HMT 16.1.15

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Re-building the Fabric of our Local Communities
By bringing together
The Public Sector, Investors & Business
In an Integrated National Solution
Underpinned by
Central and Local Government
Trust, Fairness, Transparency

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Contents
Introduction Page 3
Specific questions posed by John Salvador
In his email of 23 January 2014 Pages 4-8
The National Wealth Service Model Pages 9-10
The NWS Model in relation to the National Audit
Office (NAO) Report dated 28 April 2011
(Appendix 1) Pages 10-14
Reform of the Private Finance Initiative Pages 14
Conclusion Page 15
Appendix 1: NAO Report 28 April 2011 Pages 16-25
Lessons from PFI and other projects
Appendix 2: Treasury Call for Evidence - Pages 26-60
The NWS Response 28 February 2012
Appendix 3: Evidential Pieces on Affordable Pages 61-66
Housing
Appendix 4: NWS Executive Summary
Document – Rt Hon Danny Alexander MP
Chief Secretary to the Treasury
Thursday 24 October 2013 Pages 67-70
Confidentiality & Disclaimer Page 71

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Introduction
The National Wealth Service (NWS) was founded on 1 May 2010, in response to the financial
crisis in the provision of Public and Private Sector Finance for Community Infrastructure
projects in the four key areas of Affordable Housing, Care, Education and Health.
With the Public Finance Initiative (PFI) becoming increasingly discredited as expensive and
not fit for purpose, Public Sector austerity measures resulting in decreased funding for the
Housing and Communities Agency (HCA) and money earmarked for the Building Schools for
the Future programme becoming scarcer, there was a need for “Modernisation” and an
alternative Funding Model.
The National Wealth Service Model (NWS Model) was designed to learn from the concerns
expressed towards PFI, articulated in the National Audit Office (NAO) report, authored by the
Comptroller and Auditor General on 28 April 2011, entitled “Lessons from PFI and other
projects”.
The NWS Model looks to understand all the concerns and lessons learned from the PFI
experience and provide a long term National solution based on “Trust, Fairness and
Transparency”, with all stakeholders sharing equitable risk, incorporating fair but not
excessive profits and complete transparency from the beginning to the end of the process.
The traditional route of Local Authorities has been to secure debt through the Public Works
Loans Board (PWLB), utilising the monies to build and own assets, recently with their
perceived uncertainty on the interest rate charged, the Local Government Association (LGA)
has taken steps towards a Local Authority Bond Agency (LABA).
The NWS Model will sit seamlessly side by side with both the PWLB and any LABA, as it
complements these debt models by providing an equity type alternative, where assets are
owned within a National Wealth Service Community Infrastructure Fund, allowing for a
smoothed National solution, incorporating all areas of the United Kingdom.
The National Wealth Service Model is a solution for the Nation as a whole, bringing together
the Public Sector, Investors and Business in a Partnership based on trust, fairness and
transparency that seeks to re-build the fabric of our local communities.
Gary Walker, CEO
The National Wealth Service

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Specific questions posed by John Salvador – email 23 January 2014
Rationale
The rationale for a National solution to the issues surrounding Community Infrastructure, via
a National Wealth Service is extremely simple and compelling; it covers both the concept of a
“Pilot” scheme to prove efficacy if required, together with that of a holistic solution that is
fully implemented at outset.
Just as we had a crisis in the health of the Nation after the Second World War and
formulated a National Health Service to facilitate health provision, in these times of financial
austerity and the widening economic gap between certain areas within the United Kingdom,
we require a National Wealth Service to facilitate Community Infrastructure provision,
allowing a Nationwide, central Government backed, solution in the four key areas of
Affordable Housing, Care, Education and Health.
The current “spaghetti” type range of solutions is confusing, inefficient, backward thinking,
does not focus on the bigger picture, long term solution that is required, does not have the
backing or understanding of the public who make up our communities, discourages bidding
by commercial organisations and needs reorganising in to a simple trusted system, The
National Wealth Service, that provides fairness and transparency for all stakeholders.
This will not preclude any present solution, either private or public, nor will it inhibit any
future solutions, it will provide a simple to understand, value for money system that will
allow the smoothing of investment returns, therefore enabling the fabric of local communities
to be renewed, in even the most deprived areas of the United Kingdom.
The solution is fair and equitable, with all stakeholders aligned for the common National
good, with The NWS and expert Partners, such as AHR and Sweett, acting as the “Honest
Broker/Prudent Man” for both the public and private sector.
In terms of attracting institutional investors, there needs to be Central and Local Government
endorsement, a National Wealth Service Community Infrastructure Fund under FCA
regulation, with the arms length NWS taking the long term view on behalf of all stakeholders
and the Nation.
Evidence
There is much empirical evidence available within both Government and independently
credited sources of the need for an effective solution that brings together The Public Sector,
Investors and Business in a climate of Trust, Fairness and Transparency.

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Appendix 3 gives an amalgam of various Governmental sources regarding affordable housing,
explaining housing guarantee, the interaction of agencies, and the extremely complex bidding
process, how you have to be an RP or community-led organisation etc.
This is evidence of both the need, but highlights the sheer bureaucracy and opaqueness of the
current available solutions, which are not conducive to a nationally coordinated response to
the issues of economies of scale, business involvement and the attractiveness as a long term
investment for interested institutions and pension schemes.
Similar evidence is available throughout the other key areas of Community Infrastructure, but
for the purpose of this paper, it is the broad thesis that evidence is available to make the
compelling case for a National Wealth Service to be the public face within the solution.
Potential Risks
The biggest potential risk is that Central Government does nothing and lets the current status
quo prevail, a discredited PFI system, a disjointed set of what appear to be uncoordinated
responses, no public recognition of what is been achieved, nowhere near the levels of
institutional investment that is required to rebuild the fabric of our local communities.
Even the large commercial organisations are now shying away from bidding; they have come
to the conclusion that in most instances it is a futile and extremely costly and inefficient way
of securing new contracts.
There is not the pace of renewal of community infrastructure that is needed; there is no
Community Dividend in the form of long standing local businesses being able to provide long
term local employment prospects, through the knowledge that under the current system they
have zero chance of bidding success.
There is no local Environmental Dividend from the use of renewable energy, with feed in
tariffs utilised for the benefit of local communities.
What is the biggest risk to Central Government if they support the proposal for a National
Wealth Service and a National Wealth Service Community Infrastructure Fund?
It is simple, initial fund seed investment, the very minimal cost to cover the NWS expansion
costs to become a world class organisation, with its world class partners. Even in the very
worst scenario that there is no leverage of this seed capital from other institutional investors,
the Government will have invested in the excellent facilities that will be built.
There is no risk in terms of additional Government spending, as this small amount of seed
capital will be redirected from other programmes, already announced and funded in the
existing spending plans.

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In terms of a Central and/or Local Government income covenant, this is basically a
mechanism to cover potential voids in the use of facilities.
In its purest form it is “rent”, analogous to the coupon on any debt instruments, but without
the need to repay any capital, therefore a very cost effective solution, exactly the same as a
commercial organisation choosing to lease offices, because asset ownership is not a core
business requirement, capital can then be deployed more effectively in to core business areas.
In its most “debt like” form, it is akin to capital and interest, The NWS Model can
accommodate both, or any combination, but the fundamental question remains, “In the future
is the public sectors role as facilitators of services for their communities or asset owners?”
It is not the purpose of this paper to discuss in great detail the thesis and risks involved for
institutional investors, but it is prudent to highlight that these have been tested with investors
and their trustees and advisors, with the biggest single impediment being that the risk is
unacceptable without Central Government financial support and endorsement.
Benefits
We understand the rationale behind “The Five Case Model Methodology”, incorporating its
five key components of
- The Strategic Case – compelling case for change
- The Economic Case – represents best public value
- The Commercial Case – deal is attractive in the market place and commercially viable
- The Financial Case – proposal spend is affordable
- The Management Case – what is required is achievable
With the use of various tools within each of the five cases, such as, SMART – Specific,
Measurable, Achievable, Relevant and Time Constrained, CBA – Cost Benefit Analysis, NPV
– Net Present Value, DBFO – charging and risk in each of the Design, Build, Funding and
Operational phases and PPM – a recognised Programme and Project Management
methodology.
For the purpose of this paper we have assumed that because there is no requirement for any
new Government money, either capital or in the form of guarantees, the programmes from
which any monies are redirected will have already been subject to The Five Case Model
Methodology, therefore by definition it has already passed that burden of proof within the
existing system.

