FIN(3)-PPP-004

Context

King Sturge has been at the forefront of creating mechanisms for the public and private sector to engage with each other for mutual benefit. Examples that have received approval from the UK Government and are operating successfully include:

• British Waterways’ ISIS Regeneration Partnership;
• One NorthEast’s’ Buildings for Business Property Partnership;
• East Midlands Development Agency’s Property Investment Fund Blueprint; and
• North West RDA.

Further information is appended. These vehicles are generally referred to as LABVs (Local Asset Backed Vehicles). These transactions alone have leveraged in the equivalent of £400m of private sector investment. Further details of these projects are appended.

In addition we are currently in the process of advising on the creation of LABV type vehicles for:

• London Borough of Croydon
• London Borough of Newham
• Dudley Metropolitan Council
• Leeds City Council (and Yorkshire Forward RDA)
• Middlesbrough Council (ONE and Tees Valley URC)
• Newcastle City Council (Scotswood)
• Tyne & Wear City Region
• Advantage West Midlands RDA

With reference to your call for evidence, we would comment as follows:

A: The Benefits

The principle benefit for the public sector in adopting a LABV is the ability to attract advance private sector investment and expertise to bring forward the redevelopment of vacant sites and the possible relocation of the headquarter offices to new premises. Further benefits to the public sector in adopting a LABV are numerous and compelling. Although the benefits will vary from case to case they are usually of a property, risk transfer and/or organisational nature.

1.1 Property Benefits

Leveraging significant private sector investment and creating an opportunity that ignites real enthusiasm with major developers and funds (the past three LABVs arranged by King Sturge have raised c.£0.25bn investment);

Tapping into private sector appetite - previous projects have shown that there is an appetite to enter into this type of LABV.  This is not just from specialists in the PFI/LABV market, but from the wider property and funding market as a whole (institutional funds such as Morley (Igloo), Axa and The Prudential).  The attraction to the market relates to the advantages of the partnership structure and the length of the proposed project and returns generated.  

Achieving a significant premium over open market value by seeking out the synergies between various sites in the area to create an opportunity that will deliver a possible 40% premium on book value (based on the past three LABVs established by King Sturge);

The potential to increase assets ten-fold over ten years by utilising external debt (recent LABVs by King Sturge are forecasting a 10 fold return on public sector assets over ten years) thereby creating a more powerful regeneration vehicle to continue even more challenging development projects than the initial sites;

Satisfying best value requirements that would otherwise frustrate some regeneration opportunities (that are justified on social or economic but not financial terms) by cross subsidising between different sites;

A flexible structure and value for money with the partners retaining the ability to add projects under the main partnership framework, allowing them to procure at will rather than through a predetermined legal agreement giving significant fluidity and responsiveness to change. Further, the LABV can enter into sub-joint ventures by contracting with developers and other landowners beneath the main partnership and allowing the most appropriate developer/contractor to be selected for each specific project thus ensuring best value is always achieved;

Competitive lending by taking advantage of the private sector partner’s market credibility the partnership may be able to borrow senior debt at more competitive rates than without the partnership agreement in place - in particular where the LABV will benefit from the Council as occupier of a proportion of the assets created - further improving value for money.

1.2 Risk Benefits  

Transferring risk by creating a structure in which the public sector assets are assigned a guaranteed minimum price at the outset regardless of future outcomes;

Retaining control through the adoption of business plans set by the public sector at the outset and the creation of a 50/50 partnership structure that enables the public sector to block disagreeable private sector partner proposals if necessary over the life of the partnership;

Risk reduction through area uplift over the long term and cross subsidisation between a large number of sites lowers the risk profile compared to doing individual projects or even phases of individual projects.  This is due to the control that can be exercised over a wider area which will eliminate some of the uncertainties attached to one site.

1.3 Organisational benefits

Possibly the greatest challenge to successful large scale regeneration is effective organisation between the multitude of partners and agencies on both sides of the public and private sectors. Organisational development is especially challenging in the case of major regeneration projects as stakeholders include local, regional, sub-regional and national bodies from business, government and education.

Clearly this starts with agreeing strategic direction followed by establishing a structure, identifying resources and finally ensuring all parts of the organisation(s) are in constant communication:

Unfortunately this approach to urban change is rarely undertaken in UK regeneration. Rather, a highly fragmented situation prevails in which the perceived public and private divide is maintained with each side pursuing different objectives (usually social and economic versus financial); there is no decision making structure between the multitude of stakeholders; resources are not shared and finally communication is very limited due to fragmentation or non existent due to cultural differences between the public and private sectors.

LABV is an alternative that provides solutions to many of these strategic and organisational challenges. A properly structured LABV will:

align stakeholders behind a common purpose, vision and strategies;

establish a property holding and development structure with clear business planning and decision making processes;

provide resources in terms of assets, equity and appropriately geared debt; and

open channels of communication between the many parties involved.

