes in accounting and budgeting rules have, however, opened up the possibility for the surpluses to be channelled back to the authority and it is assumed that most projects will adopt this position. The surpluses will be paid to the authority as a rebate against previous unitary charge payments.
Further guidance on how surpluses are defined is included at Annex B.