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The Strategic Case
There is a compelling need for change in the way in which the system is perceived, there
needs to be a generational idea that brings together the components required to successfully
rebuild the fabric of our local communities, that solution is The National Wealth Service.
A National Wealth Service will become an instant part of the public’s consciousness; it will
be trusted by the Public, by Central and Local Government, by Business, by Investors to
deliver value for money, fairly and transparently for the benefit of all stakeholders equally.
The Economic Case
Best public value is assured; there will be equilibrium between risk and reward, which is
shared fairly amongst all stakeholders enabling the renewal of the fabric in our local
communities.
There will be National and Local Community Dividends in the form of long term sustainable
local employment and Environmental Dividends in the form of innovative use of renewable
energy sources and the recycling of financial incentives, such as feed in tariffs.
The National Wealth Service Community Infrastructure Fund will be priced at a level that is
accepted and recommended by Government, providing the vehicle for the smoothing of
investment returns across the United Kingdom, enabling economic benefit to be shared in not
only the most affluent parts of UK society, but also in those that are currently deprived.
The Commercial Case
The National Wealth Service Model is predicated on providing investors with an acceptable
long term income stream, with or without the prospect of capital asset appreciation, preferably
with RPI, CPI or other form of acceptable index linking.
The NWS Model provides business with an acceptable profit margin, which stimulates local
and national growth, but is deemed fair by Local and Central Government, with transparent
open book accounting at all stages of the process.
Risk and reward are equitably shared between all stakeholders.
The Financial Case
The proposal allows for re distribution of existing spending commitment, therefore by
definition it is affordable.
Affordability and value for money will be potentially significant as Government support
enhances the probability of investment leverage from institutions and pension funds.

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The Management Case
The requirements from Government do not entail any significant change in already
established policies, such as the Green Bank, the Money Advice Service, HCA funding,
Mortgage Guarantee etc, therefore should be achievable with minimum disruption.
Business Justification Case (BJC)
Whether or not Government backing for The National Wealth Service would be considered a
“Minor Spending Proposal” would be for Government and HMT to decide.
However, if this were the case the one stage business development process could be used,
answering the three questions
- Where are we now?
- Where do we want to be?
- How are we going to get there?
In many ways these questions have all ready been answered, but to summarise
- We currently have a whole range of costed initiatives, under a spaghetti of various
names and guises, providing various routes to finance for Community Infrastructure
projects, but it doesn’t appear to be a joined up approach. There is considerable waste
throughout extremely complex systems of procurement and bidding, which does not
serve our communities efficiently or cost effectively. The current multiplicity of
schemes do not encourage engagement of the business sector or the investment world,
we are left without leverage from the Government monies earmarked for the projects.
There is no real public recognition, all they understand is that there is no development
of their communities, no regeneration of the community fabric, no long term job
creation or community and environmental dividends
- We want a nationally recognised entity that oversees the renewal of the fabric of our
local communities, in the four key areas of Affordable Housing, Care, Education and
Health, that is trusted by all stakeholders, is fair to all stakeholders and is openly
transparent for all stakeholders
- By Government supporting the introduction of The National Wealth Service

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The National Wealth Service Model
There is overwhelming evidence that investment in to the four key areas of Community
Infrastructure, namely Affordable Housing, Care, Education and Health, is at best patchy and
at worst non-existent in the more deprived, low value rent areas of the United Kingdom.
There is a willingness on behalf of Central Government, Local Authorities and some Investors
to provide finance in to Infrastructure as a whole that will give a PFI like investment return,
but generally because there is competition for funds and no delineation of asset class, the
funds flow to new General Infrastructure e.g. HS2, roads, those projects identified in the
National Infrastructure Plan etc.
The process for institutional type investment, where there is a fiduciary responsibility, will, in
the majority of situations where “Infrastructure” is defined as a single asset class, result in
fund flows to the projects which offer the best risk/reward characteristics, invariably
bypassing Affordable Housing, Care, Education and Health (not including major PFI Hospital
construction).
The NWS has brought to the lexicon the concept of Community Infrastructure as a separate
asset class for institutional investors, where Trustees, Investment Advisors and Managers will
have the ability to allocate assets to General Infrastructure and Community Infrastructure, in
the same way as they allocate to UK, European, US, Japan, Global equities etc within their
portfolios.
In order for the above concept to be accepted there is a need for Central Government to
strategically change its view on the whole area of infrastructure, realigning the existing
National Infrastructure Plan accordingly.
Strategically, Central Government should embrace the idea of a National Wealth Service to
facilitate the Re-building of the Fabric of our Local Communities in the four key areas of
Affordable Housing, Care, Education and Health, whilst still adopting their stance on General
Infrastructure, two distinct and separate asset classes for investors to consider.
Each asset class will then have its own identifiable and quantifiable risk/return profiles, with
each asset class having the ability for separate institutional investment, without the existing
issues surrounding fiduciary responsibility.

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To evidence and understand how the NWS Model addresses all the issues identified by the
NAO in its report “Lessons from PFI and other projects” dated 28 April 2011; a copy of the
Summary sections is attached as Appendix 1.
In response to this NAO report the following highlights how The NWS Model will provide a
perfect addition to the range of current funding options that are available for infrastructure in
general, but more importantly, how to secure funds in to Community Infrastructure, the
rationale behind the formation of the NWS in May 2010.
The NWS Model in relation to the NAO report dated 28 April 2011
The current system seems full of duplication, waste and complexity with every project
appearing to some extent to be reinventing the wheel, the same Value for Money (VfM) test
performed, fees racking up against each project, with the acknowledgement in the Treasury
process that the costs are so prohibitive that any project under £20 million will not be suitable
for PFI, the evidence would also suggest that VfM was marginal in many other cases.
The NAO report, copy attached at Appendix 1, compiled by the Comptroller and Auditor
General dated 28 April 2011, entitled “Lessons from PFI and other projects” encapsulates the
issues that have occurred, and works as a template for how The NWS Model is differentiated,
allowing a clear evidential comparative source to highlight how these identified issues can be
positively addressed, in effect disrupting the discredited status quo.
In the Summary section at 2 there is the following statement, “This has included a standard
contract model and specialist private finance units to support projects. In return, good practice
and experience from non-PFI projects can help improve procurement and management”. The
NWS concept takes this one step further with the notion of a “Standard Model” that has
passed through the 3 stage assessment process for VfM and is adopted and endorsed by
Central Government, facilitated through a National Wealth Service.
The NWS Model encompasses a cost plus methodology for contractors, giving a fair but not
excessive profit, open book accounting that gives both Local and Central Government total
transparency, Financial Conduct Authority (FCA) registered funds giving comfort to
investors, fair, quantifiable and acceptable investment returns, equitable sharing of risk
throughout the project and alignment of interest between all parties over the initial 25 year
period.

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The NWS Model fulfils the identified need at 4 in the summary “........has increased the
pressure on the public sector to obtain better outcomes for less. This includes the need to
consider a range of possible financing models.........”
As you move to the section “Scope of this report”, at 8 it states “In order to secure the best
value for money, public sector bodies need to act as intelligent customers across the three
phases to a capital project”, as it is clear that duplication and waste can occur. Examples
abound, with Price Waterhouse Coopers, as reported in The Sunday Times on 26 June 2011,
admitting at a Treasury Committee hearing the week before that they had charged up to
£800 000 for providing financial advice to health trusts on a single hospital been built under
the PFI scheme, and further admitting that it netted £250 000 to £400 000 for advising
Councils on each school. The premise of the NWS Model is that once the initial due diligence
has been completed on the model, the cost savings over PFI will be significant, there will not
be the need for the “reinvention of the wheel” for every project, the cost savings in the system
will flow.
The “Key findings” section beginning at 10 could have been drafted with the NWS Model in
mind; the first three bullet points support the evaluation of the one model concept that is fair
and equitable to all stakeholders. The holistic approach gives total transparency; contractors
can then choose to say yes or no to the terms on offer, the NWS and its partner organisations,
including the National and Multi-National firms AHR (www.ahr-global.com) and Sweett
(www.sweettgroup.com ) act as “Honest Broker/Prudent Man” in the model, providing the
private sector knowledge and expertise so that Local Authorities are acting as intelligent
customers through a trusted National system and framework.
At 11, 12 & 13 the need for “accurate data” is identified, the NWS Model satisfies all these
criteria, from open book accounting to publically available investment performance data for
the FCA registered funds, this can include an element of performance sharing if returns
become unacceptably high. With regard to what investment returns are currently been made
on PFI schemes, you only need to ask the institutional investors who have previously invested
in these areas, they will confirm “north of 9%” and the data is freely available in the accounts
of pension funds in their investment evaluations. However, the key extract in 13 is that
“......equity investors are aligned to the risks they are bearing.” the NWS Model assures a total
alignment of interest between all stakeholders, Treasury/Local
Authorities/Government/Contractors/Maintenance providers and Investors throughout the
whole life cycle of the facilities.
Sections 14 & 15 explore the “Skills, capacity and experience” elements of PFI, the simple
answer is that by utilising the commercial skills available via the NWS Model, the public