Clearly this is a comprehensive approach to regeneration and renewal which is in effect a process of change management. Recognising the increasing complexities of major regeneration projects, King Sturge now includes management consultants with change management experience to provide a seamless service between our core property and financial services offer. Further information concerning the nature of King Sturge Consultancy - which also includes a dedicated public sector team - is at Appendix B.  

1.4 Regeneration Benefits

Incentivising the private sector partner to deliver over the longer term as returns are subject to performance of the partnership over 10-20 years as the whole area is uplifted (as opposed to the short term opportunism practiced by most developers which is often damaging to the prospects of neighbouring areas). First and foremost, this is the single most important benefit of the LABV approach and from which numerous other benefits flow;

Subsidising uneconomic early sites by the prospective future uplift of the whole area rather than relying on subsidies and fast disappearing European grant aid;

Building a genuine partnership rather than managing a process in order to tap into all of the creativity and enthusiasm of the private sector.

B: Policy Changes Needed

In recent months the debate concerning treatment of local authority assets has moved on considerably with the LABV model or equivalents mentioned in UK Government white papers and promoted by key advisors.

The policy changes needed in Wales are a whole hearted endorsement of the aims and principles behind City Development Companies and Local Asset Backed Vehicles:

C: Practical Guidance

Informed and experience procurement is key. If the right partner is procured and the right structure put in place then regeneration, financial, and organisational benefits can flow from the vehicle for many years.

appendix 1 What is An LABV?

A LABV is usually a limited liability special purpose vehicle (legal entity) owned 50/50 by the public and private sector partners with the specific purpose of carrying out comprehensive, area based regeneration and/or renewal of operational assets. In essence, the public sector invests property assets into the vehicle which are matched in cash by the private sector partner. The partnership may then use these assets as collateral to raise debt financing to develop and regenerate the portfolio. Assets will revert back to the public sector if the partnership does not progress them according to pre-agreed timescales through the use of 'options’ which prevent land-banking thereby assuring speedier delivery.

Control of the partnership is shared 50/50 between the public and private sectors which typically runs for an initial 10-15 years but with the option to renew if the parties elect after this period.  The purpose and long term vision of the vehicle is enshrined in the legal documents (memorandum and articles of association) which protect the wider economic and social aims of the public sector along with pre-agreed business plans based on the public sector’s requirements.

This control may be summarised as follows:

Initially:

• Shareholder documentation
• Business plan for the partnership as a whole
• Property/project specific business plans

Ongoing:

• Periodically agreed short and medium term plans
• 'Deadlock’ board control
• Power to 'deadlock’
• Regular meetings
• Financial regulations

The business plans are directed by a board drawn equally from the public and private sector which directs a small delivery team appointed by the board. This small but focussed team is responsible for the day to day operations.

appendix 2 - How does a LABV work?

The diagram overleaf summarises how the LABVs that King Sturge has created for various public sector clients can be adapted to meet the ambitions of CBC.

Key to the LABV structure is flexibility. The partners still retain the ability to add projects under the main partnership framework, allowing them to procure at will rather than through a predetermined legal agreement giving significant fluidity and responsiveness to change.

Further the LABV can enter into sub-joint ventures by contracting with developers etc beneath the main partnership and allowing the most appropriate developer/contractor to be selected for each specific project thus ensuring best value is always achieved.  The LABV can also encompass other public sector bodies and private sector interests if required who have land interests in the locality, which would result in a more comprehensive regeneration scheme.

A LABV is usually for a term of 10-15 years with the ability to renew if both parties agree. However the real potential for the LABV vehicle is longer term as the prospect for significant growth and reinvestment and therefore power to deal with increasingly challenging projects on other sites within the portfolio.

With reference to the diagram, chronologically a typical LABV would be expected to unfold as follows:

appendix C - Case studies

British Waterways

Strategy

King Sturge Financial Services has been the lead advisor to BW in the establishment of a PPP through which to develop BW’s property portfolio.  This PPP is now fully operational under the name ISIS Waterside Regeneration Ltd, with BW having chosen AMEC and Morley as its joint venture partners.

BW has a property portfolio worth in excess of £300m.  The aim of the PPP was to set up a long-term partnership with the private sector to bring in both additional funds and expertise and to take forward selected development opportunities whilst preserving BW’s wider objectives resulting from their status as a government body. Our role in establishing this PPP was advising British Waterways in the following four key areas:

Procurement Advice

We provided advice from pre-OJEC stage to Financial Close.  Our role included the production of all documentation provided to bidders through to contractual negotiations with the preferred partner.

