Whilst this is commonly the first consideration that is made in respect of the proposed grouping of DBFM projects, this is simply one of a number of factors that should be addressed in the selection of a grouped approach to procurement. It is the case that the relative value for money of elements of DBFM projects such as financing costs and advisory fees improve with the size of the financing requirement on projects due to a number of 'deminimus' levels in respect of fees. There is no absolute financing requirement limit below which project size is 'poor' value for money (however it is noted that the only relevant guidance in respect of such procurements (SoPC4) states that DBFM (which is analogous in senior funding terms to PFI as described in the document) is not suitable for projects with a capital value of less than £20m1).
Whilst recognising the foundations for the position, SFT does not believe that this £20m threshold is wholly applicable to the hub programme for the purposes of determining the minimum size for a DBFM project (or a group of schemes) as the existence of the Private Sector Development Partner ("PSDP") within hubco, along with their supply chain, should in itself mean that the project development costs associated with DBFM projects will already be lower than a standalone, non-hub DBFM project.
The following guideline thresholds should be taken into consideration with regards to hub DBFM project grouping:
• Projects with a capital value in excess of £10m could be considered either as a standalone DBFM project or as suitable for grouping, if it is efficient to do so within the project programme;
• Grouping should be considered in detail for projects with a capital value of less than £10m;
• Grouped projects should not, as a guideline, exceed a capital value of £40m as this may necessitate a financing club approach which may lead to diminished value when compared to the use of a single funder (see below).
In determining whether to group together a number of projects is appropriate the following matters should be considered:
• The requirement to group projects appropriately so as to generate economies in respect of financing. For example, grouping a potentially high risk small project with two others that have a different risk profile to reduce the financing cost may not result in the best value for money as the funders will probably take a portfolio approach to their financing terms and this may be based upon the riskiest project within the group. In so doing, it may be that the two less risky projects may receive a higher cost of financing than were they procured on a standalone basis; and
• At present funders do not appear willing to take and hold significant portions of long term senior debt when compared to the peak of PFI lending when there were many examples of banks holding c. £100m of senior debt on individual projects, without the need to syndicate (i.e. "sell on to other lenders"). It is clearly understood that following the global credit crisis funders are much less willing to hold large sums of senior debt on individual projects (c. £40m appears to be the current market level). If the grouping of projects places the level of debt requirement above individual bank's thresholds it may be the case that a club approach is required to provide the debt to the grouped scheme. This may result in delay to the procurement and also an erosion in the value for money when compared to individual projects as the club terms reflect the need to satisfy two (or more) funders rather than a single lender (effectively solving to the lowest common denominator).
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1 HM Treasury: Standardisation of PFI Contracts Version 4 Paragraph 1.4.3. The original research upon which this statement has been based was published in the 2003 HM Treasury document "PFI: Meeting the Investment Challenge", Section 4