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sector can be comforted that their interests are been catered for. AHR, Sweett and our other
business partners utilise their commercial procurement models to establish the capital needed
from the National Wealth Service Community Infrastructure Fund, this is then expressed as
easily identifiable yields on capital employed, suitable contractors can then decide if they
want to engage with the process, but at the reasonable cost plus basis already agreed by the
Treasury within the NWS Model.
As you continue through the report, at 16 costs are transparent, contractors will be responsible
for overruns etc, the NWS procurement procedure, performed by Aedas, Sweett and others
vastly experienced in this discipline, ensures that there is nothing “hidden” and at 17, as
previously stated the NWS Model is the ultimate iteration to “The use of standard contract
models.......”, the reinvention of the wheel PFI route and the associated costs can potentially
be taken out of the system completely.
The business case assumption identifies at 18 costs of debt finance, the NWS Model
addresses this as a premium above the starting income on the equivalent 25 year Government
Index Linked Gilt. However, the reference to leaving liabilities off the national balance sheet
seems to be somewhat at odds with Section 1.17 of HM Treasury VfM document
(http://www.hm-treasury.gov.uk/ppp_vfm_index.htm) where it states “PFI investment is taken
on VfM grounds alone, whether the investment is on or off-balance sheet is a decision taken
by auditors and is not relevant to the VfM of the procurement route”.
Flexibility concerns expressed in 19 are addressed in the NWS Model; it is not the use of the
facilities that is at the core of the model, it is the fact that the income is covenanted by Central
Government or the Local Authority, therefore if demographics change there will be an open
dialogue. A pertinent example may be the current reported problems of Local Authority
schools procured under PFI having issues when converting to Academy status, as long as the
income covenant is secure this can be catered for very easily.
Significantly at 20 the report states “There has, however, generally been little evidence of a
collaborative approach to identifying efficiencies with little use of open book accounting of
private sector costs”, as previously explained at the heart of the NWS Model is a collaborative
approach by all stakeholders, with open book accounting at its core. 21 examines why
Government has not been able to use its market position to obtain economies of scale, the
National Wealth Service will become the conduit for this to become a reality.
The Conclusion on value for money section details why “.......... PFI may not be suitable for as
many projects as it has been in the past.” some observers might go further and questions
whether or not PFI has been fit for purpose in the past.

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The NWS Model addresses all the issues raised within the report to this point, providing a
holistic framework solution that will be collaborative, open to scrutiny, flexible and in the
National interest, with appropriate risk sharing and fair but not excessive profit margins and
investment returns. Endorsement of the NWS Model at the outset, through the three stage
Treasury VfM process, will enable identifiable cost savings to flow directly through the
system, allowing projects of all sizes, not just those larger than £20 million to be considered
and implemented.
When the NWS Model was designed during the early months of 2010, it was known that it
was not possible to achieve a perfect solution, but what seemed very clear was that there
could be a model that served the National interest in a better way than the PFI system, that
worked in conjunction with the existing PWLB solution and in the future with any Local
Government Authority (LGA) Bond Agency. Indeed it could be evidenced that the NWS
Model, with similar backing from the LGA, could prove to be a more advantageous and cost
effective route that a debt solution.
As you read through the Recommendations section of the report, all the legitimate concerns
regarding PFI expressed by the Comptroller and Auditor General, there is a realisation that
the NWS Model, although not perfect, does address the majority of the highlighted
observations.
a You can achieve all these recommendations by simply setting up the National Wealth
Service and the NWS Model, with Government at its heart, and Local Authorities
taking control of their own destinies. You will have collaboration/cost plus/open book
accounting/transparent investment returns through an FCA registered funds/fair and
equitable risk sharing/maintenance & life cycle expressed as a % of capital employed,
total transparency within a readily understandable system, facilitated by an untainted
and trusted brand “The National Wealth Service”.
b The facilities can be used for any purpose, giving the required flexibility, at the core is
the income covenant, as long as that remains facilities will not become obsolete, and
as in “a” above and subsequent recommendations, benefits and savings will flow
through this National solution, that gives Localism the input and control required.
c Commercial skills and expertise are harnessed through the National Wealth
Service/Aedas/Sweet partnerships, which ensure that all stakeholders are treated
fairly, risks are balanced and oversight is via existing Treasury mechanisms.
d The NWS Model is predicated on taking the practice of “Standard contract models” to
its ultimate iteration, that it is the NWS Model that is endorsed through existing

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Treasury processes, and everything else flows from this. The NWS becomes the
benchmark and one of the default option, always giving VfM, with all the repetitive
costs that characterised PFI becoming obsolete. In terms of OJEU etc, the procurement
criteria is based on the NWS Model, once this is agreed Local Authorities will not
have to go through the inordinate expense of reinventing the procurement process at
every turn, the cost savings will again flow. If we revert to the HM Treasury VfM
document, we can see the concept of “Single Bidder Projects” at Box 1.4, with
clarification at 4.9. It would therefore appear that the NWS Model could satisfy these
criteria, but some work would have to be done on this aspect.
e The NWS Model has in built independent scrutiny at its heart, the National Wealth
Service Community Infrastructure Fund been independently governed by the FCA
regulation, with stated and verifiable investment returns that revert to capital
expenditure on an open book accounting, cost plus basis, with the model endorsed
through existing Treasury VfM processes.
f & g This is achieved in one solution with the NWS Model, there is no conflict between
Government exercising its buying power and local purchasing, it is an independent
process performed within the NWS Model, which is initially endorsed and seeded by
Central Government. This gives comfort to institutional investors, who then also
invest in the fund, the NWS approaches Local Authorities with its funding Model and
they respond with projects if they want to. VfM, intelligent customer status etc is
assured, and like any market, if local purchasing can secure better terms they are free
to choose that route. The NWS positively encourages this, with as many local SME’s
involved within the process as possible, leading to sustainable long-term Community
Dividends.
Reform of the Private Finance Initiative
To give further background to The NWS and The NWS Model we submitted a response to the
Treasury Call for Evidence, deadline Friday 10 February 2012, a copy is attached within
Appendix 2.

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Conclusion
In conclusion, the issues and problems surrounding the provision of Community
Infrastructure in the four key areas of Affordable Housing, Care, Education and Health is an
acute one in these times of financial austerity, particularly with a great number of individual
projects being below £20 million.
Appendix 4 details the Executive Summary document presented to The Rt Hon Danny
Alexander MP, Chief Secretary to the Treasury, and his Special Adviser on Thursday 24
October 2013. It encapsulates why this elegant solution can be fit for purpose in a relatively
short space of time following the extensive research and preparatory work that has already
been carried out by The NWS and its world class business partners over the past four years.
The National Wealth Service and its Model provides a solution that although complex in
terms of the mechanisms needed to bring about its reality, has at its heart a very simple to
understand message, communities need quality facilities within an affordable and value for
money framework.
Central and Local Government needs access to business expertise and institutional investment
over the long term, leveraging their own investments in a cost effective and value for money
solution, in the process gaining UK and International recognition for their achievements in
putting in place an innovative and vital framework, that will prove to be the catalyst for
lasting change.
Government support of The National Wealth Service, with its existing world class business
partners, AHR and Sweett, and the extensive work it has carried out with institutional
investors and pension funds, will bring all the disparate strands together in an organisation
that is instantly recognisable and trusted by all stakeholders.

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Appendix 1
National Audit Office (NAO)
Report by the
Comptroller and
Auditor General
HC920
Session 2010 – 2012
28 April 2011
Lessons from PFI and other projects

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Summary
Procuring public projects
1 Government uses a range of procurement methods for its projects and
programmes. This report draws out lessons from recent experience that the public
sector needs to address to achieve the best commercial outcomes in the current
economic environment of spending constraints.
2 The Private Finance Initiative (PFI) is a particular form of procurement where there is
a large body of experience. Lessons from the use of PFI have wider application to other
forms of Government project. Key enablers of the PFI model have included the range
of valuable guidance, support and project assurance developed by the Treasury and
departments. This has included a standard contract model and specialist private finance
units to support projects. In return, good practice and experience from non-PFI projects
can help improve PFI procurement and management.
3 In October 2009, we summarised key messages from the 72 PFI reports which
we had then published in a paper to the Lords Economic Affairs Committee. The paper
concluded that private finance can deliver benefits but is not suitable at any price or
in every circumstance. Our paper also highlighted that, notwithstanding the available
guidance, we had been unable to identify a truly robust and systematic evaluation of the
actual performance of the use of private finance at either a project or programme level.1
4 Changes in market conditions have, however, created new challenges. Uncertainty
in the financing markets, since the onset of the credit crisis in 2008, has made the use
of private finance more expensive. This factor, together with public spending constraints,
has increased pressure on the public sector to obtain better outcomes for less. This
includes the need to consider a range of possible financing models and to seek greater
efficiencies in existing contracts.
5 The type of project that Government aims to procure is changing. With large
programmes to develop social infrastructure such as hospitals and schools having
been delivered in recent years, the future focus of spending will be on economic
infrastructure2
such as energy and transport projects. According to the Government,
around £200 billion will need to be spent on economic infrastructure over the next five
years,3
with the majority of the £200 billion expected to come from the private sector. At
the same time, the Government is seeking to be more efficient in its spending to deliver
annual infrastructure savings of £2-3 billion.4