Property Development Advice

The provision of property advice included selecting the most appropriate sites for the venture through to producing detailed information on these sites to enable detailed bids.  We pulled together planning, development, investment and grant aid services from King Sturge ensuring the seamless delivery of services.

Property Holding Vehicles Advice

Our experience of establishing and operating property holding structures enabled us to advise BW on the most appropriate vehicle to utilise for the PPP.  It is by being involved on a day-to-day basis that we are able to offer the most up to date advice to organisations such as BW on what the private sector market regards as advantageous for such ventures.

Financing Advice

Through our knowledge of property holding structures and development funding, we have an intimate understanding of the appropriate funding requirements of such ventures.  This has enabled BW to develop a robust model as a basis for the partnership that satisfies not only their financial return requirements but also their wider objectives of enhancing the waterways.

"KSFS provided excellent property, procurement and financial structuring advice on the establishment of this groundbreaking partnership.”

Stuart Mills, Head of Property, British Waterways

One North East

Strategy

King Sturge Financial Services has been the lead advisor to BW in the establishment of a PPP through which to develop BW’s property portfolio.  This PPP is now fully operational under the name ISIS Waterside Regeneration Ltd, with BW having chosen AMEC and Morley as its joint venture partners.

BW has a property portfolio worth in excess of £300m.  The aim of the PPP was to set up a long-term partnership with the private sector to bring in both additional funds and expertise and to take forward selected development opportunities whilst preserving BW’s wider objectives resulting from their status as a government body. Our role in establishing this PPP was advising British Waterways in the following four key areas:

Procurement Advice

We provided advice from pre-OJEC stage to Financial Close.  Our role included the production of all documentation provided to bidders through to contractual negotiations with the preferred partner.

Property Development Advice

The provision of property advice included selecting the most appropriate sites for the venture through to producing detailed information on these sites to enable detailed bids.  We pulled together planning, development, investment and grant aid services from King Sturge ensuring the seamless delivery of services.

Property Holding Vehicles Advice

Our experience of establishing and operating property holding structures enabled us to advise BW on the most appropriate vehicle to utilise for the PPP.  It is by being involved on a day-to-day basis that we are able to offer the most up to date advice to organisations such as BW on what the private sector market regards as advantageous for such ventures.

Financing Advice

Through our knowledge of property holding structures and development funding, we have an intimate understanding of the appropriate funding requirements of such ventures.  This has enabled BW to develop a robust model as a basis for the partnership that satisfies not only their financial return requirements but also their wider objectives of enhancing the waterways.

"KSFS provided excellent property, procurement and financial structuring advice on the establishment of this groundbreaking partnership.”

Stuart Mills, Head of Property, British Waterways

East Midlands Development Agency and English Partnerships

Strategy

King Sturge Financial Services (KSFS) was lead adviser to the East Midlands Development Agency (emda) and English Partnerships (EP) in establishing the East Midlands Property Investment Fund (EMPIF), a joint venture Public Private Partnership between the two agencies and Igloo Regeneration Limited.  The aim of the fund is to hold and manage emda’s investment portfolio and to undertake development activity targeted on the urban priority areas in the Region, to include key strategic regenerative sites in the ownership of both emda and EP.

Through the utilisation of the private sector expertise and funding, EMPIF will enable emda and EP to undertake more regenerative property development activity and to refurbish and redevelop their investment portfolio to maximise returns, sharing in these returns through the structure of the Partnership, but minimising their position with regard to the risks of undertaking such developments.  

Financing Advice

A bespoke financial model was developed in order to assess the viability of a number of investment and development option scenarios and to determine the most appropriate strategy to be undertaken.  The model enabled comparison of both the internal rates of return and net present values of the differing approaches, as well as providing indicative annual receipt forecasts.  

Lead Negotiator

KSFS, working closely with emda and EP, developed the strategy for the establishment of the joint venture vehicle and led the whole process up to and including the selection of the preferred partner.  The work undertaken by KSFS included writing a detailed business case, securing all internal approvals and subsequently providing assistance in presenting the concept to Government and gaining all necessary statutory approvals.  KSFS, in conjunction with emda and EP’s legal advisers, provided guidance and advice throughout the process of evaluating the short listed bidders to the selection of the preferred partner.  This included leading the negotiations with the preferred partner and advising on all the legal documentation necessary to guide and shape the future for the new vehicle.  

Structuring Advice

A new fund has now been created, using a Limited Partnership structure, and is operating successfully with emda, EP and Igloo Regeneration each having a 25%, 25% and 50% stake respectively.  

"King Sturge Financial Services played a key role as lead consultant to both emda and EP in the creation of Blueprint, a new and exciting property fund that will have a significant role in the on-going economic development of the East Midlands region."John Tatham, Finance Director, emda