Delivery structure

In developing the proposals, various different options have been considered and the proposed solution has been agreed by Barnet as the most appropriate structure for the challenges that the Borough faces. The proposals have been guided by a number of core principles, as follows:

 Hypothecation of the identified revenue streams is possible and a clear and transparent mechanism can be established for Barnet to be able to capture these revenues;

 Project risk is allocated to the party best placed to manage that risk. In reality therefore whilst some projects will involve the transfer of risk to the private sector, there will be other projects where Barnet or another public sector entity will be best placed to bring forward the project;

 The structure allows for flexibility and therefore is capable of accommodating a diverse range of projects. Analysis to date demonstrates there is no one ‘off the shelf’ solution that has been shown to work elsewhere and which is directly replicable in Barnet;

 Barnet does not have significant surplus or undervalued assets that could be contributed to generate or underpin investment under the Financing Plan, and therefore

the delivery structure needs to consider alternatives to the asset based structures that are emerging across the UK;

 Finance raised and revenues hypothecated will only be applied against the agreed infrastructure plan. Council tax levels will not be raised to fund the Infrastructure Plan;

and

 The proposals should take account of the need to build capacity, both in terms of resources and expertise. Whilst Barnet has an excellent track record in delivering major capital projects it does recognise that additional resource capacity will be needed to implement the Barnet Financing Plan.

Diagram 1 over the page sets out the proposed delivery structure. This diagram reflects the funding flows for financing the infrastructure plan – it does not reflect other aspects of the structure such as governance or decision making, which will require further investigation if the proposed BFP is agreed by Barnet is to be taken forward.

The proposed structure is effectively a function of two key variables:

I. Sources of finance – from public sources such as equity, assets or prudential borrowing, through to private finance, with principles such as hypothecation supporting some sources of finance; and

II. Procurement route – considering the most appropriate procurement option in terms of capacity, risk appetite, risk transfer etc. Again the spectrum is from direct delivery in which the public sector takes all of the risk, through a PPP type solution with a degree of risk and reward sharing between public and private sectors and to the other extreme of 3^rd party delivery.

Diagram 1 – Barnet Financing Plan delivery structure

The role of Barnet

Barnet has a strong track record in delivering major capital projects and also in innovative use of its Prudential Borrowing powers with the added benefit of a low cost of capital. Barnet will therefore continue to be a key delivery entity going forward. However it is also important that the Borough is not exposed to projects or risks that it is not best placed to take on and therefore risk transfer will be achieved either through the creation of a new Special Purpose Vehicle (“SPV”) (called the Local Growth Fund (‘LGF’) – see below) or by transferring the project risks through a managed procurement process. Barnet will be the primary conduit for collecting hypothecated revenues which would then either be retained by the Borough or passed to the LGF. The Council will also assume the strategic role of matching hypothecated revenues with other ‘traditional’ sources of funding such as from national government programmes or the Borough’s s106 policy. Section 4.2 sets out the types of project that Barnet would either take on directly or which would be procured by it.

Treasury

Public sector risk Private sector risk

(b)Shortfallunderwrite

Public sector risk Private sector risk

(b)Shortfallunderwrite

Outputs & Revenue generation

The Local Growth Fund (‘LGF’)

The rationale for establishing an SPV as an arms length vehicle is to manage risk exposure to the Borough but also to seek to raise private finance that is outwith the Council’s prudential borrowing regime. The ownership of the LGF will need further discussion but the intention is that the Council will not have a controlling stake in it. The current preferred structure is that the LGF is jointly owned by key public sector stakeholders and therefore closely linked to the Local Strategic Partnership and Local Area Agreement. There is the potential that some of the finance raised by the LGF would be off balance sheet for the public sector and certainly non-recourse to Barnet. Various options have been considered for leveraging private finance and the ideal solution would be for a private sector equity partner to effectively guarantee the debt finance raised in the LGF against hypothecated revenues allocated to it from Barnet. The only basis where this might work is if the private partner has a step in provision – probably against development sites – in the event of default by the LGF on its borrowings. However, as previously stated in the key principles above, Barnet has already disposed of the vast majority of its surplus assets and therefore the step in rights of the private partner would be insufficient to make this preferred funding option a viable option.

The proposed solution therefore enhances the limited assets transferred to the LGF by Barnet with a shortfall agreement provided by Government which provides a private sector lender with sufficient comfort to allow the LGF to raise finance from the hypothecated revenue streams. The core principle of the shortfall agreement is that Government will guarantee that the revenues will not fall below a stated proportion of the hypothecated amount (estimated at between 50% and 70% depending on the nature of the revenue stream). More detailed work will be required on the exact nature of the shortfall agreement but we believe that it is possible that such an agreement could be considered off balance sheet for the public sector based on our understanding of the current accounting legislation. In respect of this shortfall agreement it is worth emphasising that:

 The LGF is not an essential part of the BFP but without it then the complete risk for the financing aspects of the Plan would fall to Barnet, although clearly project specific risks could still be managed. The shortfall agreement is the mechanism by which private finance can be raised by the LGF given its limited asset base. It is also questionable whether Barnet would be willing to take on the full risk of the hypothecated revenues being available as forecast and therefore some comfort will be sought from Government, either for the LGF or for Barnet;

 Without the shortfall agreement it is difficult to see a private sector lender taking the risk on the hypothecated revenue streams, given the uncertainty of some of the key assumptions that underpin the hypothecation proposals. Therefore, all finance for the

BFP would be on balance sheet for the public sector and the only risk that could be transferred is project risk on delivery; and

 It is possible that as the market develops and the hypothecation approach can be shown to work then the shortfall agreement proposals could be re-negotiated or any public debt could be re-financed.

The LGF could also encompass some of the capacity needed to drive delivery, for example through an outsourced contract for services.

Project identification and allocation of responsibility

As previously stated, the above diagram represents the funding flows rather than the governance structure or decision making process. Our proposal is that a rolling business plan would be prepared and agreed by all key stakeholders across the public sector (through the Local Strategic Partnership and Local Area Agreement process, being the ‘LSP’ and ‘LAA’

respectively) which provides a strategic consultative forum. This business plan would set out the planned infrastructure and assess priorities against the finance that can be raised from the hypothecated receipts (be it prudential borrowing or private finance). Inevitably this will be an iterative process and projects will need to be prioritised against a range of measures that the LAA process identifies. The business plan will also establish;

 Which entity (Barnet, LGF, other) should be the delivery entity?

 What would the preferred procurement routes for given projects referenced in the diagram as a choice between direct delivery or project risk transfer (in whole or in part) and referred to in the diagram as ‘project finance based delivery?

Value for money

At a structural level more detailed due diligence will be required as part of the business planning process in order to assess value for money against a more robust infrastructure plan. However the core principle on which the Barnet Financing Plan has been developed is that of risk transfer, both in terms of the infrastructure projects and the finance raised against the hypothecated revenue streams. It is reasonable therefore to assume that the proposed solution could pass a value for money assessment, whilst recognising that a definitive assessment will need to be deferred until the full business plan is prepared.

Further details of the how it is envisaged that the above structure would deliver the identified infrastructure priorities and further discussion on the capacity necessary to implement the plan is set out below.