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1 See http://www.nao.org.uk/publications/0809/private_finance_projects.aspx
2 The network and systems in energy, transport, digital communications, flood protection, water and
waste management.
3 Infrastructure UK, National Infrastructure Plan 2010, October 2010.
4 See http://www.hm-treasury.gov.uk/iuk_cost_review_index.htm
6 Recent National Audit Office PFI reports have examined projects and
programmes being undertaken in these new market conditions. The high level lessons
learned from recent PFI experience will be relevant to both PFI and other areas of
Government expenditure.
Scope of this report
7 This report mainly draws on findings from our five recent PFI reports examined
by the Committee of Public Accounts in 2010, which between them considered 162
projects with a capital value of £18 billion. The five PFI reports (see Appendix Two) are:
- Procurement of the M25 private finance contract
- Financing PFI projects in the credit crisis and the Treasury’s response
- PFI in Housing
- The performance and management of hospital PFI contracts5
- Delivering multi-role tanker aircraft capability6
We also refer to other National Audit Office reports on non-PFI projects
(see Appendix One on scope and methodology) to further illustrate issues relevant
to all projects.
8 In order to secure the best value for money, public sector bodies need to act
as intelligent customers across the three phases to a capital project: specifying the
requirements; negotiating the contract and arranging finance; and managing the asset
and service delivery. In a PFI project these phases are dealt with in a single contract.
As well as taking care over the contracts that are entered into, public officials need, in
the current economic environment, to give greater emphasis than previously to effective
service contract management to obtain best value.
9 This report is in four parts which focus on the issues which need to be
considered as a capital project passes through its three phases. Part One highlights
the characteristics of PFI projects and the aspects that are relevant to other forms of
procurement. The remaining parts consider the key enablers of successful projects in
the context of:

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- Making informed decisions where there are alternative courses of action (Part Two);
- Ensuring the intended outcomes from projects and programmes are delivered
(Part Three); and
- Pushing the boundaries of existing commercial arrangements to get better
outcomes from projects and programmes for less (Part Four).
5 Referred to as PFI in hospitals.
6 Referred to as Future Strategic Tanker Aircraft.
Key findings
10 We identified from our reports, the key enablers that allow the public sector to act
as intelligent customers across all phases of a project. They are:
- accurate data to make informed choices; provide accurate estimates of time and
cost, get better outcomes for less, and secure value for money;
- skills, capacity and experience to assess whether complex major projects
represent a good deal over the life of the contract;
- effective accountability and project assurance with appropriate
empowerment to ensure that projects and programmes only go ahead where they
will deliver value for money; and
- challenge to the method of procurement, the scope of the deal and the business
case assumptions to identify opportunities to obtain better deals.
Accurate data
11 There is no clear data to conclude whether the use of PFI has led to
demonstrably better or worse value for money than other forms of procurement.
Although most PFI projects are delivering the services expected, we have previously
highlighted the lack of systematic ongoing value for money evaluation by departments
of operational PFI projects.7
This was raised as a concern by the Committee of Public
Accounts in their recent report on PFI in housing and hospitals.8
Consequently, the
departments had not had appropriate data available to assess the merits of using PFI for
future projects. The Department for Communities and Local Government told us it has
now addressed the need for better data for its PFI housing programme.
12 Procuring authorities fail to specify the essential cost and operational data they
require. Projects have incurred delays, extra costs and have failed to explore potentially
beneficial alternative solutions as a result of not gathering the best data to inform decisions.
This was an issue in our reports on the PFI deals to procure the Future Strategic Tanker

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Aircraft and the M25 widening. There is also scope for better use of benchmarking data
including ‘should cost’ modelling to provide assurance that bidders’ costs are reasonable.
13 There is insufficient data on the returns made by equity investors for the risks
they are bearing. The original basis of PFI contracts let in a competitive environment
did not generally require disclosure or regulation of investors’ returns after the contracts
had been let. Transparency on investors’ returns is required where refinancing take
place and, in current standard contract terms,9
authorities may request updated financial
models for the project which will provide details of financial performance. Nevertheless,
there is still limited data on investors’ returns. In particular, when investors sell their
shares in project companies to other investors, there is little transparency of the price
at which these shareholdings are bought or sold or the impact of these transactions on
investors’ returns. In our 2010 report on the effects of the credit crisis, we recommended
that the Treasury should consider whether the returns to equity investors are aligned to
the risks they are bearing. This is an issue we expect to return to in our future work.
7 See http://www.nao.org.uk/publications/0809/private_fi nance_projects.aspx
8 Committee of Public Accounts, PFI in Housing and Hospitals, Fourteenth Report of Session 2010-11,
HC 631, January 2011.
9 Standardisation of PFI contract (SOPC4 (2007)).
Skills, capacity and experience
14 The lack of commercial skills to match those of the private sector can put the
public sector at a disadvantage in the negotiation and management of contracts.
Since our 2009 report on commercial skills for complex projects,10
the Government
has taken steps to improve commercial skills across the public sector. Despite this,
the public sector’s skills are generally not as well developed as their private sector
counterparts, which puts value for money at risk. The risk arises in particular during the
life of the contract. Major contractors and investors can improve their returns through
cost efficiencies not shared with the public sector, or, high margins on the changes in
asset usage which are likely to occur over a long contract.11
15 Because of the length and complexity of PFI procurements, there is a risk of
important knowledge not being passed on when advisers or key individuals move
on to other work. Skill shortages leave departments over-reliant on advisers who may
be expensive and are not always incentivised to deliver more quickly. For example on
the procurement of the M25,12
we noted that the Highways Agency was over-reliant on
advisers, in part due to insufficient commercial and technical skills.

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Effective accountability and project assurance with appropriate
Empowerment
16 Despite a range of valuable project assurance and governance processes,
many specifically related to PFI, it has been rare for large projects to be halted.
The development of department private finance units, together with central government
review processes, has helped the oversight of PFI projects. Existing project assurance
processes, such as the Project Review Group for local authority projects, have been
valuable. There have, however, been notable examples of large projects not being
cancelled13
or significantly changed where value for money has been in doubt. We
welcome the Government’s actions to strengthen project assurance through the recent
formation of the Major Projects Authority and revised Treasury approval processes
for all major projects as part of a wider programme of strengthened spending control.
There is a particular need for greater project assurance from the senior management of
departments and local authorities, and other independent parties, who have not been
closely involved with the projects.
10 Comptroller and Auditor General, Commercial skills for complex government projects, Session 2008-
09, HC 962, National Audit Office, November 2009.
11 Comptroller and Auditor General, Making Changes in Operational PFI Projects, Session 2007-08, HC
205, National Audit Office, January 2008.
12 Comptroller and Auditor General, Procurement of the M25 private finance contract, Session 2010-11,
HC 566, National Audit Office, November 2010.
13 Assurance for high risk projects, National Audit Office, June 2010; Comptroller and Auditor General,
Procurement of the M25 private finance contract.
17 Local bodies procure contracts as part of programmes managed and
funded by central government. The shortcomings in post-contract programme
evaluations have meant that good practice and lessons learned have not been
sufficiently identified and disseminated. The regular forums of NHS Trusts to share
experiences of PFI contract management is an example of how this can be done.
A lack of good quality information has also restricted departments’ ability to identify and
intervene in projects. The use of standard contract models has, however, helped local
bodies who may not have had previous experience of privately financed projects.
Challenging the business case assumptions and taking opportunities
to obtain better deals
18 There is a need for greater challenge of both the decision to use private
finance and the scope of the deal. The decision to procure assets and services
creates long-term commitments. It is therefore essential that there is a robust, impartial

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scrutiny of the business case decisions on the form of procurement and project scope.
The value for money case before the credit crisis was sometimes marginal. The case
for the use of private finance therefore needs to be challenged, given our analysis which
showed that the costs of debt finance increased by 20-33 per cent since the credit
crisis. Also, although there is well developed Treasury guidance on assessing the value
for money of PFI projects, the method of calculating public sector net debt may, even
though the financial accounting treatment has changed, continue to act as an incentive
to use PFI as it often leaves liabilities off the national balance sheet. This makes robust
project assurance especially important. Finally, projects have not always considered
how better negotiation on conventional procurement could lead to more challenging
comparators to PFI procurement.
19 With an average contract period of 25 to 30 years, PFI contracts can be
relatively inflexible. Long contract periods are needed to enable the private sector to
repay the bank loans out of affordable public sector payments. There is a risk that any
asset may become obsolete but in PFI, the termination costs would include breaking
long-term service contracts.
20 There has also previously been little opportunity for public authorities to
obtain further efficiencies during these long contract periods. Our PFI in hospitals
report highlighted that there are limited PFI contractual mechanisms to share efficiencies
although existing value testing14
of facilities services can generate savings. There
has, however, generally been little evidence of a collaborative approach to identifying
efficiencies with little use of open book accounting of private sector costs. The Treasury
and Cabinet Office have recently launched a series of initiatives to seek cost savings on
existing and new contracts.
14 Value testing takes two forms: Benchmarking, where subcontractors’ prices are compared to the market
price for equivalent services and adjusted accordingly; and market testing, where services are re-
tendered to test the cost of the contract in the market.
21 Unlike its private sector contractors, the Government has not used its market
position to obtain economies of scale. There are around 700 PFI contracts in the
United Kingdom (500 in England), most of which are procured and managed locally.
Whilst this encourages local decision-making, local bodies are not well placed to use
the Government’s buying power on common services such as catering, cleaning and
building maintenance. Investors have, however, built portfolios of PFI projects from
which economies of scale should be possible. There is no formal mechanism for the
Government, which created these large markets, to share these gains.

