4.19 The Department and PUK set up BSFI to invest in the risk capital of local projects and provide directors to LEP boards, to gain more influence over local delivery. BSFI buys 10 to 20 per cent of the equity of each project and invested £13 million up to March 2008 in ten LEPs and their PFI projects. It expects to invest between £52 and £83 million more over the remainder of the wave 1-6 projects in progress, of which the Department and PUK had committed to an extra £27 million by December 2008. This is risk capital which would otherwise have been put in by the private sector equity investors. BSFI receives the same terms and rate of return as the private sector, aiming for an average nominal rate of return of at least 12.5 per cent, before tax, over its portfolio. Its current forecast rate of return is 10.9 per cent.
22 | Forecast payments to PUK under the joint venture arrangements |
|
| ||
|
| Forecast payments to PUK | Net cash return | ||
| £m | £m |
| % | |
Contributions and returns payments paid to date (April 2004-March 2008) | 18 | 4 | -14 | n/a | |
Entire programme prior to 2008 renegotiation Wave 1-15 (April 2004-March 2022) | 106 | 140 | 34 | 14.9 | |
Committed projects | 20 | 26 | 6 | 12.8 | |
Remaining programme after the 2008 renegotiation Wave 4-15 (April 2004-March 2022) | 86 | 110 | 24 | 13 | |
Source: National Audit Office analysis of the Joint Venture Agreement Model |
|
| |||
NOTES 1 All forecasts assume that PfS costs remain constant in future and that there will be no further delays or performance adjustments. 2 They do not include any return to PUK for PfS's delivery of the Academies programme, payments made for secondees or rental payments for PfS's use of PUK's accommodation. 3 All contributions and returns stated at nominal value at 2007-08 prices. | |||||
4.20 The investment in risk capital provides the Department and PUK with greater practical influence through:
i Scrutiny of commercial viability. BSFI's investment committee, comprising two representatives each from the Department and PUK and an independent chair, scrutinises LEP deals to try to ensure they create a viable business.
ii A director independent of the client or supply chain. The independent director has been useful in resolving issues, promoting partnering workshops and mechanisms to improve joint working.
iii A focus on the LEP as a business. Because BSFI invests in the LEP and PFI project but not the supply chain, it promotes more robust governance and management structures, new business opportunities for the LEP and the appropriate distribution of profits and risks between the LEP and the supply chain.
iv A communication link between local projects and the national programme. Close contact between BSFI, the Department and PfS provides early warning of local problems. BSFI directors share knowledge between projects.
4.21 BSFI's powers over LEPs could potentially be retained if BSFI's share of equity was reduced to a token amount. The Department and PUK believe, however, that a significant exposure to risk capital is required to align the interests of BSFI directors with those of the private sector directors and to have influence on the LEP. Otherwise, they believe, the other parties in the LEP would not take them seriously and would exclude them from decision-making.
4.22 The Treasury believes the inherent conflict between acting as a client and as an investor will normally outweigh any benefits that may arise from such an investment. The Treasury agreed for the Department and PUK to invest in wave 1-6 BSF projects, via BSFI, because of the practical leverage this brings, but will undertake a review of this policy before the launch of wave 7.