4.15 The Department brought in PUK to provide: commercial, project and programme management expertise; a governance structure that promotes effective delivery; and help in establishing the programme. PUK funds half of PfS's operating expenditure under a joint venture agreement for a return, paid through PfS, based on the performance of the programme. The arrangements align PUK's interests with those of the Department and incentivise PUK to help the Department manage the risks better. Paying PUK to adopt some of the programme risks, however, costs the Department more than just paying for the services PUK provides and does not significantly reduce the amount of risk to which the Department is exposed. The arrangements are based on the joint venture framework used for PUK's involvement in the earlier Local Improvement Finance Trusts primary healthcare programme. In other programmes, such as the Waste Infrastructure Development Programme, PUK is remunerated for its costs of providing secondments and services. The Department has not assessed the expected benefits compared to the costs.
4.16 The effect, however, has been to engender top level attention to BSF in PUK and greater in-depth support and commitment. Remuneratio was set to provide a target internal rate of return to PUK of 15 per cent (IRR). This rate of return is similar to that of private risk equity in Public Private-Partnerships. The returns can vary by up to 2.5 percentage points depending on Key Performance Indicators (KPIs) and reduce if projects are delayed against set milestones.
4.17 The key risks that affect the return to PUK are:
i not delivering against the KPIs;
ii projects being delayed;
iii PfS spending more than its budget; and
iv the programme being unsuccessful or terminated.
In 2008, the Department and PUK agreed that the risks had changed and there was no longer a risk of PfS spending more than its budget, or a significant risk of the Department terminating the programme. They thus reduced the maximum IRR to 13 per cent for waves 4 onwards.
4.18 Forecast payments are set out in Figure 22. For its support so far to the first three waves, PUK is expected to receive a net cash return of £6 million. This would give it an IRR of 12.8 per cent, rather than 15 per cent, because of the delay in the programme.