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Conclusion on value for money
22 The use of private finance has brought useful disciplines and a framework of
support which are applicable to other forms of procurement. Our recent reports on PFI
and other major projects have, however, highlighted that Government needs to act as
a more intelligent customer in the procurement and management of projects. Value for
money will be improved through officials being proactive in: collecting data to inform
decision-making; ensuring they have the right skills; establishing effective arrangements
to test, challenge and, if necessary, stop projects; and using commercial awareness to
obtain better deals. In the current climate, PFI may not be suitable for as many projects
as it has been in the past. The lessons from PFI can, however, be applied to improve
other forms of procurement to help Government achieve its aim of annual infrastructure
savings of £2-3 billion.15
15 See http://www.hm-treasury.gov.uk/iuk_cost_review_index.htm
Recommendations
23 Our recommendations below focus on important improvements which need to be
prioritised to ensure value for money is secured on all future projects, whatever the form
of procurement.
a Too often, Government has failed to identify, collect and use the data it
needs to help support decision-making and secure the best value for money.
Greater focus should be given to the types of data that should be gathered to
improve decision-making, who should collect them and the cost of collection.
In particular:
- The Major Projects Authority, the Treasury and departments should work
collaboratively to agree the data that is required to support the preparation,
assurance and scrutiny of major projects in Government. Data should be
collected where it adds demonstrable value, and supports decisions but only
where the benefits clearly outweigh the costs and burden of collecting the data.
- Those setting the data requirements should consider whether good quality
up-to-date data is available to challenge whether the best solution to a
defined requirement is being pursued and the best commercial terms are
being obtained.
- Departments should undertake periodic value for money reviews of their
programmes highlighting any areas where value for money has diminished.
These should be high level reviews, with sufficient project data to inform the

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reviews, but should not include burdensome revisiting of all aspects of project
business cases. Gateway 5 Reviews of operational projects will be useful
evidence to draw on. The programme reviews should be used to improve
performance and to assess how well the procurement method is working.
- As there has not been a Government assessment of the value which PFI
equity investors contribute, the Treasury should consider how data can be
collected to better understand the relationship between investors’ returns and
the risks they have borne.
b Although PFI has delivered benefits, the payments for facilities services do not
harness Government’s buying power and may involve liabilities for longer than
needed if assets become obsolete. The Treasury should work with departments
in identifying a range of alternative methods for delivering infrastructure and related
facilities services, building on the lessons learnt from PFI, to maximise value for
money for Government. Contracts should allow for flexible usage of the asset over
time with clear arrangements to ensure that charges levied for additional services are
both reasonable and equitable.
c There is a shortage of the public sector skills needed to manage and oversee
complex major projects.
- The Cabinet Office and departments should urgently report on progress in
implementing our previous recommendations to improve commercial skills
and expertise in central government. The Major Projects Authority should
keep under review the standard of commercial skills in projects which it
oversees. It should provide feedback to the Cabinet Office and departments
on any further skills issues which need to be addressed.
- Procuring authorities should ensure that there are suitably experienced
contract managers prepared to robustly challenge contractors. The managers
should be incentivised and held to account for maximising value for money.
d Procuring authorities do not always set expectations for the service they
expect to receive from their advisers, and do not incentivise them to
provide a more effective service. Procuring authorities should define at the
outset the outcomes and benefits they expect to receive from the use of advisers;
the measures to be put in place to ensure full transfer of knowledge; and the
framework that will be used to assess performance. More use should be made of
incentive-based and fixed price contracts.

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e Although there are project assurance processes in place, they have rarely
resulted in robust interventions. The Major Projects Authority should prioritise
independent project scrutiny within Government by experienced senior individuals
who are independent of the project. They should be empowered to intervene and,
if necessary, recommend to the Accounting Officer that the project is stopped.
To facilitate this, departments could use peer review from either within their
department or elsewhere in Government, supported by a team with experience
and the relevant technical skills.
f Government is seeking to devolve responsibility for local public services.
Where departments sponsor and fund significant programmes of investment
which are delivered at the local level they should set out, at the earliest stage,
the roles and responsibilities of all parties and the criteria for central intervention.
Departments should facilitate local bodies to work collaboratively and share best
practice, including experience of securing cost efficiencies in existing contracts.
g All parts of the public sector need to seek better deals in the current
economic environment. To ensure that the best deals are achieved:
- Project managers should challenge their existing commercial arrangements,
being alert to changes in operational need, market conditions, or
technological innovation to maximise benefits and cost reduction;
- Project and programme managers should develop an efficiency plan for each
project and programme, setting out a strategy for getting better value over
the life of the contracts. This should include identifying the scope for sharing
benefits from economies of scale; and
- The Treasury and Cabinet Office should consider what changes should be
made to procurement methods to harness the Government’s buying power.
There is a risk of conflict between Government exercising its buying power
and local purchasing

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Appendix 2
Response to
The Treasury Call for Evidence
On
Reform of the Private Finance Initiative
Deadline: Friday 10 February 2012

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REFORM OF THE PRIVATE FINANCE INITIATIVE RESPONSE TEMPLATE
Please send your responses via email, to: PFIevidence@hmtreasury.gsi.gov.uk
or in hard copy to PPP Policy team, 2/S1, HM Treasury, 1 Horse Guards Road,
London SW1A 2HQ.
The deadline for responses is Friday 10 February 2012.
Respondent details
A list of companies, organisations and their named representatives who
respond will be published. However, we do not intend to publish the names
of respondents who respond in an individual capacity. The contact details
supplied below (telephone, email and any address) will also not be published
and used only for the purpose of the evidence gathering process. Any
particular interest in the reform of the Private Finance Initiative (PFI) will be
published unless you consider there is reason to treat it as confidential (see
section on the next page)
Your name Gary Walker
Job Title / Level CEO
Organisation
(Please state whether you are
responding on behalf of an
organisation or as an individual)
Telephone number +44 (0) 777 181 5492
Email address gary.walker@thenws.com
Particular interest in the reform of
the Private Finance Initiative (PFI), if
helpful in providing context to your
answers
The National Wealth Service has
developed a new innovative model for
community infrastructure funding,
which will be attractive to institutional
investors, providing a cost effective
solution for the public sector.

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Guidance on using this response document
In responding to the call for evidence, responses and evidence are welcome
both on the areas and questions set out in chapter 2 of the Reform of the
Private Finance Initiative document and on any other issues that respondents
consider are important, including proposals for alternative delivery models.
Not all issues will be relevant to all respondents so you are not required to
respond to all questions.
When responding it would be helpful if interested parties could include any
evidence, research or references to project examples where possible.
Using this template
In order to help us review responses respondents are asked to use this
template to complete their answers. It is recommended that respondents
have a copy of the Reform of the Private Finance Initiative document in view
when completing this template in order to provide the context to the
questions. The template is structured in the following way:
 a front page box to capture respondents details;
 the questions as set out in chapter 2 of the Reform of the Private
Finance Initiative with a box for responses;
 a box for views on other issues that respondents consider to be
important that are not covered by the questions in chapter 2 of the
Reform of the Private Finance Initiative. This box can also be used to
capture alternative proposals or you may want to submit these a
separate attachment; and
 an annex for any information that you consider to be confidential and
that should not be published (see section on confidentiality below).
Additionally, respondents can also choose to submit separate attachment(s)
to this template (e.g. proposals for alternative delivery models or specific
evidence, research or examples to support statements in response to the
questions) if they would find it helpful.
Additional information

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All responses will be acknowledged, but it will not be possible to give
substantive replies to individual representations.
The Treasury will delete from its records any responses that are potentially
unlawful (i.e. defamatory or possibly libellous content), are offensive, contain
party political material or are not directly relevant to the scope of the reform
of PFI.
Confidentiality
To meet the Government’s transparency commitments the Treasury intends
to publish all responses received to this call for evidence this including the
names of companies, organisations and their named representatives
submitting their evidence. However, we do not intend to publish the names
of respondents who respond in an individual capacity. The contact details
that are supplied will not be published and used only for the purpose of the
evidence gathering exercise.
If you want some of the information you provide in your response to be
treated as confidential and not be published please note that on your
response and include the information in the annex at the end of this
template. However, please be aware that, under the Freedom of Information
Act 2000 (FOIA), there is a statutory Code of Practice with which public
authorities must comply and which deals with, among other things,
obligations of confidence. In view of this it would be helpful if you could
explain to us why you regard the information you have provided to have the
quality of ‘in confidence’. If we receive a request for disclosure of the
information we will take full account of your explanation, but we cannot give
an assurance that confidentiality can be maintained in all circumstances. An
automatic confidentiality disclaimer generated by your IT system will not, of
itself, be regarded as binding on Treasury.
Treasury will process your personal data in accordance with the Data
Protection Act and in the majority of circumstances this will mean that your
personal data will not be disclosed to third parties, other than the publication
of the names of representatives of organisations and companies as stated
above.

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Questions outlined in chapter 2 of the Reform of the Private
Finance Initiative document
Below are the questions outlined in chapter 2 of the Reform of the Private
Finance Initiative document. To note each box expands to allow for the
respondents answer to be inserted. It is recommended that respondents
have the document in front of them when completing this template in order
to provide the context to the questions.
Section 1: Role of the Private Sector
Question 1
Do respondents think that the private sector has a role to play in the future delivery
of public sector assets? Are there specific sectors where the private sector should
not have a role?
Yes it does, and it should be delivered by one organisation that acts as “honest
broker” between the public and private sector, in the same way as the “prudent man
rule” operates in the investment world. The National Wealth Service Model fulfils the
above criteria and recognises equitable risk sharing across all stakeholders with
fairness at its core.
Question 2
Are there other delivery and procurement models used in the delivery of public
assets in the UK and internationally that respondents consider work well? What are
the key features of these model(s)?
The National Wealth Service Model recognises both the strengths and weaknesses of
the existing procurement models and engages with the positive aspects of these,
whilst discarding what seem to be the impediments to successful outcomes.
We have already submitted a full working document to the Treasury looking at the
National Audit Office report of 28th April 2011, highlighting the lessons of the
current procurement models and how these can be addressed.

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The key is to produce one model that has passed through the three stage
assessment process for VfM, and is then adopted and endorsed by the Treasury and
Central Government as an integral part of the solution.
Question 3
How should the use of private finance be evaluated when considering the best
procurement route to deliver a public asset?
The first fundamental question that needs to be addressed is, “In the future is the
public sectors role as facilitators of services for their communities or asset owners?”
The answer to the above question has a fundamental impact on how models can be
constructed and how value for money is evaluated; the National Wealth Service
Model can embrace either answers, or a combination.
In our opinion, any model needs to have a degree of certainty at its core for both the
private and public sectors, with institutional investors understanding the risks they
are pricing, and all stakeholders accepting equitable risk and reward sharing that is
transparent and simple to understand.
The evaluation of the fair but not excessive investment return is in essence
extremely simple, and should be expressed as a premium above the requisite
Government Gilt or index-linked Gilt. As with the National Wealth Service Model, the
evaluation should then be built from the bottom-up, with Government grants being
replaced by Government investment in its truest sense, with the aim of achieving as
near to a neutral cost for the public purse over the life cycle of the project as is
possible.
The delivery/construction phase should be predicated on a “cost plus basis”, with
fair but not excessive profit margins incorporated, it is in no one’s interest to price
projects at below cost to win business, and this should be transparent to all through
open book accountancy protocols.
FSA registered funds hold the assets for the investors, giving transparency of
investment returns and ongoing charges, leading to a simple evaluation for value for
money.

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Question 4
Are there features of the PFI model that should be retained?
Please refer to question 2 above.

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Section 2: Institutional investment
Question 5
What changes to the current approach to the allocation of risk and the procurement
and delivery of public facilities and services would increase institutional fund
investment appetite, either directly or through intermediary investment vehicles?
The National Wealth Service Model encompasses a cost plus methodology for
contractors, giving a fair but not excessive profit, open book accounting that gives
both Local and Central Government total transparency, Financial Services Authority
(FSA) registered funds giving comfort to investors, and fair but not excessive
investment returns.
The key to attracting institutional investment is that the investment vehicle and
returns must be able to compete against the universe of investment opportunities
that are available to trustee boards, and be able to pass through investment
committees once evaluation has taken place, enabling discharge of fiduciary
responsibility.
The specifics of this will mean the recognition of the cohort of members and
beneficiaries that the investment is aimed at, and The National Wealth Service Model
recognises and achieves this.
Question 6
Would alternative approaches to the current typical capital structure of projects be
favoured by institutional investors? What constraints currently exist to adopting
these approaches, and how could these be addressed?
The capital structure needs to be adapted to reflect the three phases and different
risk profiles of the typical community infrastructure project. After extensive research
with institutional investors a thorough understanding has been gained into the
requirements needed for each of the three phases, and these are highlighted below;
Phase 1: Development & Construction 0-2 Years

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This phase is seen by institutional investors as the phase with potential for the
highest risk, and therefore if they were to price this phase separately the costs
involved could prove prohibitive.
Phase 2: Income Generation 2-27 Years (or longer term if needed)
This is the phase where risk can be mitigated with a secure income stream
“covenanted” by either the Local Authority or Government. The income stream
reflecting the liabilities of institutional investor’s as closely as possible, with RPI
linking a pre-requisite where matching certain liabilities is at the core of the
investment decision.
Phase 3: Capital Value of the Asset
If institutions amortise and write down to zero over the term then the asset reverts
to the Local Authority or Government. If there is no capital repayment to the
investor i.e. the facilities are leased only then the asset reverts to the investors, with
Local Authorities or Government having the flexibility to walk away from further use
if demographic change has been such that the facilities are no longer required, or
they can renew the lease with the calculation being based on the prevailing
Government Gilt rates at that time.
The National Wealth Service Model asks the fundamental question and reacts
accordingly dependent on the answer already posed in Q3, “In the future is the
public sector’s role as facilitators of services for their communities or asset owners?”
There are various permutations that can be configured to meet most situations
dependant on how each of the three phases is funded, and The National Wealth
Service Model addresses these.
Fuller details on all the scenario planning the National Wealth Service has
undertaken over the last 18 months can be provided to highlight the effective
solution in each case.

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Question 7
Are there other actions that could be taken, by the public or private sectors, to
increase institutional investment in public assets and services, and what are these?
What would be the expected implications for cost, risk transfer and value for
money?
Adapting the “honest broker” and “prudent man rule” The National Wealth Service
Model ensures that there is equitable sharing of risk and total alignment of interests
between all stakeholders, Treasury, Local Government, Government, contractors,
maintenance providers and investors throughout the life cycle of the facilities.

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Section 3: Government’s role in project funding
Question 8
What if any role should public sector capital play in the financing of the construction
or operational phase of public assets and services? How and when might public
sector capital be best used to improve investor/lender appetite and pricing without
adversely affecting risk transfer and performance incentives? What constraints
should apply to the quantum of public sector capital grants?
Public sector funding will provide best value for the taxpayer in the following
scenarios:
Phase 1: Development & Construction
Public sector funding in the form of either capital provision for this phase or interest
payments on commercial loans will be used to fund this phase. We have already put
forward the idea that the Merlin Banks should be used to provide these commercial
loans and that the Government should then recognise this in the targets they have
set for lending to these banks. The elegance of the public sector contributing its
funding to this phase is that institutional investors will then purchase the facilities at
the beginning of phase 2, and the public purse will receive their investment back
leaving the tax payer in a neutral position.
Phase 2: Income Generation
The institutional investors having purchased the facilities will receive a fair income
during this phase with the covenant provided from the public sector either by the LA
or by Central Government. This can be achieved in two ways dependant on the
answer to the fundamental question posed in Q3,”facilitators of community services
or asset owners?”. If the public sector answers that they want to be facilitators of
services then The National Wealth Service Model recognises this and the relationship
is one of a commercial lease with the capital risk at phase 3 being taken by the
institutional investors, but with no debt repayment the cost to the public purse is
less. Conversely if the answer is that the public sector wants to be asset owners the
institutional investors will amortise their capital over the term, and the risk in phase
3 reverts to the public sector. The consequence of this is that payments during the
term are higher, with the distinct possibility that the term will be considerably
longer than 25 years to accommodate the requisite investment return profile.

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Phase 3: Capital Value of the Asset
Dependant of how the public sector wishes to proceed, this will rest with either
investors or the public entity procuring the facilities, a combination of the two can
be achieved.
Question 9
What if any role should public sector risk underpinning or guarantees play in
partially de-risking the construction or operational phase of public assets and
services? In which areas could underpinning or guarantees have a beneficial impact
on investor and/or lender appetite and pricing? What are the constraints to this
approach, with particular regard to risk transfer and performance incentives?
Please refer to previous answers, and The National Wealth Service fuller assessment
already provided to Nick Hurd MP, Lord Sassoon, Danny Alexander MP’s officials,
members of the Treasury select committee and the Public Administration select
committee.
In summary, it is our belief that the most appropriate areas for the public sector to
look at in terms of equitable risk sharing by all stakeholders, are in the construction
and development phase, where the private sector then guarantees purchase for the
operational phase, by covenanting income during the operational phase, with the
private sector taking on the risk for FM and life cycle overruns.
Question 10
If public sector capital grants are made to part-finance the construction phase of
projects, what constraints should apply and what impact would a level of capital
contributions in excess of the current 30% be expected to have on equity and debt
investors’ investment appraisal and pricing, and on risk transfer and performance
incentives?
For there to be the greatest level of effectiveness, first and foremost is the need for
a nationally endorsed solution to the whole area of community infrastructure, which

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The National Wealth Service believes is in four key areas: Care, Education, Health
and Housing.
The current approach aims to provide complex competing alternatives, and this
actually adds to the cost profile of projects as the public sector explores each of
these, and the private sector knowing the probability of their success has to price
accordingly, and therefore the bid costs for multiple projects are actually reflected
in each successful bid with value for money being compromised.
As we stated earlier, having one nationally endorsed model that is flexible enough
to react to most circumstances will enable the duplication of costs to be taken out
of the system, and by definition value for money will increase.
To achieve maximum efficiency there not only has to be equitable sharing of risk,
transparency throughout the process, and fair but not excessive profits and
investment returns, but a potential cross-subsidy from wealthier to more deprived
areas. The best example of this is a national solution to the key area of housing,
which could provide the opportunity for a notional national rent by utilising higher
rent areas to cross-subsidise lower rate areas.
If the thesis throughout this submission is accepted, that the concept of public
sector “grant” could be replaced by the concept of public sector “investment” during
the development and construction phase, the efficiency and value for money will
increase. The public sector would in effect be providing the short term finance,
either with or without interest, the private sector purchasing those assets for the
income generation phase, equitable risk sharing at neutral cost to the public purse.
There are potential mechanisms for this public sector “investment”, as discussed
earlier via the Merlin banks, hypothecated short term gilts that are repaid when
institutional investors purchase the facilities, direct “investment” by the public sector
as seed for the FSA registered investment funds and so on.

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Question 11
If public sector loans are made to part-finance the construction or operational
phase of projects, what impact would this have on equity and debt investors’
investment appraisal and pricing, assuming pari-passu ranking with senior debt?
What approach should be taken to lender voting rights and what other constraints
or procedures would be relevant?
In The National Wealth Service preferred approach the investment vehicle would be
FSA registered funds, and therefore the whole process and the issues above are
simplified to a transparent buying and selling transaction of units within the fund.
In terms of the development and construction phase this process would again be
simplified to that akin to a commercial loan arrangement that is repaid at the end of
that phase i.e. maximum 24 months.
The optimum pricing is achieved if public sector “investment” is utilised, with
repayment by the private sector once the income generation phase commences.
The public sector then has two choices, to either own the facilities again after the
operational phase is completed “capital and interest” with reversion, or “lease”
facilities, with the private sector retaining the risk for the value of the capital asset.
Either way it is “covenanted revenue” rather than loans that are the key to success.

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Section 4: Debt finance
Question 12
What alternative approaches to the debt finance of projects should be considered
that would address regulatory pressures on the market, while maintaining current
benefits of lender due diligence and risk monitoring - thinking about both bank
finance and capital markets solutions?
See answers above referring to The National Wealth Service Model.
Question 13
What is the view of respondents to an approach which financed the construction
period of projects separately from the operational phase?
We absolutely recommend this in terms of how the private sector prices the inherent
risks in each of the three phases, and therefore achievement of complete
transparency and best value is assured.
The risks associated with the construction and development phase mean that
institutional investors find it difficult to price and therefore they tend to err on the
side of caution, with the outcome that whether they are pricing this phase separately
or collectively, the whole overall cost of a project increases.
In order to maximise the value for money for the public sector and tax payer, the
approach outlined throughout this submission in The National Wealth Service Model
would seem to be the most efficient solution available.

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Question 14
What impact would a shorter term debt finance approach be expected to have on
financing costs? What if any implications would there be for the lenders’ due
diligence approach and for the transfer of asset design, construction and
maintenance risk? What factors would enable the transition from bank debt funded
projects to capital markets refinancing?
There is really no need to overcomplicate the issues involved in reaching a solution
that benefits all stakeholders. The simplified approach of The National Wealth
Service Model mitigates against the wider implications of the more complex nature
associated with PFI and other similar approaches.
Transparency is the key to success, and the “honest broker/prudent man” approach
gives both the public and private sectors comfort during the transitionary elements
that will occur between the three main phases of the process.
In essence The National Wealth Service Model enables a fixed cost-plus basis for the
development and construction phase, with a certain capital value purchase price
from the Financial Services Authority registered funds, a secure income stream for
those investors backed by Local Authority or Government covenants, with the asset
value risk apportioned dependent on the circumstances of each project.
Question 15
What factors are relevant to consideration of the appropriate allocation of
refinancing risk between the public sector authority and the contractor? Is it
possible for project performance and credit factors to be separated from market
factors when allocating refinancing risk?
As an integral part of the risk sharing process contractors will have the certainty of a
cost plus, fair profit approach. The National Wealth Service Model incorporates
expertise from the private sector in terms of checking the efficacy of a contractors
pricing and therefore the risk of overrun, contractor default etc rests with the
business involved.
The traditional method of risk assessment allows for contractor default, but with the
potential addition of Government and Local Authority backing for this risk,
commercial pricing becomes more attractive, with public sector “investment” even
more so.

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At the present time evidence would suggest that many contractors are pricing
projects so that they can maintain their turnover, the reality being that a number of
these projects could be priced at a loss in order to gain that turnover, this has
potentially lead to some of the high profile failures that we have seen. However, if
there is broad agreement that a fair but not excessive profit is acceptable, and if
that profit is reflected transparently within The National Wealth Service Model, this
will have the effect of stabilising a volatile and hard to price phase of the model.
By having a Financial Services Authority registered entity, or similar structure, that
institutional investors can commit capital to, the refinancing risk is taken out of the
process.
Investors are committed on the basis of the requisite income stream, either RPI-
linked for certain liability matching, or maybe fixed for other circumstances, with
the public sector covenant based on the prevailing Government gilt profiles.
Question 16
What are the views of respondents on the effectiveness of preferred bidder debt
funding competitions? Could a wider application of debt funding competitions
enable more effective access to the debt markets and what role should the public
sector play in this, at a local or central level?
As stated in previous answers, the thesis behind The National Wealth Service Model
is to create an efficient, transparent and easily understood solution that everyone
has the utmost faith in. If, as is the current practice, the Treasury defines its role as
providing alternatives, then waste within the system will always be present as
competitive bidders in all phases of the process have to factor into their bids that
they will only by successful in a certain percentage of those bids, therefore the price
of the successful bid will invariably be ‘inflated’.

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Question 17
What alternative approaches could be considered to inflation risk and interest rate
risk management, taking into consideration trade offs between budgetary certainty
and operational flexibility?
It is predicated within The National Wealth Service Model that projects at any given
time will reflect the underlying Government gilt yields. The institutional investors
will buy into those long term secure income streams at that prevailing level and
illiquidity, and in those terms the risk management will have been considered
during the due diligence phase.
With regards to the trade-off there is no perfect solution if this question is directed
at situations where either Central of Local Authority budgets are squeezed during
the lifetime of the facilities.

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Section 5: Equity return
Question 18
Would a regulated asset model be more economically efficient than the PFI
concession model?
Yes.
Question 19
What are respondents’ views on an approach that capped equity returns or that
provided for public sector sharing in returns achieved above a specified level? What
impact would this be expected to have on investor appetite and pricing and on
project performance? At what level should any cap or sharing threshold be set?
The key to any successful model that requires a true alignment of interest between
the public and private sectors is that of trust and equitable risk sharing, and it
would appear that the balance has not been achieved in the models that are
currently available.
The National Wealth Service Model is flexible in the fact that risk and reward sharing
can be established at the project level if need be, but in its simplest form The
National Wealth Service Model provides an holistic framework that is transparent for
all stakeholders and shares the risks and rewards equitably between the public and
private sector.
The solution to the national problem in terms of community infrastructure is not
going to be absolutely perfect, but with goodwill and trust on both sides, that is
enhanced with the honest broker/prudent man rule concept; there should not be
many circumstances where an effective solution cannot be devised for each
individual project.

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Question 20
Should the public sector limit the transferability of PFI equity? What nature and
quantum of limit would not adversely impact on investment appetite and pricing,
and on project performance?
This to us seems an unnecessary and artificial constraint that only serves to make
the process more complex, when the solution can be reasonably simple to
understand for all stakeholders.
There is a truism that if you don’t understand something then you shouldn’t get
involved with it and maybe one of the lessons to be learned from the PFI experience
is just that.
Question 21
Should the public sector share in gains on sale of PFI equity, and what impact would
this have on investment appetite and pricing?
As previously stated, if all stakeholders understand at the outset what each other’s
expectations are, and those expectations are capable of delivery within a simple to
understand solution, then the previous and subsequent questions related to this
topic should be capable of equitable definition at the outset.
The National Wealth Service Model is able to accommodate the majority of situations
that are envisaged within this questionnaire.
Question 22
What views do stakeholders have on public sector co-investment or joint venturing
alongside private sector equity? What quantum or terms of public sector equity
stake would not adversely impact investment appetite and pricing, and on project
performance?
See previous answers above on public sector “investment”.

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Section 6: Risk allocation
Question 23
In what areas do respondents consider that a change to the conventional PFI risk
allocation as between the public sector authority, sponsors, funders and suppliers
could reduce costs and/or improve the flexibility while still offering value for
money?
Please see answer to question 8 and previous submissions to Treasury, MP’s, select
committees and others.
See further attachments to this submission;
Executive Summary of National Audit Office report dated 28 April 2011, together
with the explanation of how The National Wealth Service Model addresses the
concerns highlighted.
Question 24
Are there other ways in which the conventional contractual framework could be
simplified in a way that would enable the private sector to price more cost
effectively
The bid process is not conducive to achieving VfM or best value, as the cost of
unsuccessful bids has to be reflected in the costing of bids that are successful. In
any event the bid process does not encourage local SME’s, who may be the best
option for sustainable local communities, to bid as there is a feeling that they will in
any event be unsuccessful against the larger national and multi-national
corporations.
It is not about pricing more efficiently, because invariably the public sector may be
awarding contracts to the bid that appears the cheapest, but in reality may have
been priced to gain turnover, with the result that quality may be sacrificed, and in
the long term the maintenance and life cycle issues may render it more expensive.
Just as the private sector has to understand that a fair but not excessive profit
should be made, the public sector also needs to acknowledge that a fair but not

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excessive profit is actually the best value solution for all concerned in the longer
term.
The National Wealth Service Model understands and reflects this, by building from
the bottom-up in terms of transparent cost plus contractor rates, which reflect a fair
but not excessive profit. In this way the public sector should also be able to accept
this transparent solution as a fair and sustainable way of building quality facilities
and sustainable communities.
VfM or best value is very subjective and should not be confused with the cheapest
price.

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Section 7: Procurement and contract management
Question 25
What further improvements could Government consider to the standard approach to
PFI procurement in order to streamline the process and reduce costs, while meeting
wider objectives for effective competition, accessing bidder innovation and
maintaining a robust contractual framework?
We would suggest that The National Wealth Service Model gives access to private
sector expertise that ensures that best practice and innovation are at the forefront
in terms of successful project completion.
Question 26
Are there particular ways in which the private and/or public sector approach to
contract management can be improved in order to manage contracts more cost
effectively?
We believe the standard contract approach is both good practice and a means of
managing costs effectively.
The obvious next iteration of this is the use of a standard model or models, which
will lead to complete transparency and a deep understanding of costs, which will
then translate in to comfort for both the public and private sectors that the process
has fairness at its core.
If we utilise the Treasury VfM model to prove the efficacy of a particular model then
the need for re-invention of the wheel is alleviated with the obvious and attendant
cost savings.
At the present time it does not appear that the commercial procurement model
delivers the requisite contracts and cost management controls, because rather than
facilitating a widely available simple to understand model, the complexities of
differing methodologies lead to the present perception of an opaque system that
leaves stakeholders with an uneasy decision-making process, that invariably leads
to further costs and inefficiencies within the system.

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Section 8: Balancing innovation and standardisation
Question 27
What is the right balance of output based versus standardised specification, when
considering the twin objectives of accessing greater contractor innovation and
reducing costs?
In our opinion this is the wrong question to ask, it should be framed more around
innovative specifications that will still be available via a standardised model.
The whole thesis behind The National Wealth Service Model is that it is able to
capture market innovation whilst controlling costs by way of looking at projects
from the bottom-up, assessing the costs of capital against prevailing Gilt rates and
providing a fair investment return to the institutions who will support the concept, if
it meets their needs and investment objectives.
There is no perfect answer to this balance, but by endorsing a model that is
conducive to the needs of all stakeholders it then changes the balance towards
innovation, the only barrier being the known capital and income requirements
already established at the outset of the project.
Question 28
Could a different approach to the engagement of contractors in the procurement
process access greater private sector innovation?
This goes to the heart of the honest broker/prudent man concept, where the private
sector will know with a degree of certainty whether the project is viable at an early
stage of the process, with an easy to understand financial model that they can
utilise, thus bringing both speed and certainty to the engagement process, whilst
curtailing excessive bid costs.

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Section 9: Soft facilities service management
Question 29
Should soft services continue to be included within the contractual model alongside
the delivery and finance of the public facility?
We do not have a view on this.
Question 30
Are there alternative approaches to the contractual framework for soft service
delivery for a long life facility that could result in a better balance of risk transfer,
flexibility and competitive pricing?
We do not have a view on this.
Question 31
What impact would the separate contracting of soft services be expected to have on
equity and debt investors’ view of the project’s risks and rewards?
In The National Wealth Service Model the focus is completely on the provision of the
facility, not the soft service management needed for day to day operation of say a
care home. Therefore the impact has no bearing on the risk-reward balance for
investors.

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Section 10: Hard facilities management
Question 32
Under the current PFI model, how effectively has the party who holds hard facilities
management and lifecycle risk been able to price those risks?
It is hard to gauge the effectiveness of hard facilities management and life cycle
costs within the current PFI model as evidential data is difficult to access. However,
there are robust models available based on many years experience of varying types
of built facilities, and this data can be used effectively to price these aspects into an
holistic model that should provide an effective pricing tool.
Question 33
Reflecting on the long term nature of the contracts and changing approaches in
maintenance contracts, for example improvements in technology that drive greater
efficiency, how could the public sector have better confidence in the ongoing value
for money achieved from hard facilities management and lifecycle risk transfer?
Again we believe this question does not address the real issue which is how do you
measure VfM? Experience has shown us that this invariably has been interpreted as
the cheapest with catastrophic consequences.
With any innovation the cost of R & D must be factored in to any VfM equation,
invariably this is often not recognised; the cost of achieving the implementation of
improved technology has value in its own right.
By adopting a model that incorporates hard facilities management at the beginning
by expressing this as a yield within the process, the public sector has total
transparency and equitable distribution of risk. The alignment of interest this brings
to all stakeholders continues not just through the development and construction
phase, but also through the operational phase.
If the value of the assets is owned by the institutional investors, their only recourse
to capital value is with a quality construction and quality ongoing hard facilities
management. Conversely, if the public sector wants to engage on the basis of a
reversion model within the National Wealth Service framework, they can be assured
that the same standards will apply, and they will not be left with a decaying facility

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at the time of reversion, which evidence would suggest is a possibility, as the private
sectors alignment of interest will have ended.
To ensure that VfM is being achieved, access to information on the hard facilities
management lifecycle portion of the investments will be made available at all times
to the public sector, as it is in no-one’s interest to build facilities and maintain them
in a way that will lead to their deterioration over a short time frame.
In reality, the ethos behind The National Wealth Service approach is that the facilities
will be constructed and maintained in a way that is conducive to two renewals i.e. 75
years, as that is the liability matching period that is required by many institutional
investors.

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Section 11: Insurance
Question 34
Are the insurable risks of PFI projects most appropriately dealt with (a) by the
private sector with a fixed cost passed through to the unitary charge, (b) by a
premium risk sharing mechanism or (c) by the public sector? Please specify reasons
for your choice.
In a typical PFI reversion model or the current reversion models offered to
institutional investors’ by insurance groups, insurable risks are invariably left with
the public sector via a full repairing and insurance lease. In our opinion the correct
approach is to agree a price for the insurable risk that is an integral part of the
model and agreed by both the public and private sector at the outset, expressed
within the model as a simple yield.
Different insurance risks will be applicable to the four key areas of community
infrastructure namely care, education, health and housing, and therefore those will
be priced applicably within the model.
Question 35
Are changes in insurance costs that are attributable to project-specific factors (eg
claims-history, poor security, quality of build material, installation of sprinklers,
security arrangements , etc) most appropriately borne by (a) the private sector, (b)
the public sector, or (c) borne on a shared basis? Please specify how.
Please see answer to question 34.

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Question 36
Are there (a) certain types of project (eg housing, office accommodation, specialist
accommodation, highways, street lighting, equipment etc) and (b) certain types of
risk (eg negligence of the contactor/supply chain, business interruption cover for
banks, officer’s liability, statutory cover, third party liability, vandalism, construction
phase cover, property damage all risks), which are more/less suited to coverage by
the public sector. If so, which are they and why? What are the concerns, constraints
or procedures that would be relevant or required for any such public sector self-
insurance?
Please see answer to question 34.
Question 37
If the public sector provided cover for insurable risks for any future PFI projects,
what incentives or penalties would be needed to promote a private sector interest in
managing risks effectively to reduce/avoid claims?
In our opinion this question is predicated on the perceived mistrust between the
public and private sectors, where each is looking over the other’s shoulder. If each
stakeholder has the confidence in a model with an honest broker/prudent man rule
at its heart there should not be the need for incentives or penalties, as both the
public and private sector will be working in harmony with the same goal. If the
public sector provided the cover for the insurable risk, but was then the facilitator
utilising the framework of insurers underneath, the pricing should at all times
reflect VfM.

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Question 38
Would you favour the establishment of a framework of insurers for PFI contractors
to use (with the use of mini-competitions)? If so (a) should the use of the
framework be mandatory and (b) would it lead to better value for money for the
public sector compared with contractor–led portfolios?
Wherever there are many competitions or other similar mechanisms, the pricing will
also reflect the cost of bids that are unsuccessful and therefore it is very difficult to
gauge whether the best value is achieved. In our opinion it would be better to
establish a framework as described in question 37.
Question 39
Do you consider that the ratio of premium income to claims paid for PFI projects
indicates that (a) commercial insurance does or does not represent good value for
money and (b) the commercial insurance market is or is not operating efficiently in
this area? Please specify reasons for your view.
We do not have a view on this as we do not have access to the relevant data to make
a cogent response.

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